How Do You Buy and Trade
Cryptocurrency

How Do You Buy and Trade
Cryptocurrency

Guide to Buying and Selling Cryptocurrency

Cryptocurrency has become increasingly popular in recent years, creating a range of opportunities for traders who want to take advantage of market price movements. In just a decade, the cryptocurrency market for digital currencies has grown from one to over 2,000 cryptocurrencies.

Nonetheless, the market involves quite a lot of processes and jargon which can be daunting for both novice and seasoned traders alike. It’s essential to know how the market operates and how to trade cryptocurrency before you join in the market action.

What is Cryptocurrency
Trading?

Cryptocurrency trading involves either speculating on cryptocurrency price movements via CFD trading or buying and selling cryptocurrencies via a cryptocurrency exchange. With cryptocurrency CFDs, you don’t take ownership of the underlying cryptocurrency but only speculate on its price movement.

On the other hand, when you buy or sell cryptocurrencies via a crypto exchange, you purchase the actual coins. Some exchanges let you buy with fiat currency, while others are for trading cryptocurrencies only and don't accept fiat deposits.

By linking a bank account to your bitcoin wallet, you can, for example, buy bitcoin and sell bitcoin and deposit that money directly into your account. Because you own the bitcoins you buy on a bitcoin exchange, you need to have a wallet to receive, store and send the cryptocurrency tokens. There are several types of wallets available but the five main ones are online, mobile, desktop, paper and hardware wallets.

What Influences
The Cryptocurrency Market

The cryptocurrency market is decentralised, therefore, the economic and geopolitical issues that affect traditional currencies tend not to affect it. There are still, however, some factors that influence the market including:

1. Supply

The total number of coins available for a particular cryptocurrency and the rate at which the coins are released, lost, or destroyed plays a crucial role in setting market prices. Generally, all things being equal, the scarcer the cryptocurrency, the more valuable it should be.

For example, both bitcoin and bitcoin cash which have an upper limit of 21 million coins are more valuable than litecoin which has an upper limit of 84 million coins. In turn, litecoin (LTC) is more valuable than ripple (XRP) which has an upper limit of 100 billion coins.

2. Reputation

The way a cryptocurrency is portrayed in the media and how much media coverage it gets can affect prices.

For example, negative press following a major wallet hack can cause prices to fall.

3. Major Events

This includes key events such as security breaches, breaking news, ICOs, and cryptocurrency regulation updates.

4. Integration with
existing infrastructure

How easily a cryptocurrency integrates into a wider network of infrastructure with expanded applications can increase its value.

For example, the value of a cryptocurrency that cannot be integrated into any infrastructure may be lower compared to that of a cryptocurrency that integrates with e-commerce payment systems.

Why Trade
Cryptocurrency CFDs?

One of the first things you will have to do before venturing into the cryptocurrency trading space is to choose between speculating on cryptocurrency price movements and buying coins outright via an exchange. To do this, it may help to understand why cryptocurrency CFDs have become a popular alternative to buying and selling cryptocurrencies via an exchange. The following are some of the benefits cryptocurrency CFDs offer traders.

  • Volatility

    The cryptocurrency market is volatile because it tends to attract short-term speculative interest and comparatively small trades can have a big impact on market prices. This means when trading CFDs, CFD traders can capitalise on the volatility with the aim to earn some money in the market. The market can also experience rapid intraday price movements which give traders a chance to potentially profit.

    Example: The value of bitcoin (BTC) has been historically quite volatile. In the three months spanning from October 2017 to January 2018, the volatility of the price of bitcoin almost reached 8% and in the year leading to October 2018, the price of bitcoin rose as high as $19,378 and fell as low as $5,851. Some cryptocurrency CFD traders were able to realize some gains from this sudden market boom.

  • Improved liquidity

    Liquidity is a measure of how easily a digital asset can be sold. It’s important because it brings about faster transaction times and better pricing. Cryptocurrency market transactions are considered illiquid which means that when you hold cryptocurrency in a wallet you can expect slow transaction times and sometimes poor pricing. Trading cryptocurrency CFDs offers improved liquidity since you don’t own the asset and you can execute trades quickly at a lower cost.

  • Ability to trade in both rising and falling markets

    When you buy a cryptocurrency on an exchange, you do so hoping that its value will increase. On the other hand, when you trade only price movements, you can potentially make profits both when the value of the cryptocurrency rises and when it falls. You can go long (buy the cryptocurrency) if you think the price will increase or go short (sell the cryptocurrency) when you think the price will decrease.

  • Leveraged positions

    Cryptocurrency CFDs are leveraged and you can open a position on margin. This means that while you will still be able to profit according to the full position of the trade, you only need to deposit a fraction of the full value of the cryptocurrency to gain exposure to the market. Simply put, with CFDs, you can possibly make large profits from a relatively small investment. Conversely, when you buy a cryptocurrency on an exchange, you have to pay for its full value.

  • Quick account opening

    Buying and selling cryptocurrencies via an exchange requires that you create an exchange account and open a cryptocurrency wallet. Depending on the exchange, this process can sometimes be time-consuming and restrictive. However, opening and setting up a CFD account with a broker is relatively straightforward and quick; allowing you to start trading much faster.

Start Trading Cryptocurrencies
on MT5 today

How are
Cryptocurrencies

Although somewhat complex, cryptocurrency trading can be broken down into a couple of steps.

