What is cryptocurrency trading and does it work?

What is cryptocurrency trading?

Cryptocurrency trading simply refers to the act of buying and selling digital assets like Bitcoin, Ethereum and other altcoins. Unlike traditional currencies controlled by central banks, cryptocurrencies operate on decentralised networks using blockchain technology.

Traders can participate in either spot trading, where you buy actual cryptocurrencies, or in Over the Counter (OTC) derivatives trading, such as contracts for difference (CFDs), where you speculate on price movements without actually owning the underlying assets.

Why do people trade cryptocurrency?

People trade cryptocurrencies for all sorts of reasons. One of the most obvious motivations is the potential for high returns due to the crypto market’s inherent volatility. Cryptocurrencies also allow for interesting diversification opportunities, as they can provide a hedge against traditional assets.

There’s also the decentralised nature of cryptocurrencies, which can be appealing for investors who prefer to dabble in a financial system without intermediaries. For others, the 24/7 availability of crypto markets can be highly attractive, as it means traders can act on CFD opportunities at any time – not just during standard market hours. Then there’s the speculative or hedging attraction of trading pairs (e.g. BTCUSD) on Pepperstone. It is important to remember when trading cryptocurrency CFDs like offered by Pepperstone you do not own the underlying cryptocurrency.

What are the most popular cryptocurrencies?

Undoubtedly the most popular cryptocurrency is Bitcoin (BTC), however Ethereum (ETH), Tether (USDT) and Litecoin (LTC) are also heavily traded in today’s marketplace, often through Contracts for Difference (CFDs) which allow traders to speculate on price movements without owning the underlying assets. There are also interesting followings for penny cryptocurrencies like Dogecoin.

Bitcoin is often referred to as digital gold as it’s the first and most widely recognised cryptocurrency. However, Ethereum stands out as well for its smart contract functionality which enables decentralised applications (dApps) to run on its blockchain.

Elsewhere, cryptos like Ripple facilitate fast and cost-effective cross-border payments, while Litecoin allows for faster transaction times and lower fees compared to Bitcoin. Then there are altcoins like Bitcoin Cash, which is a fork of Bitcoin, that claim to provide faster and cheaper transactions.

How do I choose which cryptocurrency to trade?

Choosing the right cryptocurrency to trade with CFDs involves careful consideration of myriad factors. Start by analysing current and historical market trends, and understand the technological foundation and adoption rate of the coin. Be sure to also research the development team and the real-world problems the cryptocurrency aims to solve.

With Pepperstone, you can trade cryptocurrencies CFDs involving Bitcoin, Ethereum, Litecoin and more without the need for a digital wallet or cryptocurrency exchange with the ability to go long or short with leverage up to 2:1 as you are trading a CFD of those cryptocurrencies, not the cryptocurrency itself. The most important thing is to stay informed about market news and developments to make well-timed trades.

What moves cryptocurrency markets?

Crypto markets are influenced by several different factors, including:

• Technological advancements: Such as blockchain upgrades or new features, which can drive market sentiment.
• Regulatory news: Both positive and negative news can influence prices.
• Market sentiment: This is driven by investor perceptions and social media trends.
• Macroeconomic factors: Things like inflation rates and global economic conditions.
• Speculation and trading volume: These may also contribute to market volatility and, as a result, create opportunities for traders.

How do I start trading cryptocurrency CFDs?

After doing your due diligence and deciding that cryptocurrency CFD trading is something you want to do, you’ll need to open an account with a CFD broker that offers crypto CFD trading, such as Pepperstone.

1. Choose a platform that provides CFDs on various digital currencies.
2. It’s a smart play to start out using a demo account so you aren’t actually trading with your ‘real’ money to familiarise yourself with how to trade crypto CFDs.
3. Once you are confident and understand how crypto CFD trading works, you can set up your trading account.
4. You’ll need to deposit funds and familiarise yourself with the platform’s various trading features to get started.

As always, do market analysis and develop a trading strategy before trading cryptocurrency CFDs. Depending on your risk appetite, you might start with smaller trades to gain some experience and then gradually increase your trading volume to your risk tolerance.

