Bitcoin, Litecoin & Ethereum seem to be the new buzz words of today and I’m guessing you’ve already heard of them? These Cryptocurrencies are one of the most disruptive inventions of the 21st century and are completely revolutionizing the way we do business.
Now whether you’re motivated for profit or purely educational purposes is none of my business, But I’m glad you’ve taken the initiative to educate yourself on the subject of Cryptocurrency Trading.
So let’s get started
What exactly is Cryptocurrency Trading?
Cryptocurrency trading is the art of generating a “PROFIT” by trading the price fluctuations of cryptocurrency pairs. In other words you’re betting whether the price of a cryptocurrency will increase or decrease over time. So will the value of Bitcoin weaken or strengthen against the united states dollar over the next week?
Dependent on what type of trader you are, there are two methods you can use to trade cryptocurrencies:
Just like stock exchanges, there are crypto exchanges where users can create an account and buy & sell different cryptocurrencies. These exchanges, mostly, allow for the conversion of fiat currency to cryptocurrencies and vice versa.
So for example at the time of writing Bitcoins was valued at $4,692.29
That means that you would need $4,692.29 to buy 1 Bitcoin + Fees dependent on the exchange you’re using.
When buying a cryptocurrency on an exchange you will “own” the asset which can than be transferred to your digital wallet.
Trading on exchanges is more suited for investors who want to buy-and-hold a cryptocurrency over an extended period of time.
You may also trade cryptocurrencies using traditional Forex & CFD Brokers.
With CFD trading, you get the same exposure to the value of the cryptocurrency, but without actually owning it. Instead, you are buying a “contract” that tracks the price of the actual cryptocurrency.
The most obvious benefit of using a CFD broker is that you can trade with leverage. Dependent on the Leverage offered by the broker you can open positions of say $30,000 with only $1,000 in capital.
Trading with CFD Brokers is better suited for day traders looking to profit from the short-term price fluctuations of cryptocurrencies.
The remainder of this course is focused on the 2nd method of trading cryptocurrencies, using traditional CFD Brokers. However, if you’re more interested in actually owning & storing cryptocurrency than skip to our guide on how to become a bitcoin trader.
So let’s specify what Cryptocurrency CFD brokers actually represent. CFD stands for Contract for Difference, and, as the title suggests, the parties involved in this contract trade the difference in rates. When trading Cryptocurrnecy CFDs, you can generate income based on price fluctuations, and the final profit depends on the distance that the price has made since opening the trade order.
The key thing you should understand here is that you don’t physically buy the asset but merely trade on its price movement. So, when trading cryptocoins with CFD brokers, don’t expect to possess Bitcoin or Ethereum because CFD and Forex brokers don’t replace crypto wallets.
A few particulars you need to understand…
Spread – if you plan to trade cryptocoins with one of the CFD brokers, be ready for a much higher spread when compared to typical Forex pairs like EUR/USD. Sometimes the spread can be so high that scalping becomes irrelevant. For example, if the spread with EUR/USD is 1.5 or 2.00 pips, then the spread with BTC/USD is 20.00 pips at least. It means that you will pay $20 more dollars per Bitcoin.
The spread differs from broker to broker, and some services can offer a fluctuating spread.
Trading Hours – I guess you know that Forex currencies are open for trading 24/7. The same is true about cryptocoins, but, unlike Forex pairs, they can be traded in the weekends too. However, trading during weekends and in the nighttime is not the best deal since the volume is low and the market becomes unpredictable. The most favorable periods for trading Bitcoin and altcoins are the US and European sessions.
Leverage – margin trading has a great feature called leverage, which can boost the potential profit in exchange for the risk of amplified potential loss. In other words, you borrow money from the broker to increase the investment per trade while aiming for a higher return. With typical Forex pairs, maximum leverage can reach 400:1, suggesting that you can boost your profits by 400 times by investing only 0.25% of the total position. However, when trading cryptocoins, most of the brokers offer a maximum leverage of 10:1 and sometimes 5:1. The small leverage limit is a reaction to higher volatility and risk involved with the cryptocurrency trading.
Swap – most of the brokers require a negative swap on crypto contracts, i.e., it charges a commission for keeping position overnight. As you might guess, this amount negatively affects the potential profit of long-term trades.
Volatility – Despite being present for over a decade, cryptocurrencies still represent an emerging market that suffers many changes because of updating regulatory requirements and contradictory attitudes from institutions and influential people. This is why you can see Bitcoin, Ethereum or any other coin moving up or down by over 20% or 30% within a single day. Such jumps and drops are not typical for Forex pairs, which barely move up to 2% on an average day.
Cryptocoins Vs. Currencies Vs. Stocks
Cryptocurrency trading is different from trading CFDs on stocks and regular currency pairs. I have mentioned some of the differences right above, such as trading hours, leverage, volatility, and spread among others. When trading stocks, the leverage is even lower than with cryptocoins – up to 3:1. Also, stock trading is available during a certain day period from Monday to Friday.