Step 1 | Learn how the market works

The cryptocurrency market is unlike the other financial markets. It’s vital to understand its jargon before you begin trading. This means that you have to, for example, learn things such as how transactions are added to the blockchain and how the cryptocurrency peer-to-peer checks system work. You will also need to learn other key factors such as market volatility and margin calls.

Step 2 | Decide how to trade

Before you can trade, you first need to decide which trading route you will take – trading via an exchange or cryptocurrency CFD trading.
You may opt for an exchange if you:

  • Want to own the cryptocurrency

  • Can afford to pay for the full value of the cryptocurrency upfront

  • Want exposure to just one exchange

  • Don’t mind the deposit and withdrawal
    fees that come with exchanges

  • Don’t mind paying capital gains on the profits you make

  • Don’t mind maximum deposit limits

You may opt for CFD trading if you:

  • Want to speculate on price movements
    without having to own the cryptocurrency

  • Don’t have the full amount required to buy a cryptocurrency and you want to leverage your position

  • Want exposure to multiple exchanges
    using one account

  • Want to capitalise on the tax benefits of CFD trading and not having to pay deposit or withdrawal fees

  • Don’t want deposit limits

Step 3 | Set up an account

After you learn how the market works, you can open an account. If you are trading through an exchange, you open an exchange account and store the cryptocurrency in your wallet. If you opt for CFD trading, you will need to open a trading account with a broker who offers cryptocurrency CFDs. Once you set up an exchange account, you will have to learn the technology involved and how to make sense of the data you are given. If you opt for CFD trading, you will have to create a trading plan.

Step 4 | Formulate a trading plan

  • A trading plan is crucial in any market, but it’s even more important in the highly-volatile cryptocurrency market. The plan should include:

  • An outline of your trading goals and expectations.

  • Your preferred method of market analysis. Cryptocurrencies are sensitive to market sentiment,
    so whichever method you choose, always stay on top of any news that can impact the market.

  • The cryptocurrencies you want to trade.

  • A robust trading strategy with a clear methodology for entering and exiting trades.
    Risk and money management plan including the maximum acceptable loss,
    your risk/reward ratio, and the use of stop-loss and limit orders.

Step 5 | Select a trading platform

There are now several platforms available for trading cryptocurrencies. Your choices will include advanced proprietary trading platforms, third-party platforms such as MT4 and MT5, web-trading platforms, and mobile apps.

Step 6 | Start trading

When you have chosen a platform, you can start trading. Despite the cryptocurrency you choose to trade, you can open a position by deciding on the size of your position, choosing to go long or short on the trade, and adding orders to protect your position from unnecessary risk. Once you open the position, you can monitor it from the platform and close it by placing an equivalent trade in the opposite direction.

Trading
example - Etherium

Let’s say that you believe the price of ethereum is going to fall in value against the US dollar (ETH/USD), and you decide to go short (sell ethereum). The current sell/buy quote market price of ethereum is 319/339 and you decide to sell 5 contracts (each equivalent to 1 ETH). This means that you will gain or lose $5 for every $1 change in the value of ethereum. Let’s say your prediction is correct and the new price quote is 240/260. You decide to take the profit, buying 5 contracts to close your position. The price has moved 59 pips in your favour (319 – 260), so your profit is $295 (59 pips x $5).

If the price of ethereum had subsequently increased and the new price quote was 355/373, you may have decided to buy 5 contracts to close your position and prevent any further losses. In this case, your loss would have been $270 (54 pips x $5).

Before Trading: What Should You Know?

You can simplify your cryptocurrency CFD learning curve by learning what some common financial market terms and fundamentals mean when it comes to cryptocurrency trading.

  • Volatility

    The volatility which makes the cryptocurrency market attractive to many traders is double-edged – it can also make trading very difficult as the market can suddenly move against you. This means that you increase your risk significantly when you run large open positions.

  • Pip

    With cryptocurrencies, a pip refers to a one-digit movement in the price of a cryptocurrency. Generally, the most valuable cryptocurrencies are traded at the ‘dollar level’. So, for instance, a price movement from $152.00 to $155.00 would mean the cryptocurrency has moved 3 pips. Nonetheless, some lower-value cryptocurrencies have different scales and a pip can be as low as a fraction of a cent. You should familiarise yourself with the measure of price movements for your chosen cryptocurrency before opening a position.

  • Lot

    Lots are used to standardise the size of trades. Due to their volatility, cryptocurrency lots tend to be very small.

  • Spread

    The spread is the difference between the buy and sell prices quoted for any cryptocurrency. When you open a cryptocurrency position you will see two prices – the sell price and the buy price. When you go long you trade at the buy price, which is slightly more than the market price. For a short position, you trade at the sell price, which is slightly less than the market price.

  • Leverage

    Leverage in cryptocurrency trading works the same way as with other financial markets – you gain exposure to large amounts of cryptocurrency with just the margin. However, while leverage can magnify your profits, it can also amplify losses, including those that exceed your margin on an individual trade. It’s crucial to use leverage as a trading tool and learn how to manage your risk. You should consider the total value of a leveraged position before you start trading.

Start Trading Cryptocurrencies
on MT5 today

Buying and Selling Cryptocurrency
the Right Way

The cryptocurrency trading world is one where patience is key. Just like with other financial markets, it’s important to first build knowledge of the market then practice and have the discipline to stick to your trading plan. With the right approach to trading, you will be able to buy and sell cryptocurrencies successfully.

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