Cryptocurrencies are swiftly transitioning from being an alternative form of finance to becoming mainstream, seeing an ever-growing interest from various types of investors, ranging from retail to institutional.
These digital currencies, underpinned by Blockchain Technology, offer a novel way of executing financial transactions, characterized by decentralization, security, and anonymity. As a result, they're creating a new dynamic in the global financial ecosystem that can't be ignored.
However, to successfully navigate this new landscape, it's crucial to comprehend the workings of Cryptocurrency Exchanges, which is the primary platform where buying, selling, and trading of these digital assets occur. Equally important is understanding Cryptocurrency Wallets which serve as the storage medium for your digital assets, and the security measures required to safeguard these wallets from theft or loss. Since cryptocurrency trading is inherently volatile, Risk Management becomes a critical aspect as well.
Additionally, successful trading requires a well-structured Trading Strategy, underpinned by a sound understanding of both Fundamental and Technical Analysis. Furthermore, the growing involvement of regulators worldwide and the resultant Impact of Regulations on the cryptocurrency market is another vital domain to understand. Finally, as with any form of trading or investment, it's crucial to consider the Tax implications related to cryptocurrency trading to ensure compliance with local laws and regulations.
Contents: How to Trade Cryptocurrencies
In the digital world, cryptocurrencies have emerged as a new asset class that has gained significant popularity due to their potential for high returns. The technology that underpins these digital assets is blockchain. Blockchain technology is a decentralized, distributed ledger system that records transactions across multiple computers to ensure transparency and security. (Suggest an illustration showing the working of a blockchain)
Contracts for Difference or CFDs, as they are commonly referred to, are derivative instruments that enable traders to speculate on a wide range of financial markets, without taking direct ownership of the underlying asset.
The cryptocurrencies are traded as pairs against regular currencies. For example Bitcoin, the most famous ‘crypto’ is traded as
BTC/USD – Bitcoins valued in US dollars
BTC/GBP – Bitcoins valued in British pounds
BTC/EUR – Bitcoins valued in euros
BTC/JPY – Bitcoins in Japanese yen
BTC/CHF – Bitcoins in Swiss francs
There is no need to obtain an account with a Bitcoin exchange or a bitcoin wallet to trade. FlowBank takes the cryptocurrency price from the most reliable exchanges as well as the CME futures prices for Bitcoin.
Using CFDs to trade cryptocurrencies offers the flexibility of taking a position on whether Bitcoin rises or falls without having to actually own any Bitcoin. This means that there are more trading opportunities available, as profit can be made from buying or selling cryptocurrencies.
The main cost when trading a cryptocurrency CFD is the spread. The spread is the difference between the price you can buy at and the price you can sell at. For example, the price for Bitcoin may be bid 6000 / offer 6050, which means a spread of 50.
Cryptocurrency trading example 1: Going long
Instead of taking ownership of Bitcoin, you can place a ‘long position’. Your position will increase in value as Bitcoin’s price increases. If Bitcoin’s price falls, then your position will lose value.
In this example, the price of Bitcoin is $6000/6050. A trader buys 5 CFDs of Bitcoin for $6050. Each CFD is worth 1 Bitcoin (or 100 Bitcoin cents) so the size of the position is $30,250.
If the price rises 500 dollars to $6500/6550 and the trader closes out the position at $6500 (valued at $32,500) they make a $2250 profit. Alternatively, if the price of Bitcoin falls to $5500/5550 (meaning the position is now worth $27,500), once the position is closed, it would mean a loss of $2750.
Cryptocurrency trading example 2: Going short
You can also place a ‘short’ position so if Bitcoin's price drops, your position increases in value and if the price goes up, your position decreases in value. This is akin to short-selling a company’s shares.
In this example, the price of Bitcoin is $6000/6050. A trader sells short 5 CFDs of Bitcoin for $6000 so the size of the position is $30,000.
If the price rises 500 dollars to $6500/6550 and the trader closes out the position at $6550 (valued at $32,750) they make a $2,750 loss. Alternatively, if the price of Bitcoin falls to $5500/5550 (meaning the position is now worth $27,750), once the position is closed, it would mean a profit of $2,250.
Cryptocurrency exchanges are platforms where you can buy, sell, and trade cryptocurrencies. They play a crucial role in the cryptocurrency market by providing a platform for liquidity and price discovery.
There a two main approaches to analyzing cryptocurrencies: fundamental and technical analysis. Fundamental analysis uses the news and events affecting the coins, exchanges and other crypto businesses. Technical analysis uses only price data to map areas of historical supply and demand for the cryptocurrencies.
Government regulation, the introduction of new cryptocurrency technology and problems at cryptocurrency exchanges can affect supply and demand for the coins.
One of the advantages of trading cryptocurrencies is that they appear to have lower correlations with traditional asset classes like bonds or stocks.
The performance of cryptocurrency firms, especially in countries with high ownership like South Korea and Japan tend to have an over-sized impact on the price action. The hacking and collapse of the Mt Gox and YouBit digital currency exchanges caused investors to lose faith in the safety of funds held in cryptocurrencies and caused a sharp drop in bitcoin and altcoin prices.
Institutional ownership is growing, and we have seen long-term holders "buy-the-dip", bringing support to cryptocurrencies.
Some believe the high concentration of retail traders makes cryptos more true to traditional chart patterns and indications of oversold, overbought conditions etc.
Technical analysis techniques can be applied to any market where the price can freely fluctuate and data is available to see those fluctuations. The FlowBank trading platform has a full suite of all the best-known technical indicators and chart drawing tools.
Using financial leverage, investors are able to trade the markets with a smaller initial deposit. This makes CFD trading more accessible and cost-effective than other investment methods. However, it also carries an extra level of risk. It is critical that an investor fully understands how CFD trading works and has a sound risk management strategy in place before opening a position.
Trading cryptocurrencies with FlowBank's advanced trading platforms offers the ability to utilise advanced order types to place trades and importantly, to manage risk. For example, there will be the ability to buy or sell at the current market price or select a preferred entry point using limit and stop orders. These orders will be automatically triggered when the price of the cryptocurrency hits that level.
A cryptocurrency wallet is a piece of software that allows you to store and manage your digital assets. It contains a pair of cryptographic keys: a public key, which is your wallet address, and a private key for signing transactions. (An illustration of a cryptocurrency wallet)
Additional security measures include using hardware wallets, enabling two-factor authentication (2FA), and regularly updating wallet software.
Cryptocurrency trading entails substantial risk due to the market's inherent volatility. However, there are several ways traders can manage this risk.
Having a well-thought-out trading strategy is crucial in cryptocurrency trading. Here are some steps to consider:
Both fundamental and technical analysis are critical in crypto trading. Here's why:
Regulations can significantly affect the crypto market. Here's how:
Tax obligations are an important consideration in crypto trading. Here are some key points: