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Cryptocurrency Trading - A Comprehensive Guide

Do you want to take part in the crypto revolution, but you’re unsure of how to get started? Don’t worry, you’re not alone!

How are cryptocurrencies and the associated blockchain technology changing our world? What are the best ways to take advantage of the crypto-market? What do you need to keep in mind while trading cryptocurrencies? How do you choose the right broker or trading strategy to profit from the crypto-market’s volatility?

This cryptocurrency trading guide will give you a good grounding on almost everything you need to know to start your crypto investing journey. Keep reading to get a sense of what you should know and take into consideration to make better crypto-investment decisions.

While cryptocurrency trading can seem complicated at first, once you master a few concepts, this can be one of the most profitable alternative investment solutions around. The potential to profit from the exponential growth of crypto-assets trading is huge, and many people are now taking advantage of it.

To understand how blockchain technology and cryptocurrencies are changing our world, we need to take a step back and examine the global macroeconomic and financial circumstances that first gave rise to cryptocurrency and the blockchain.

First, lets take a brief look at the history of Cryptocurrency..

2007/2008, the subprime crisis and the rise of the Bitcoin network

Thanks to subprime mortgages, many low-income American families were able to buy houses on very little income, accumulating significant debt. For credit institutions, these transactions were considered "low-risk" - in the event of a non-payment, they could seize the property to sell it.

Credit institutions were comfortable lending this money at low interest rates at first, leading to an increasingly large number of Americans households buying houses during the 2000s. When interest rates rose due to the high risk premium, these households couldn’t repay their loans, which meant that more and more houses were seized and put in the market for sale, which led to a drop in prices.

To get out of the situation and reduce the risk associated with these sub-primes, most credit institutions securitized subprime mortgages into mortgage-backed securities and collateralized debt obligations, which they sold on the financial markets.

When the crisis broke out in 2007, the effects reverberated worldwide. Investors everywhere started being suspicious of these mortgage-backed securities and collateralized debt obligations. They were eager to offload them on a massive scale, which in turn led to a fall in the global market prices.

From a financial to an economic and public debt crisis ..

As banks, hedge funds and institutional investors were heavily invested in these products, they had to clean their balance sheets of these questionable securities, which were no longer worth anything.

Some of these financial institutions couldn’t sell them or use them to refinance themselves – for them, losses were massive. For some banks, like Lehman Brothers, bankruptcy were inevitable. To prevent the situation from worsening, the American government decided to intervene, refinancing the still standing banks that were “too big to fail”.

The situation, as well as the intervention of the US government, was strongly criticized, especially regarding the amount of money involved in the first place. The banking, financial, economic and debt crisis had become a crisis of confidence as well.

This lack of trust in the US’s financial institutions was perfect timing for the first decentralised peer-to-peer payment network to be launched.

The banking crisis led to a trust crisis for the existing banking and financial system. People suddenly realised that they had no power over their money. Banks and other financial institutions could use their money with impunity. Their money wasn’t safe in the hands of banks.

As financial institutions were no longer trustworthy, there were some who conceived of another type of financial system. This is how the Bitcoin and the underlying blockchain technology were first introduced in 2008 by Satoshi Nakamoto.

In his white paper, called Bitcoin: A Peer-to-Peer Electronic Cash System, Satoshi Nakamoto described a new peer-to-peer payment system based on blockchain - third parties like banks wouldn’t be needed to exchange money, and the control of money wouldn’t be given to a centralised organization, like a government or a central bank.

To understand how this new system works, let’s look at a few examples...

Let’s imagine that to buy something to eat, you needed to use stones as currency. As it became more and more inconvenient to exchange stones, orality became the way to know what belongs to whom.

If John had a big yellow stone that he wanted to use to buy a horse from Paul, he would go to the main village square to let everyone know that he had a deal with Paul. So, everyone knew that the big yellow stone didn’t belong to John anymore, but to Paul.

While orality was great, someone had the idea that it might be more convenient to appoint someone in the village to record all transactions. Let’s call this person a “bank manager”.

Paul wants to buy a carpet from John that costs 10 stones. So, before making a deal, John wants to make sure Paul has enough stones, so he goes to the bank manager. Once the deal is done, the bank manager writes down the transaction in a sort of register - a ledger.

It’s a functional system, but not without flaws. What happens when the bank manager is on holiday, or when he is sick? No-one can make a transaction.

Via this system, the bank manager becomes quite an important (not to mention rich) man in the village. He’s needed for all transactions within the village and takes a generous commission every time he records one.