The fundamental difference you should understand about cryptocoins is that their behavior is very similar to company stocks. When I say this, I mean that cryptocurrencies struggle to increase in price the same as companies look to increase their market capitalization. Because of this, you will note that, in the long-term, most of the cryptocoins show an uptrend with some corrections now and again, which is so similar to many company shares.
Elsewhere, typical Forex pairs represent a ratio between two national currencies, suggesting that the quotation can move upwards or downwards with the same success.
As with typical Forex pairs, one can apply strategies based on technical and fundamental analysis – there is no big difference about it. However, cryptocurrencies are more sensitive in both instances. The news and important events related to the crypto industry can shake the prices, which is why trading on the news has to be a smart approach when operating with longer timeframes.
When it comes to applying technical analysis on cryptocurrencies, there are serious disputes. Some traders believe that technical analysis is not appropriate since the cryptocurrency industry has a different nature of the economy, while others stick only to indicator-based strategies. In the end, the choice should be yours.
Most of the straightforward and practical strategies based on technical analysis involve Moving Averages (MA), which refer to specific lines that follow the price by mathematically averaging it for a given period. MAs make the trends more visible and clear.
The price action patterns, especially those based on Japanese candlesticks, are also effective at forecasting the potential future movements.
Do CFD Brokers Offer Conditions For Mining?
Some of you may have heard of mining, which is a process in which one can generate new cryptocoins, such as Bitcoin. Miners use special software programs to solve specific math problems in exchange for new coins. By doing this, miners monitor and support the state of the blockchain system, and they get new coins as a reward. Today, Bitcoin mining is almost impossible for individual users as the competition is fierce – only institutional miners can win this battle.
Well, CFD and Forex brokers have nothing to do with mining since they only provide the trading platform to invest on the rate difference. It means that you cannot directly operate with the cryptocoins you trade.
CFD brokers offer a decent list of cryptocoins for trading. In reality, there are more than one thousand cryptocurrencies, which is pretty impressive. New cryptocoins are born during the so-called initial coin offerings (ICOs). If you are new to this, ICO is something between crowdfunding and fundraising. It resembles initial public offering (IPO), hence the similar name. Initially, the coins are referred to as tokens, and then, when they reach crypto-exchanges and are available for open trade, we can call them cryptocoins, though “token” can still be used.
Bitcoin is the first cryptocurrency out there. The creation of a mysterious entity known as Satoshi Nakamoto, it came out in 2008. Since then, most of the altcoins (we call altcoins all the cryptocoins besides Bitcoin – from “alternative coins”) are built on the same basis as BTC. Accordingly, the principles are the same: you will hear about the blockchain, mining, transactions, and so on. Altcoin developers want to make their tokens better than Bitcoin, so they come with new features, enhance the algorithms, speed up the processing, improve security, and more.
Now, let’s check the most traded cryptocurrencies and see their nuances:
This is the superstar of the cryptocurrency world. With a market share of 49% as of October 2017, Bitcoin is by far the most popular cryptocoin. In reality, the Bitcoin hype in the media has substantial grounds, and here is why:
- Bitcoin is the very first cryptocurrency and the blockchain technology as we know it today was developed especially for it.
- This veteran digital coin stays guilty for revolutionizing online transactions, which are borderless, low cost, and almost anonymous.
- It is the only coin that is widely accepted as a means of payment by many merchants worldwide.
- There are thousands of Bitcoin ATMs all over the world. 99% of these cryptocurrency vending machines focus namely on BTC.
- Most of the initial coin offerings (ICOs) today use Bitcoin and Ethereum as intermediary coins through each new token are launched.
Accordingly, most of the cryptocurrency traders who want to make profits in the short-term or the long-term opt for Bitcoin Investing. I would say it is the right choice, especially for beginners, as most of the news and events are related to it. Each story or government decision pro or against Bitcoin is an excellent occasion to open long or short positions depending on the situation.
As of today, the price for one Bitcoin is $4355.06, and the total market capitalization is $72 billion. However, since you will trade CFDs on Bitcoin, the price is not that relevant – you will simply open positions on its quotation.
This is Bitcoin’s biggest rival. Some experts say that Ethereum would exceed Bitcoin in terms of market capitalization and price per coin. In fact, ETH quotation demonstrated meteoric jumps until June 2017, when its price crashed from $319 to 10 cents (yes – that’s 99.9%) for a few minutes. A few months have passed since then, but ETH still cannot update its record. However, most analysts are sure that Ethereum has a fantastic perspective.
You may wonder what’s so special about this coin. Well, it has a more sophisticated blockchain system than the one behind Bitcoin. It allows smart-contracts, which are specific pre-coded contracts that are automatically triggered when specific pre-set conditions are met. With the help of smart contracts, no third party is needed for negotiations and agreements.
If you plan to trade Ethereum with one of the CFD brokers, be ready for high volatility and spontaneous price movements, which is basically true about any other cryptocoin. In the recent months, ETH/USD tries to simulate BTC/USD on large timeframes.
