Cryptocurrency Trading: A deep dive
Cryptocurrency trading is currently the most active space of the industry and the backbone of the digital asset infrastructure. However, learning about it for the first time can be quite confusing. What is cryptocurrency trading? How does it work? How is it different from the traditional trading ecosystems such as stocks, forex and shares etc.? These are the questions that we’re going to answer in today so let’s dive in!
What is cryptocurrency trading?
Cryptocurrency trading can be broken down into two main categories – speculating on cryptocurrency price movements through a CFD account (keep reading to learn about this) or buying and selling the underlying coins through cryptocurrency exchanges.
CFD Trading on Cryptocurrencies
A contract for difference (CFD) is a popular form of derivative trading. It enables you to speculate on the rising or falling prices of fast moving global financial markets such as shares, indices, currencies and treasuries. In the case of cryptocurrencies, CFD trading means that you can speculate on the forever changing prices of different digital currencies without actually owning any.
You can go long (‘buy’) a digital currency if you think it’s price is about to increase or go short (‘sell’) if you think the price is about to nose dive. However, in both cases you are dealing with leveraged products. That means you only have to deposit a small amount in order to fully take advantage of trading market. Your deposit is called ‘margin’. Any profit or loss is always proportionate to the size of your margin.
Buying and selling cryptocurrencies through an exchange
This form of cryptocurrency trading is rather simple. You set up an account with one of the numerous cryptocurrency exchanges available worldwide and buy some cryptocurrency tokens. You can then sell the coins when or exchange them for another cryptocurrency in order to make marginal profits while still keeping a stake in the market. There are many different strategies to this approach and in order to understand the pros and cons, you have to invest time and effort into learning about the cryptocurrency market.
What sets cryptocurrency trading apart from traditional derivatives trading?
Cryptocurrencies are not issued by a singular central authority. They are decentralized assets maintained only on a secure network of computers spread all over the world. These computers are responsible for verifying transactions and keeping each other honest.
There are many different copies of the transaction history of a cryptocurrency spread throughout the internet. There are special cryptographical and mathematical procedures implemented into the blockchain’s code to ensure that no one computer can lie to the network and claim false ownership or transactions. The consensus system of verifying transactions ensures that there is no need for trust between the transacting parties or intermediaries like banks and other financial institutions.
Since cryptocurrencies are decentralized, they are free from many of the economic and political concerns that affect traditional currencies and commodities. Having said that, cryptocurrencies have their own list of factors that can greatly impact the price. Supply of the cryptocurrency “coins”, market capitalization, press, and key events are some of the factors that can sky rocket or floor a cryptocurrency’s price on any given day.
The volatility of the cryptocurrency market has always been a fact that cryptocurrency traders have had to deal with. However, as more people are learning about and adopting these cryptocurrencies, the market has scene stabilization.
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