Things need to change…so, what if about everyone becomes a bank manager?

For example, let’s say that Paul wants to give 10 stones to John to buy a carpet from him. In our new situation, Paul will go back to the village’s main square to make the deal public. This time, however, everyone will check that Paul has enough stones to buy the carpet. If it’s the case, everyone will validate and add the transaction to the ledger.

This is the concept of the blockchain.

What is a blockchain?

A blockchain represents a decentralised digital register, or ledger, acting as a database where every transaction is chronologically organised and securely distributed on all the network’s computers.

One of the most innovative features of this is that it works without a central body. Each user can, at any time, using a cryptographic system, check the validity and authenticity of the information, and add data to a block, while recording a transaction. This step is called “mining”.

What are the main advantages of the blockchain technology?
Decentralisation Disintermediation Distribution
Transparency Immutability Less corruption
Improved traceability Security Empowered users
Reduced transaction costs Faster transaction settlements Increased efficiency

What is a cryptocurrency?

Cryptocurrencies are 100% digital coins exchanged by two parties on a specific blockchain without having to go through a trusted third party, such as a financial institution.

What are the main advantages of the blockchain technology?
The technology it is based on: blockchain for most cryptos, Tangle for IOTA for instance The algorithm used to create the digital coin The way it is governed, or the consensus it uses: proof-of-work, proof-of-stake, delegated proof-of-stake, proof-of-stake voting, proof-of-authority, proof-of-importance, proof-of-history, etc.
The way it is distributed Its nature: a coin works on a new blockchain, while a token uses an existing blockchain Its functions: alternative method of payment, cryptocurrency used in a niche industry/within a complex protocol/within a social network, etc.

To secure and protect all transactions made on a blockchain, as well as to be sure they cannot be counterfeited nor deleted, encryption technologies are used. As cryptocurrencies aren’t controlled or secured by a central organisation, they have to be built on cryptography techniques. Simply put, they’re secured by math.

What are cryptocurrencies main properties?
Decentralised Irreversible Permission-less
Fast Global Secure
Limited supply (Pseudo) Anonym Efficient

Trading Cryptocurrencies

While financial transactions were the first kind of transaction to be carried out on the Bitcoin network, other kinds can now be made on other blockchains, such as the Ethereum network.

There are also an increasing number of places where you can use Bitcoins and “altcoins” (cryptocurrencies that aren’t Bitcoin). There are even a few credit cards you can use to spend the cryptocurrencies you have in exchanges (they are converted into fiat currencies like USD, EUR, GBP, etc.).

The crypto-market is a fast-paced market where new cryptocurrencies emerge (and die off) every day. But what’s sure is that cryptocurrencies are here to stay. Institutional investors are starting to offer cryptocurrencies as an asset class to their clients. Big international companies are even launching their own digital currencies, like JP Morgan’s digital coin, or Facebook’s stable coin.

What is cryptocurrency trading about?

Cryptocurrencies are now more than just a means of payment. They are also a means of speculation. Cryptocurrency trading has become a big phenomenon over the last few years, with great trading opportunities.

Since the beginning of May, total crypto-market capitalisation has gained more than 46%, showing increasing interest from investors, which in turn help fuel cryptocurrency prices and trading volume.

Cryptocurrency trading is very similar to Forex trading. The main difference is that you’re dealing with digital currencies instead of fiat currencies. So, how do you take part in this revolution and make your share of the profits?

There are two popular ways you can take advantage of this growing market:

  • buy the coins in an exchange
  • trade CFDs on cryptos through a Forex and CFD broker

Everything comes down to your personality and your financial goals, as both methods have their own advantages and risks. To decide what’s best for you, here are what differentiates the two techniques.

Owning cryptocurrencies

If you want to own cryptocurrencies, you first need to buy coins through an exchange with fiat currencies. This place is called a fiat-to-crypto exchange. If you already own some cryptocurrencies, you can use them to buy new cryptocurrencies at a crypto-to-crypto exchange.

Finding the right platform ...

The first challenge here is to be able to find a popular, well-known, reliable and secure exchange that is available in your country. You also need to be sure that it offers the payment method you want to use: credit card, bank transfer, PayPal, etc.

Finding the right wallet

As with cash, you need to store your digital coins in a “wallet” as soon you have them. Actually, to be more accurate, your cryptocurrencies aren’t really “held” in your wallet. You’re storing instead the “key” allowing you to access your coins’ address.

