How to trade
If you want to be part of the great adventure that is trading, it’s time to join the financial markets and start investing in the most profitable assets. Trading can provide you with a superior lifestyle, provided that you follow a few simple rules in keeping your trading capital safe.
Cryptocurrencies are by far the most exciting financial assets of 2017, providing traders with some of the best returns. Almost all investors are starting to show an interest towards this monetary revolution by actively buying and selling in the market to take advantage of their short-term price variations.
If you are new to trading cryptocurrencies, it’s normal to feel somewhat overwhelmed. It’s understandable if you feel confused by the new terms and concepts associated with trading Bitcoin, Ethereum, Litecoin and other altcoins – also known as “alternative digital currencies”. If this is a completely new market for you, here’s an introduction to get you familiar with the latest trading phenomenon…
Introduction to the Cryptocurrency Market
Cryptocurrencies are digital or virtual currencies that use cryptography to create money as well control and validate every transaction. Bitcoin was the first virtual currency to launch, but overtime we have seen the establishment of several more. The five most significant in terms of market capitalization are Bitcoin, Ethereum, Bitcoin Cash, Ripple, and Litecoin.
It all started in 2009 when a paper named Bitcoin: A Peer-to-Peer Electronic Cash System was published by an individual, or a group of people, called “Satoshi Nakamoto”. This anonymous creator introduced the new payment method known as Bitcoin.
This peer-to-peer online payment system allows users to send money (Bitcoin) from one person to another without the intervention of a third party such as a bank or any other financial institution. There is no government or central bank that governs this cryptocurrency, making it a completely decentralized system. Every transaction is executed pseudo-anonymously which is recorded and made visible to everyone in a general and public ledger. The technology that powers this system is called “Blockchain technology”. Its associated “distributed ledger technology”, doesn’t only apply to Bitcoin and other cryptocurrencies, its uses can also be widened to an enterprise level when creating contracts, sharing data and for other innovating services. A growing number of companies are already enjoying the limitless possibilities of Blockchain technology including Microsoft Azure.
Cryptocurrency Trading: What Can You Trade?
Start trading cryptocurrencies by purchasing and storing them in a wallet. The next step involves finding a cryptocurrency exchange to trade with. Note that cryptocurrency exchanges are not part of a regular stock exchange.
You can also use cryptocurrency brokers like CFD brokers, which enable you to easily trade digital currencies and other financial assets without owning them. You can usually profit from leverage and margin trading through these brokers, enabling you to increase your market exposure and invest more funds that what you currently hold in your trading account. Each market movement will then amplify your gains, as well as your losses.
Opening a position in the cryptocurrency market involves the same process as Forex. It involves buying/selling one currency while selling/buying another simultaneously. Cryptocurrency trading involves opening a position on a virtual currency to bet on its rise or fall against another cryptocurrency or fiat currency.
A currency pair includes a base currency and a quote currency. The base currency, also known as the transaction currency, is the first one displayed in a currency pair while the quote currency, or counter currency, is the second. With a currency pair like BTC/USD – Bitcoin (BTC) is the base currency while the American Dollar (USD) is the quote currency. If BTC/USD = 4,638, then it means that 1 Bitcoin is worth 4,638 USD.
You can trade cryptocurrencies against the most common and widely used traditional currencies such as the American Dollar (USD), the Euro (EUR), the Chinese Yuan (CNY), the Japanese Yen (YEN). There is also the option to exchange them against other cryptocurrencies. For example, you can trade Ethereum against Bitcoin (ETH/BTC), Ripple against Bitcoin (XRP/BTC) or Litecoin against Bitcoin (LTC/BTC). Your broker will determine which currency pairs are available to trade.
The Most Important Concepts to Know about the Cryptocurrency Market
• Cryptocurrency = A digital currency that is completely decentralized, meaning it doesn’t require a middleman or no third party to control it, which ultimately reduces fees. Transactions are fast, pseudo-anonymous, irreversible, secure and they do not require any permission to be executed.
• Blockchain = The base technology behind the foundation of cryptocurrencies. It includes a giant database which stores and shares information and records transactions in a general and public ledger.
• Mining = A process whereby miners confirm transactions and allocate them across the network and build and add blocks to the Blockchain. This is also how the currency is created, as each miner is rewarded with a token according to the cryptocurrency they are working on.
• Cryptography = Cryptocurrencies are built on cryptography – a method that encrypts a message to protect its content. The security of every transaction is not achieved through its users but through this mathematical process.
• Private Key = This represents a private and secret combination of numbers and letters that are used to spend and send digital coins. The private key acts as your digital signature.
• Public Key = This key is open to all. It represents your public address and is linked to your wallet that people can use to send you coins.
• Wallet = This is where you can store, send and receive your coins. There are different types such as paper, hardware, web, software and mobile wallets.
• Altcoins = Alternative digital currencies to Bitcoin which usually have lower market capitalization.
• Fiat currencies = Traditional currencies such as the EUR, the USD or the YEN as opposed to virtual currencies such as Bitcoin, Litecoin, Ripple and Ethereum.
• Leverage and Margin Trading = Involves borrowing funds from your broker, helping you increase your market exposure. Only a small fraction of the position is given to your broker as collateral.
• Margin Call = Occurs when your trading positions are against your direction and the value of the assets are below a certain level, thus requiring you to either deposit more money into your account or your assets.
• Spread = The difference between the buying and selling price.
• Slippage = The difference between the price you ideally wanted to buy or sell at and the actual price at which the trade is executed.
• Market Order = This order type will execute your position as quickly as possible with the current rate available in the market.
• Limit Order = This type of order gives you better control over the price at which you want to sell or buy an asset.