Cryptocurrencies

What are Cryptocurrencies?

Cryptocurrencies are decentralized money which are created based on blockchain technology. The very first cryptocurrency was Bitcoin, created in 2009. Since then, there have been thousands of other cryptocurrencies created, although most of them are lightly traded at best. Some cryptocurrencies can be used to purchase goods and services, while others provide some utility for their own blockchain. Nearly, all are used to trade in the same way traders speculate on price changes for currencies, equities, and commodities.

Popular Cryptocurrencies

The most popular cryptocurrency by far is Bitcoin. It’s dominance in the cryptocurrency market has remained constant over the years, and at any given time the market capitalization of Bitcoin makes up greater than 60% of the total market capitalization of all cryptocurrencies.

The second largest cryptocurrency is Ethereum, and it is also extremely popular. As the very first blockchain to include Turing-complete smart contracts, Ethereum is the home of many decentralized application (dApps), or applications that run on the blockchain. Ethereum dApps have also led to the decentralized finance revolution, as most of the decentralized finance applications run on the Ethereum network.

Other popular cryptocurrencies include Ripple, a proposed replacement for the SWIFT banking transfer system, Litecoin, which has often been called digital silver to Bitcoin’s digital gold, and Doge, a so-called “meme-coin” that was originally created as a joke, but has since gained extreme popularity among cryptocurrency enthusiasts.

How do I Trade in Cryptocurrencies?

There are two ways to trade in cryptocurrencies. One is to buy and sell the actual cryptocurrencies through a cryptocurrency broker or exchange. This involves understanding how cryptocurrency wallets work, and the use of complex wallet addresses and private keys. If a mistake is made while transferring cryptocurrencies there is rarely any way to recall the coins.

The second way is to speculate on the price change of cryptocurrencies using CFDs. This method doesn’t involve the actual ownership of any cryptocurrencies, and there’s no need to worry about wallets, addresses, private keys or any mistakes made in transferring tokens.

Trading Example

Say that you believe that the price of Bitcoin is due to fall. You can speculate on this by going short and selling Bitcoin against the U.S. dollar.

The current price of Bitcoin is $16,000 and you decide to sell 3 contracts (each equal to 1 BTC).

If you are right and Bitcoin falls you can close the position at a profit. Let’s say Bitcoin fell 10% to $14,400. You can close your contracts at this price and collect the $4,800 difference ($1,600 x 3 contracts).

You could just as easily be wrong however. Suppose Bitcoin’s price rises to $17,600 instead. If that happened you would close your position for a loss of $4,800 ($1,600 x 3 contracts).

Benefits of Cryptocurrencies Trading

There are a number of benefits to trading in cryptocurrencies. Chief among these, is the large percentage price moves that are frequently seen in cryptocurrencies. This makes it easier to realize large changes in your capital, hopefully in your favour.

Another benefit is that cryptocurrency markets never close. Many traders like the forex markets because they are open 24 hours a day and 5 days a week, but the cryptocurrency markets are open 24/7. You can always trade in cryptocurrency.

Cryptocurrency markets have no restrictions against short selling, so traders can go long or short.

When using CFDs to trade in cryptocurrencies there’s an added bonus of being able to use leverage.

Cryptocurrencies CFDs Trading Risks

Of course, there are also risks in trading cryptocurrency CFDs. Interestingly, one of the benefits is also one of the risks. That’s the large percentage moves seen in cryptocurrencies. While this can lead to rapid outsized gains, it can also lead to rapid outsized losses. Risk management is crucial when trading cryptocurrency CFDs.

One further trading risk is that there can often be large differences in pricing, which can lead to large spreads for this asset class.