Therefore, the next challenge is to pick the right wallet to store your cryptocurrencies, view your crypto-balance, as well as to make transactions (send and receive coins). As you might guess, there are different types of wallets, such as paper, hardware, desktop, mobile, online and offline. Each type of wallet refers to the way coins are stored, as well as who controls the wallet (custodial vs. non-custodial wallets).

While some wallets are dedicated to a single cryptocurrency, others are multi-currency wallets.

Cold vs. Hot wallets

Another important difference is whether or not they’re connected to the Internet. Connected wallets, like online or cloud-based wallets, or mobile wallets, are called “hot wallets”. Wallets that do not need an Internet connection to work, like hardware or paper wallets, are called “cold wallets”.

Cold wallets

As cryptocurrency buyers are often considered an easy target for hackers, cold wallets are the most effective and secure way to protect your coins from hacks. For this reason, it’s usually advised to transfer your digital funds to your own wallet once you’ve bought coins. That way, you will avoid the counterpart risk and the risk of loss, like loss or bankruptcy from thefts by hackers.

Custodial vs. Non-custodial wallet

Most exchange wallets are online and custodial, which means that the exchange is the one that truly controls your private keys. Never forget that the true owner of the coins is the one that possesses the private keys. In case of hacks, you will lose all your funds with an exchange custodial wallet.

Owning cryptos sum-up

Owning cryptocurrencies means that you can transfer money and use the coins to shop. You can also sell them later at a higher price to make profits. Therefore, owning virtual currencies is generally a longer-term investment solution, where you don’t pay fees for holding your coins in a wallet. However, it can be risky, as you won’t use regulated exchanges, you need to choose a wallet to store and hold your coins and you are exposed to cyber-thieves.

Trading Cryptocurrencies throuh a Forex Broker

Buying cryptocurrencies and trading them are two activities that are fundamentally different in nature. While buying cryptocurrencies means that you own the coins you can use or sell later on, cryptocurrency trading is all about using derivative products like CFDs (Contracts for Differences) to make short and quick profits on the coins’ price movements.

What is a CFD?

A CFD is a contract with your broker to exchange the value difference of the coins between the moment you open CFD positions on cryptos and the moment you close them. Therefore, trading CFDs on cryptos means that you will be able to take advantage of cryptocurrency price fluctuations without owning the coins themselves. As you don’t own the coins, you don’t need to choose a wallet to store your private keys

Other advantages of CFD trading

There are a few other advantages to cryptocurrency trading with CFDs:

  • multi-assets trading account to trade different asset classes in a single trading platform
  • place orders outside trading hours, when the market is closed
  • open a long position (if you think prices will rise) or a short position (if you think the market will fall), and make profits regardless of the market direction
  • take advantage of lower operational costs than with other types of brokers or exchanges
  • use margin trading and leverage for greater market exposure and amplify market movements

Leverage and margin trading

CFDs are leveraged financial derivative products. The biggest advantage is that you’re only required to put aside a fraction of the total value of your position - a small deposit acting like a collateral: also known as the “margin”. The other funds required to trade the markets are borrowed from your broker.

Margin trading associated with leverage means that you can invest more money than you actually possess in your trading account. As leverage magnifies price movements, every price fluctuation will be amplified, as well as your results. While it’s a great tool for increasing your profits, it is also very risky. Managed poorly, you could lose more money than with traditional financial products if the market goes against you.

CFDs are usually offered by regulated brokers

While crypto exchanges aren’t regulated, you can find Forex and CFD brokers that are licensed and regulated. Using them as a retail trader means that you will benefit from higher protections.

Trading cryptos sum-up

Cryptocurrency trading with CFDs is a great way to implement short-term investment strategies with appropriate money and risk management tools. You can also use leverage and margin trading to increase your exposure to the crypto-market and bet on rising (and falling) markets. With CFDs on cryptos, you do not own the coins. You only aim at taking advantage of crypto-market volatility to make short-term profits with a regulated, authorised and licensed broker.

Owning cryptocurrencies vs. Trading cryptocurrencies
Owning cryptocurrencies Trading cryptocurrencies
You own the coins and have to store them in a wallet. If you lose your private keys, you lose all your funds You do not own the coins, so you do not have to pick a wallet
You can make profit when the cryptocurrency is following an upward trend You can make profit whether the cryptocurrency goes up or down
A cryptocurrency exchange is not a regulated regular stock exchange A Forex and CFD broker offering CFDs on cryptos is licensed, authorised and regulated, which offers better protection to retail traders
There is a risk of hacking and theft There is no risk of hacking and theft
There is no way a transaction can be cancelled, reversed, or modified A trade can be cancelled or even reversed if there is a fault in the broker’s system

What are the 3 most traded cryptocurrencies?

