Trading Cryptocurrencies FAQ

  1. What is a Cryptocurrency?

A cryptocurrency is a virtual or a digital currency that is designed to work as a medium of exchange and it uses cryptography to secure transactions. The cryptography has made it very hard to counterfeit cryptocurrencies. Investors are going for cryptocurrencies due to the fact that it is organic in nature; the digital currencies are not subject to government interference since they aren’t issued by any central authority.

Cryptocurrencies began in 2009 when Satoshi Nakamoto unknowingly invented Bitcoin while he was trying to develop a digital cash system. He invented it so as to prevent double spending as the digital currency will be completely decentralized and with no server or a central authority to interfere with it.

2. How do they Differ from Regular Currencies?

The main difference that seperates cryptocurrencies and regular currencies, otherwise known as fiat currency, is the fact that cryptocurrencies are decentralised.

This means that there is no institution that controls the supply of the currency or imposes rules and regulations over the currency. Fiat currency is normally produced by governments or central banks, who have control on the supply. They can decide to increase or decrease supply when they see fit.

The idea of having a central body in charge of your money has always been a point of concern for a lot of people. Cryptocurrencies are a breath of fresh air because a consensus makes decisions and there is no middle man when it comes to transactions.

3. How to Start Trading Cryptocurrencies?

The quickest and easiest way to trade cryptocurrencies is to trade using leverage. This means that you do not need to go through the process of actually buying the asset.

To trade this way, you must open an account with a broker. You can have an account open and funded within the hour! Everything is very quick nowadays.

4. What is Leverage?

Leverage essentially means you are borrowing a certain amount of money needed to invest or to take a trade. In most cases, you are borrowing from a broker.

Different brokers offer different levels of leverage, meaning that you can either take less risk by putting less on a trade because the broker will cover the rest. Or, it allows you to put on a larger position. A larger position results in larger returns but as with all trading, it also results in larger losses.

As highlighted, leverage allows you to put less capital down, which in turn frees your capital for other investments or trades.

This happens by trading derivatives of the asset you want exposure to. Likely instruments include futures contracts and Contracts for Difference (CFDs).

5. What are Cryptocurrency CFDs?

Contracts for Difference or CFDs are instruments that give you exposure to certain markets without actually owning the underlying asset. They allow you to trade on the difference between two prices.

They are a seperate market to the actual asset but they do offer you extra liquidity. This is because they access liquidity from the underlying assets market as well as the liquidity from the CFD market.

If you were to imagine trading oil. When you buy oil, you do not receive a barrel of oil to your door. The process of receiving the asset would be a nightmare and the same can apply to cryptocurrencies. Therefore if it suits the investor, it is advisable to trade using CFDs.

6. Why Trade Cryptocurrencies on Leverage?

As highlighted in the CFD FAQ, trading on leverage means you do not need to go through the, sometimes, long process of buying the underlying asset.

Another advantage of trading on leverage is that because you are borrowing from the broker, you can borrow from the broker and sell without owning the product. This allows you to short sell a market. Resulting in you being able to take advantage of a market going up and down.

This essentially doubles your trading opportunities. No longer must you wait for a market to pull back before buying it, now you can sell it down to that level and then buy it back up!

7. Does it Cost to Trade Cryptocurrencies?

Fees are dependant on the broker but most brokers only charge you a spread. You will notice every time you take a trade you are automatically offside. This is the very small fee brokers charge you. Some brokers also charge you a commission as well, however we do not think this is fair and so have only recommended brokers who charge via the spread.

When you buy the actual cryptocurrency, again depending on who you go through you will be charged. Most exchanges that trade the actual cryptocurrency coins charge a transaction fee.

8. Are Cryptocurrencies Profitable to Trade?

Cryptocurrencies can be hugely profitable to trade! Considering the huge boom we have experienced in the crypto market in 2017, it is not surprising that we are reading about ‘overnight millionnaires’.

Now, we are not suggesting that this is going to happen to you, but the volatility that the cryptocurrency market is seeing is providing traders with ample trading opportunities.

Traders cannot make money in a market that does not move and thankfully the crypto market is quite the opposite, with growth of some currencies over 10,000% it is no wonder people are flooding to trade cryptocurrencies.

9. What is the Difference to Trading Forex?

Because you are actually trading CFDs rather than the actual cryptocurrency, there are a lot of similarities to trading Forex. You get all the same functionality that you get when trading Forex.

The first big difference, is the liquidity of both markets. The forex market is the largest market in the world, with over $5 trillion going through it everyday. This means that you can enter and exit a position very easily at the price you intended to. Compared with the cryptocurrency market, because it is so new, despite the high liquidity for its age, it is still miles off the forex market and therefore can mean you get out of trades at worse prices than you had expected.

The second difference is the volatility. The forex market, although is volatile, is nothing in comparison to the cryptocurrency market. Because it is so new, the price swings are huge, which is why lots of traders are getting attracted to it. If you are on the right side of a trade it can go very far very quickly.