What are the benefits of trading cryptocurrencies?

High liquidity and market accessibility are arguably the two biggest advantages, as they allow you to enter and exit your positions swiftly. There’s also the potential for substantial returns, which are driven by market volatility.

For some, the round-the-clock nature of crypto markets (i.e. they are always open) means there are non-stop opportunities to trade, unlike with traditional stock markets like the ASX. Plus, being decentralised, cryptocurrencies are less susceptible to government interference and inflation, which can be a helpful hedge against economic instability.

What are the risks of trading cryptocurrencies?

As with any type of investment, there are always risks to consider. For crypto CFDs, despite the potential for high returns, it does carry some level of risk.

High market volatility can result in substantial losses, remembering that trading in crypto CFDs is leveraged meaning that losses are magnified. Then there are regulatory uncertainties and sudden changes in government policies that can impact the market’s stability.

When trading cryptocurrency CFDs, be aware that the market is relatively young and constantly evolving, making it susceptible to speculative bubbles and market manipulation.

It’s always recommended to do plenty of research and have robust risk-management strategies in place before you start trading crypto.

What is a cryptocurrency trading example?

Let’s stick with the most commonly traded cryptocurrency for this example: Bitcoin.

If you believe that the price of Bitcoin will go up, you can open a CFD position to buy Bitcoin at a certain price using leverage. For example, with a 10:1 leverage, you can control $10,000 worth of Bitcoin with just $1,000 in margin. If the price increases as you anticipated, you can close your position for a profit. However, if the price falls, you will incur a loss.

This is a common trading strategy with CFDs (i.e. opening a long or short position) that lets you speculate on price movements without owning the actual asset. Thus, it’s easier to take advantage of both rising and falling markets.

What is leverage in cryptocurrency CFD trading?

‘Leverage’ is what traders use to control a bigger position with a smaller amount of capital. Here’s an example: with 10:1 leverage, you can trade $10,000 worth of cryptocurrency with just $1,000.

While leverage can seriously boost your profits, it also increases the risk of major losses. So you’ll want to use leverage cautiously, especially as a beginner trader, and make sure you have adequate risk-management strategies in place to shield your capital.

What is margin in cryptocurrency CFD trading?

This is the collateral needed to open and maintain a leveraged position. The ‘margin’ is usually a percentage of the total trade value; think of it as the funds required to open a trade and maintain it.

Say the market moves against your position – your broker can issue a margin call, which means you have to deposit extra funds in order to hold your position otherwise if there is insufficient margin, the position will be stopped out.

What is the spread in cryptocurrency CFD trading?

The ‘spread’ is the difference between the buy (ask) and sell (bid) prices of a cryptocurrency. It’s a term that represents the cost of executing a trade and can depend on current market conditions as well as the broker.

The smaller the spread, the better the market liquidity. But a wider spread suggests lower liquidity. As a cryptocurrency CFD trader, you’ll need to factor in the spread when planning out their trades, as it will affect the potential profitability of your positions.

What is a lot in cryptocurrency CFD trading?

A ‘lot’ is a commonly used term that refers to the standardised unit size of a trading position. In other words, it determines the amount of the asset being traded. The size of a lot tends to depend on the broker, like Pepperstone and the specific cryptocurrency.

Let’s say you are keen to start crypto CFD trading on Pepperstone. A standard lot, for example, might represent one Bitcoin or a fraction of it, depending on the broker’s terms. You’ll want to wrap your head around lot sizes in order to better manage your risk levels and calculate the potential profits or losses in any given trade.

What is a pip in cryptocurrency CFD trading?

A ‘pip’ – or percentage in point – is the smallest price increment that a cryptocurrency CFD can move. For most cryptocurrencies, a pip is equal to one hundredth of a percent (0.01%). However, the value can vary depending on the cryptocurrency and the broker’s pricing model.

Now that you know the foundations of cryptocurrency trading, you can take advantage of speculation and hedging opportunities with crypto CFDs by finding the right platform to start trading.