- How to trade cryptocurrencies
- How to trade cryptos with FOREX.com
- How cryptocurrency markets work
- What moves the prices of cryptocurrencies?
Cryptocurrencies, or cryptos, were first made popular by the likes of Bitcoin. Now, there are thousands of cryptocurrencies, with some of the most popular to trade being Bitcoin, Ethereum, Litecoin, and Ripple.
Trading cryptocurrency requires a firm commitment to learning about a new and evolving market. Here, we'll break down the crypto market into manageable sections, so you have all the necessary information to start trading cryptocurrency CFDs with FOREX.com.
How to trade cryptocurrencies
There are two ways to trade cryptocurrencies:
Crypto trading via an exchange
Here, you buy a cryptocurrency or a fraction of a cryptocurrency outright via an exchange. The full purchase price is required upfront, and you hold it in a digital wallet with the hope that the price appreciates.
Crypto trading via CFDs
When trading cryptocurrencies as CFDs, you do not own the underlying asset. Instead, you are speculating on the price movement of the cryptocurrency, and you do not need a digital wallet. If you think that the price of the cryptocurrency will increase, you buy - or go long. If the price moves in your favor, you make a profit. However, if the price declines, you make a loss.
Perhaps the most significant difference between buying cryptocurrencies through an exchange and storing your coins in a wallet compared to trading cryptos through CFDs is the ability to go short.
How to trade cryptos with FOREX.com
At FOREX.com, traders can engage in the cryptocurrency markets by trading CFDs, eliminating the need to purchase actual "coins" or "tokens" - a process that can often be time-consuming.
Purchasing physical cryptocurrencies typically involves sending requests to specialized cryptographic platforms, a process that can take days or even weeks to complete. A cryptocurrency CFD operates similarly to CFDs based on other currency pairs. Essentially, you're trading the value of your chosen cryptocurrency against a conventional currency like the US dollar.
Here's a step-by-step guide on how to trade cryptocurrencies, using Bitcoin as an example:
Step 1: Market research
Suppose you come across news that analysts are predicting a surge in Bitcoin's value due to a significant increase in investor demand. Based on this information, you decide to buy Bitcoin.
Step 2: Placing your trade
To execute your trade, follow these steps:
- Log into the FOREX.com web platform.
- Type "Bitcoin" into the search bar located at the top left of the screen.
- Select "Bitcoin ($)".
You can now see the "SELL" and "BUY" buttons. Selecting either of these will open the trade ticket and you can choose how much you want to trade.
Step 3: Access comprehensive information
Before you proceed, select "Market 360". This provides a comprehensive overview of Bitcoin, including charting tools, news, and margin requirements, all in one convenient location.
Step 4: Execute your trade
To buy Bitcoin, click the green "BUY" button. This action will open the trading ticket.
In the “Amount” section, input the quantity of CFDs you wish to purchase. For this example, enter 0.1. The pip value on the deal now reads $0.10, which means you will earn or lose 10 cents for every point that Bitcoin's price rises or falls, respectively.
The margin requirement is US$310.12. This is the amount you must have in your account to execute this trade.
Click "Place Trade". Congratulations, you've just bought 0.1 Bitcoins at 12,405.2, with a 25% margin rate.
Step 5: Closing Your Trade
Suppose your analysis was accurate and Bitcoin's value jumps 1,000 points to 13,405.2 within a few hours. You decide it's time to close your trade and secure your profit.
To do this, log into the FOREX.com web platform, select the default workspace tab, and choose “Close” in the position’s subtab. This action will open the closure ticket.
Step 6: Finalizing the Trade
The ticket shows that if you close the trade now, you will make a profit of $100. To finalize your trade, simply click "Close Position".
Remember, trading is unpredictable. Bitcoin could have fallen 1,000 points, resulting in a $100 loss.
Please note that holding a crypto position overnight incurs a financing charge of 0.0411%. It's calculated as follows:
Position Size x Closing Price x Financing Charge = Financing Cost
In the example above, your finance charge would have been $0.53 (0.1 x 12,800 x 0.0411%).
Bear in mind that for short positions, the overnight finance charge is 0.0136%.
How cryptocurrency markets work
Before starting crypto trading, it is important to understand how cryptocurrency markets work and what moves them.
Cryptocurrency is a digital currency that is transferred between two parties. Transactions are then recorded on the blockchain. There is no middleman, and it is decentralized. This means that it is controlled by its users and computer algorithms, unlike fiat currencies which are controlled by a central bank.
Cryptocurrencies are "mined". This is the process by which transactions are verified and added to the blockchain ledger. The supply of cryptocurrencies is controlled, and most have maximum total supply.
Cryptocurrencies are also traded like stocks or fiat currencies. Like other currencies, the value of cryptocurrencies is measured by what they are worth against other currencies such as the dollar, the euro or the pound.
What moves the prices of cryptocurrencies?
Due to their decentralized nature and independence from government institutions, cryptocurrencies tend to be unaffected by the usual macroeconomic and political factors that affect other asset classes, such as currencies or stocks.
Yes, it can be said that cryptos are often sensitive to news. For example, the prospect of increased regulation or news attacking the credibility of a currency. Changes in the way a crypto is produced have the biggest impact in the short term. Let's see below different factors that affect the prices of cryptocurrencies.
Supply and demand
The fundamental economic principle of supply and demand is the primary driver of cryptocurrency prices. For instance, if the demand for Bitcoin surges while its supply remains limited, its price will rise. Conversely, if the demand dwindles, the price will decrease due to an oversupply of Bitcoin.
The way a cryptocurrency is perceived by investors and the public will affect the price. For example, bad publicity about its security, uses in criminal activity, and negative news sentiment will reduce the value, and vice versa.
Increases in mining costs
The real-world cost of crypto mining can affect prices. If the complexity of the mining process escalates, it will limit the supply and subsequently increase the price. For instance, Bitcoin's algorithm is intentionally designed to augment the difficulty of the computational puzzle that adds new blocks to the chain and rewards users with new Bitcoin, thereby controlling the release of Bitcoins over time.
With thousands of cryptocurrencies vying for investor attention and Bitcoin's crown as the most dominant crypto, this competition helps drive prices down.
Discover the range of cryptocurrencies you can trade with FOREX.com.
The degree of acceptance of cryptocurrencies among businesses, their integration with existing financial systems, and their standing in the regulatory environment can all impact the price.
Find news and analysis from FOREX.com's expert analysts here and stay informed about the world of cryptocurrencies.
Crypto trading has grown in popularity since exploding onto the scene in 2017. Whilst there are now thousands of cryptocurrencies, the most popular are Bitcoin, Bitcoin Cash, Ethereum, Litecoin and Ripple.
Cryptocurrencies can be traded via an exchange or through CFDs. Trading cryptocurrencies through CFDs enables you to:
- Make money in rising or falling markets
- Trade using leverage*
- Use orders, trade alerts, and stop losses to protect your position
Cryptocurrencies are notoriously volatile and should be traded using a sound risk management strategy.
* With increased leverage comes increased risk.