There are currently more than 2,350 cryptocurrencies on the market today. Let’s have a look at the 3 largest cryptocurrencies in terms of market cap.

Bitcoin

Everything started when Bitcoin was launched in 2009. It was the first blockchain and the first cryptocurrency. The Bitcoin (BTC) is still the most important and the most traded digital currency today. At the time of writing, it accounts for 65% of the entire crypto market.

This cryptocurrency was created as a new way of exchanging money, free from the banking system thanks to a peer-to-peer decentralised payment network, providing a method for better and more secure payments, while facilitating international payments. The Bitcoin network is also working towards more anonymous transactions to protect people’s privacy.

Ethereum

Launched in 2015, Ethereum is the second largest cryptocurrency. More than a cryptocurrency, the Ethereum is more like an ecosystem, using its native cryptocurrency - the Ether (ETH). While Bitcoin was created as a peer-to-peer decentralised payment system, Ethereum is more than a payment system, taking blockchain to the next level with “smart contracts”.

Smart contracts exclude human participation in the validation and implementation of contracts. When predetermined criteria or conditions are met, these decentralised contracts are automatically triggered.

As you can imagine, these contracts can be used in many different sectors, such as education, retail, health, law, and supply chains among others, which is quite promising. That’s why many consider the Ethereum blockchain as the driving force of the crypto-market.

Ripple

Created in 2012, the RippleNet aims at improving the global payment system financial institutions and banks are using. The company developed solutions to offer faster and more secure payment options, whose associated currency is called Ripple (XRP).

While the Bitcoin payment system is dedicated to retail users, the Ripple network has been developed primarily for financial institutions. That’s why many people compare the Ripple real-time gross settlement system (RTGS) to the SWIFT system.

This alternative payment system now has more than 200 banks and other financial institutions using the different Ripple solutions. These companies can benefit from greater liquidity with the xRapid solution and the direct use of Ripple.

Ripple is now the third most significant cryptocurrency in terms of market capitalisation. The main difference with other cryptocurrencies is that most Ripple coins are held by Ripple Labs. That’s why Ripple is often considered a centralised crypto.

What else there is to do before trading cryptocurrencies?

While cryptocurrency trading seems to be the new “Eldorado” for investors looking for great return on investment (ROI), it’s important to always trade following a trading strategy through a reliable, robust and regulated broker.

How do you choose your cryptocurrency trading strategy?

If you are patient, serious, dedicated and committed to develop and follow a trading plan - as well as to use the right tools and platforms, you will increase your chances of making money with trading positions on cryptocurrencies.

But for that, you first need to work on your cryptocurrency trading strategy to be able to better control your emotions and make more rational trading decisions.

The most important thing to think about first is yourself as a trader. Ask yourself the following:

  • Which type of trading style do you think suits you best? Does it fit your personality, your availability, your risk tolerance, as well as your goals?
  • What is your financial and trading knowledge?
  • Do you like to take risks?

Once you’ve determined your trader profile, you can develop and test your trading strategy and integrate it into your trading plan: trading set-ups, risk management rules, position size, etc.

Remember that successful trading requires a strategy that suits both your aims and your strengths.

How to choose the best cryptocurrency brokers?

Choosing a cryptocurrency trading platform is a very important step towards your trading success in the crypto-market. You need to be sure that the cryptocurrency broker you select offers the best trading conditions for your trading style, and the best trading tools.

To be sure you’re using the best broker possible, consider the following:

  • Where is the broker licensed and regulated?
  • How available and knowledgeable is its customer service?
  • Is the broker available in your country?
  • Does it offer the cryptocurrencies you want to trade?
  • What about the spreads and the leverage effect?

Once you’ve found the right broker for your trading style, use a demo account first so then you can get used to their cryptocurrency trading platform before you invest real money.

CFDs on cryptocurrencies are perhaps the best ways to take advantage of the amazing ROI on cryptocurrencies, especially in the short-term.

Cryptocurrencies are here to stay. Some might even consider that maybe one day they’ll become (or replace) the current dominant fiat currencies, such as the USD or the EUR. Cryptocurrencies could also replace central bank’s monetary reserves.

For all these reasons, more and more people are investing money in the crypto-industry - they want to participate to what many are calling the 4th industrial revolution. Investing in cryptocurrencies is deffinitely worth concidering!