Chronologically, Litecoin is the second only to Bitcoin. It came out in 2011, and it has tried to solve some of the most evident problems of the blockchain behind BTC. For example, Litecoin transfers are much faster, and the mining process is much easier to perform by regular users. However, as you already know it, mining is not relevant for CFD traders anyway.
As of today, LTC/USD quotation is $51.78, and the coin’s market cap is $2.7 billion.
Litecoin is considered the most stable cryptocoin out there, being the least volatile. But again, we speak about large timeframes. It doesn’t suggest that the price will keep flat on H1. Amid lack of solid fundamentals, Litecoin may go in tandem with Bitcoin.
Considering the market capitalization, this altcoin is only after Bitcoin and Ethereum, at $9 billion. Interestingly, if you plan to buy it directly, one XRP, this is how Ripple’s token is called, would cost you only $0.23. Anyway, it doesn’t mean that the coin is a midget – it rose from $0.003 in 2013.
Ripple coin is a huge network that connects retail and investment banks, financial institutions, exchanges, agencies, and payment services under RippleNet. It allows fast transactions at affordable prices.
If you want to trade Ripple, wait for big news or new partnerships with reputable banks to come out.
Launched in 2014, the altcoin is considered by many as the most user-friendly cryptocurrency. Unlike Bitcoin, which allows some transparency since all the transactions are visible in the blockchain, Dash may offer its users complete anonymity.
Today, DASH token costs $304, and the coin has shown an astronomical return since the end of 2016. For example, exactly one year ago, in October 2016, its price had fluctuated around $11.
Besides these coins, some CFD brokers provide even more. Two of them may cause some confusion among beginners, so let’s talk about them:
This cryptocoin, which appeared in July 2017, is traded separately from Bitcoin. However, it actually derived from the “real” Bitcoin. We call it a fork, which happens when miners want to move a portion of the blockchain in another direction in order to add some features for better performance. Today, Bitcoin Cash acts like a completely different coin, and it costs $355. You can trade it with most of the CFD brokers that allow cryptocurrency trading.
This one is also a result of a fork. It came out as a result of the extinction of another token, called DAO. However, this is quite a long story for our intro.
If you decide that trading cryptocurrencies is something you’d like to try than you can proceed with the following steps:
Register and create a live account
Before picking a broker that allows cryptocurrency trading, make sure it is regulated and has mostly positive reviews online. Examples of CFD Brokers which allow cryptocurrency trading can be found our list best cryptocurrency brokers.
There are minimum deposit limits that differ from broker to broker. Some of them offer micro-accounts where this limit is as low as $1.
Open the web-based platform or download it on the desktop
Some brokers have their in-house platforms while others operate with platforms like MT4 or cTrade. Most of them have different platform versions to meet any needs.
you can open your first position by picking a cryptocurrency pair on the platform (like BTC/USD), and going long or short, e., clicking on Buy or Sell. Don’t forget about the stop orders to automate your trading!
If you happen to be a Forex trader, you can see that trading cryptocurrencies is no different from traditional trading practices. There are many intermediary steps, but this short guide comprises the most important ones.
A few trading tips to remember
Before opening the platform and placing the first order, make sure you check our 10 cryptocurrency trading tips:
- Any trade should be conducted with much confidence.
- Greed and emotions are always your enemies. You must be patient enough to wait for clear bullish or bearish signals. Impulsiveness in such risky trades will wipe out your deposit.
- The list of quotations must continuously be monitored.
- Only invest what you are ready to lose! Never borrow money for investing in cryptocoins!
- Follow a strict money management plan!
- Don’t wait for new peaks and lows – just take your decent profit and leave the market.
- Avoid trading cryptocurrencies in the short-term, especially amid low volumes.
- Never invest your deposit in a single currency! You should use basic hedging methods by opening various
- Record your trades in a special
- Always do your homework rather than just following the crowd!
It is true that the spread is much higher when trading cryptocurrencies. However, the volatility can be your friend in this case. Well, it can also be your enemy if you don’t stick to basic money management techniques – volatility is tricky. The point is that cryptocurrencies can generate an impressive return. If you check the long-term trend, you can see that most of the popular cryptocurrencies tend to grow, which is a great occasion to trade long.
Another good reason to get involved with cryptocoins is their ability to react to the news. Trading on the news might be the most profitable strategy when you find big headlines.
Cryptocurrency is the future of money. We move toward globalization and decentralization – it is a visible trend that cannot be denied. In light of this, cryptocurrency trading becomes more relevant and profitable.
To understand the scale of the cryptocurrencies, know that big banks are already afraid of them since they pose a threat to banking control over the money flow.
The British Banking Association said in a report:
It doesn’t mean that Bitcoin or Ethereum will live forever. But cryptocurrencies, as a concept, have a bright future.
Some analysts believe that in 10 years from now, cryptocurrencies will account for 10% of the entire Forex market, the daily trading volume of which is $5 trillion on average.
As technology investor Chris Dixon said: “There are three eras of currency: commodity based, politically based, and now, math based.”