Cryptocurrency trading refers to the practice of speculating on digital currency price movements through a CFD trading account or buying and selling actual cryptocurrencies via an exchange. This article explains what cryptocurrency trading is, how it operates, and the key factors that influence market movements.
Understanding Cryptocurrency Trading
Cryptocurrency trading involves either predicting price changes using CFDs (Contracts for Difference) or purchasing and selling the actual digital coins on a cryptocurrency exchange.
Trading Cryptocurrencies with CFDs
CFDs are derivative financial instruments that allow traders to speculate on the price movements of cryptocurrencies without owning the underlying assets. Traders can open a long position (“buy”) if they expect prices to rise, or a short position (“sell”) if they anticipate a price decline.
CFDs are leveraged products, meaning traders only need to deposit a small amount of the total trade value, known as margin, to gain exposure to the market. However, profits and losses are calculated based on the full position size, so leverage can amplify both gains and losses.
Buying and Selling Cryptocurrencies on an Exchange
When trading through an exchange, investors purchase the actual cryptocurrency tokens. This requires opening an exchange account, paying the full value of the asset, and storing the coins in a personal digital wallet until they are sold.
Using exchanges often involves a steep learning curve, as users must understand the technology and interpret market data. In addition, many exchanges impose deposit limits, and maintaining an account can be costly.
How Do Cryptocurrency Markets Operate?
Cryptocurrency markets are decentralised, meaning they are not controlled or issued by a central authority such as a government or central bank. Instead, they function across a distributed network of computers. Cryptocurrencies can be traded on exchanges and stored in digital wallets.
Unlike traditional currencies, cryptocurrencies exist solely as digital records of ownership on a blockchain. When a user sends cryptocurrency to another person, the transaction is sent to the recipient’s wallet. It is only final once it has been verified and added to the blockchain through a process called mining, which is also how new coins are generally created.
What Is Blockchain Technology?
A blockchain is a shared digital ledger that records data. In the context of cryptocurrencies, it contains the complete transaction history of each coin, showing how ownership has changed over time. Transactions are grouped into blocks, which are then added sequentially to the blockchain.
Blockchain technology offers security features that conventional digital files do not.
Network Consensus
Blockchain data is stored across multiple computers within a network rather than in a single location. This data is typically accessible to all network participants, making the system transparent and extremely difficult to manipulate. There is no single point of failure that hackers or system errors can exploit.
Cryptography
Blocks within a blockchain are connected using cryptographic techniques based on advanced mathematics and computer science. Any attempt to alter the data breaks these cryptographic links and is quickly identified by the network as fraudulent.
What Is Cryptocurrency Mining?
Cryptocurrency mining is the process of verifying recent transactions and adding new blocks to the blockchain.
Verifying Transactions
Mining computers select pending transactions and verify that the sender has sufficient funds. This involves checking transaction details against the blockchain’s historical records. Another verification ensures that the transaction was authorised using the sender’s private key.
Creating New Blocks
Once transactions are validated, miners group them into a new block and attempt to solve a complex algorithm to link it to the previous block. The first computer to succeed adds the block to its blockchain and broadcasts the update across the network.
What Influences Cryptocurrency Market Prices?
Cryptocurrency prices are driven primarily by supply and demand. Because these markets are decentralised, they are often less affected by traditional political and economic factors. However, several elements can significantly influence price movements:
-
Supply: the total number of coins and how quickly they are created, destroyed, or lost
-
Market capitalisation: the overall value of all coins in circulation and how this is perceived by investors
-
Media coverage: how cryptocurrencies are portrayed in the press and the level of public attention
-
Adoption: how easily cryptocurrencies integrate into existing systems such as online payment platforms
-
Major events: regulatory changes, security incidents, and economic disruptions
How Does Cryptocurrency Trading Work?
With IG, traders can access cryptocurrency markets through a CFD account. These derivative products allow speculation on price movements without owning the underlying cryptocurrency. Prices are quoted in traditional currencies such as the US dollar.
Because CFDs are leveraged, traders can open positions using only a fraction of the total trade value. While leverage can increase potential profits, it also increases the risk of losses if the market moves unfavourably.
What Is the Spread in Cryptocurrency Trading?
The spread is the difference between the buy price and the sell price of a cryptocurrency. When opening a trade, two prices are quoted. To open a long position, traders buy at a price slightly above the market rate. To open a short position, they sell at a price slightly below the market rate.
What Is a Lot in Cryptocurrency Trading?
Cryptocurrencies are commonly traded in lots, which standardise trade sizes. Due to high market volatility, lot sizes are usually small—often just one unit of the base cryptocurrency. Some digital currencies, however, are traded in larger lot sizes.
What Is Leverage in Cryptocurrency Trading?
Leverage allows traders to gain exposure to large market positions without paying the full value upfront. Instead, a small margin deposit is required. When the position is closed, profits or losses are calculated based on the full trade size, not just the margin paid.
What Is Margin in Cryptocurrency Trading?
Margin is the initial deposit needed to open and maintain a leveraged position. Margin requirements vary depending on the broker and the size of the trade. It is typically expressed as a percentage of the total position value.
For example, a Bitcoin trade might require a margin of 10%. This means that instead of depositing $5,000, a trader would only need to provide $500 to open the position.
What Is a Pip in Cryptocurrency Trading?
A pip is a unit used to measure price movements in cryptocurrencies. It generally represents a one-digit change at a specific decimal level. For high-value cryptocurrencies traded in dollars, a move from $190.00 to $191.00 equals one pip. Lower-value cryptocurrencies may use smaller increments, such as cents or fractions of a cent.
Before placing a trade, it is important to review your trading platform’s specifications to understand how price movements are measured.
