Cryptocurrencies are a digital form of money that can be used for trading or investing, just like traditional currencies. However, cryptocurrencies operate outside the control of financial institutions and governments. There are many types of cryptocurrencies, each with its own unique characteristics and uses. How to trade them? How to make money on them? What to pay special attention to when trading cryptocurrencies? We write about it below!
How does cryptocurrency trading work?
Cryptocurrency trading is a process in which investors make decisions about the future price movements of cryptocurrencies using a CFD account or by directly buying and selling cryptocurrencies on a cryptocurrency exchange. In the case of a CFD account, the investor does not hold the actual cryptocurrency, but merely speculates on its prices by entering into contracts with a broker. On a cryptocurrency exchange, on the other hand, investors can buy and sell actual cryptocurrencies, which pass into their ownership.
CFDs, and cryptocurrencies
CFD is a type of derivative instrument. It allows you to trade cryptos without owning them. With CFD trading, you can open a long position (buy) if you expect the value of the cryptocurrency to rise, or a short position (sell) if you expect the value to fall.
CFDs are usually leverage-based, which means that by investing a small amount, called margin, you can get full exposure to the underlying market. However, profit and loss are still calculated based on the full size of your position, which means that leverage can increase both your profits and losses.
Cryptocurrency exchanges as one way to buy them
When you decide to buy cryptocurrencies through an exchange, you become the owner of them. To start trading, you need to create an account, pay the full value of the cryptocurrencies you want to buy and hold them in your wallet until you are ready to sell them. Remember that trading on cryptocurrency exchanges requires knowledge and experience with technology and storage. Many exchanges also impose restrictions on the minimum deposit amount and charge account maintenance fees.
How does a cryptocurrency transaction work?
Cryptocurrencies are digital money that no government controls. Instead, the entire system works through a network of computers. They can be bought and sold on exchanges and stored in wallets. Unlike traditional currencies, cryptocurrencies do not exist physically, but rather as electronic records on a blockchain. When a user wants to send cryptocurrency to another person, he sends it from his digital wallet. The transaction is confirmed and added to the blockchain, creating new units of cryptocurrency.
Blockchain and network consensus
Blockchain takes care of storing data digitally.In the case of cryptocurrencies, blockchain is used to keep track of the transaction history for each unit of cryptocurrency, making it possible to determine which people have held it in the past. Transactions are stored in blocks, and new blocks are added at the beginning of the chain.
Blockchain has unique security mechanisms that ordinary computer files lack. A blockchain file is stored on multiple computers on the network, not just one, making it transparent, but at the same time very difficult to change. In addition, it is resistant to hacking attacks and human error, making it very secure.
How does a cryptocurrency transaction check work?
Computers that are used to mine cryptocurrencies select transactions that are pending from a group of available transactions, and then perform verification to ensure that the person who sends the money has enough funds in his account to complete the transaction. This verification includes checking the details of the transaction and the transaction history recorded on the blockchain. The second verification confirms whether the person who authorizes the money transfer is actually using his private key. Computers used in the cryptocurrency mining process collect valid transactions and try to create a cryptographic link to the previous block by solving a complex algorithm. When they succeed, they add the new block to the blockchain and inform the rest of the network. This is how blockchain transactions are completed.
What affects the prices of cryptocurrencies?
Cryptocurrency prices in the markets fluctuate depending on supply and demand. Unlike traditional currencies, these prices are not controlled by politics and the economy. There are many factors that affect the prices of cryptocurrencies. For example, these may include:
- the rate of issuance,
- the value of all coins,
- the way they are presented in the media.
Also important are the degree of integration with existing payment systems and key events, such as regulatory changes, security problems and economic crises, which can indirectly affect the base price of a given crypto.
What to look for when trading cryptocurrencies?
The following are aspects to consider before trading cryptocurrencies:
- The spread – that is, the difference between the buying and selling price of crypto. If you intend to create a long position, i.e. buy a cryptocurrency, you have to pay a bid price, which is usually slightly higher than the market price. On the other hand, if you want to open a short position, i.e. sell a cryptocurrency, you have to sell it at the selling price, which is usually slightly lower than the market price.
- Cryptocurrencies are often traded under contracts, which help normalize the size of trades. Because cryptocurrencies are highly volatile, these contracts tend to be very small, and most involve only one unit of crypto. However, some cryptocurrencies are also traded under larger contracts.
- Leverage – allows you to gain exposure to a larger number of cryptocurrencies without having full capital in this regard. To do this, investors put in only a small amount of money, called margin. When they close a leveraged position, their profit or loss is based on the full value of the transaction. Leverage can increase potential profits, but it also comes with the risk of greater losses, which can exceed the margin in a single transaction.
- Margin – is an important part of trading with leverage. It is the initial deposit you must pay to create and maintain a leveraged position. The margin required depends on the broker and the size of the trade, and is usually expressed as a percentage of the full value of the position. For example, in the case of a Bitcoin trade, you may be required to pay 50% of the total value of the contract to open the position. Instead of paying the full amount, the trader must deposit only a portion of it.
Where can cryptocurrencies be traded?
There are various ways to trade cryptocurrencies, including cryptocurrency exchanges, cryptocurrency brokers, bitmats and P2P platforms.
- Cryptocurrency exchanges are online platforms that allow you to buy and sell cryptocurrencies according to current market prices.
- Cryptocurrency brokers, on the other hand, offer leveraged cryptocurrency trading, which allows you to invest in cryptocurrencies without having to hold them in your wallet.
- Bitmats are physical devices that allow you to purchase cryptocurrencies with cash or a debit card, and are available at some stores, malls or airports.
- P2P platforms allow direct trading between users without going through exchanges or brokers, allowing cryptocurrencies to be bought and sold using various payment methods such as bank transfers or PayPal.
Whichever form you choose, pay attention to the commission, as well as the security features of the form. Use special wallets to store crypto, which will take care of its security.
