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Cryptocurrencies are one of the most dramatic financial stories of all time. Depending on who you ask, these highly speculative, volatile assets are either the harbingers of a monetary revolution or an absurd example of an asset price bubble. Whatever you believe, the price action and trading volume of these novel financial assets has attracted millions of traders to the crypto markets, and it has made the best-known cryptocurrencies household names. Trading CFDs on cryptocurrencies allows you to share in this price action without taking ownership of the underlying digital assets, avoiding the requirement (and potential risk) of using exchanges and wallets. But before you can start trading cryptocurrencies, you need to know a bit about what they are and how they work.
“Learning how to trade crypto is no different to any other financial market, except for their sheer volatility”
Crypto, short for cryptocurrency, is a form of digital currency that acts as a medium of exchange without a centralised authority. Cryptocurrency transactions and ownership records are stored on a ledger, that records the transfer and ownership of different cryptocurrencies. This ledger is recorded in code, using cryptography – hence the name, cryptocurrencies – to protect the integrity of the ledger. In the case of Bitcoin, the first cryptocurrency and the largest, this ledger is called the blockchain.
Bitcoin became the starting point for many subsequent cryptocurrencies, and it involves a proof of work algorithm where different Bitcoin ‘miners’ solve increasingly different puzzles to confirm past transactions on the blockchain, enhancing the security and reliability of the network. Today, around 40 cryptocurrencies have a market capitalisation of over $1 billion, but this emerging asset class is still controversial thanks to its tendency towards extreme price volatility and lack of central control over market participants. You can learn more about the origin and mechanics of Bitcoin here.
Learning how to trade crypto is no different to any other financial market, except for its sheer volatility: the price trajectory of Bitcoin and other major coins over the 2010s was phenomenal, making headlines around the world. But it is important to remember the price action of these volatile assets goes in both directions.
For many retail traders, crypto trading has become an important part of their overall strategy, and CFDs on cryptocurrencies offer an effective method for avoiding the use of wallets and centralised exchanges, which present both costs and in some cases a security risk. The ability of cryptocurrencies to increase in value rapidly is unparalleled by most traditional financial assets, but the flip side to this remarkable upside volatility is frequent, devastating crashes.
There are a few other attributes that make crypto popular with day traders: the global cryptocurrency market operates 24/7, with worldwide trading concentrated on a few major exchanges. But above all, cryptocurrencies are popular because cryptocurrency markets are highly volatile, far more so than traditional financial assets. That means they should be approached with caution and effective risk management strategies.
The mainstream acceptance of cryptocurrencies is varied, with some analysts considering it a worthless bubble and others a financial revolution. One country, El Salvador, accepts it as legal tender, whereas Egypt, China and Algeria have banned it outright. In many countries, Bitcoin can be bought and sold with mainstream bank accounts, whereas in others it faces partial restrictions. It is not clear where exactly cryptocurrencies fit into global financial markets: they are not conventional currencies, nor do they have an issuer or any financial backing like bonds or forex. They have no role in the real economy, and so cannot be a commodity. Regulators and traders alike are still not sure just where these assets fit into the financial system, and it seems increasingly likely they are an entirely new financial asset class, understandable only in reference to itself. This is exciting, but it should also give pause for thought: cryptocurrencies are effectively unregulated and have been treated differently in different markets and jurisdictions. It is likely this confusion will continue for some time to come. In the meantime, CFDs on cryptocurrencies are an idea way to share in their price action while avoiding both restrictions on crypto ownership – because CFD traders do not own the underlying asset – and the difficulties of banking and exchanging crypto.
Despite the launch of thousands of different cryptocurrencies, trading volume is heavily concentrated in a few big names. Bitcoin (BTC) and Ethereum (ETH) are by far the most traded cryptocurrencies, followed by other major coins such as Litecoin and Bitcoin Cash. There are thousands of smaller coins and tokens available for trading, most of them extremely illiquid and of little practical interest to traders. These four top cryptocurrencies are responsible for a significant portion of daily trading volume and are typically the most liquid. Another important type of cryptocurrency is the stablecoin, a highly controversial subtype that aims to preserve a fixed exchange rate with a traditional currency. The most famous of these is Tether, which has attracted controversy thanks to its unproven claim to have billions of dollars in reserve to support its 1:1 peg to the US Dollar.
Cryptocurrency assets are speculative, and are traded rather than invested in, since they are highly volatile. Accordingly, the use of leverage in retail crypto trading is curtailed, with much lower max ratios. When trading crypto CFDs, you’re speculating on the changing value of a cryptocurrency without owning the underlying asset. For instance, if you believe Bitcoin’s price will rise, you could open a long position on a Bitcoin CFD. If your prediction is correct and the price moves in your favour, you can then close the position at a profit. Conversely, if you expect the price to fall, you can open a short position.
When trading crypto, always use more cautious risk management parameters than with traditional assets such as stocks or bonds. To make decisions about which cryptocurrencies to buy and when to sell them, you can use all the same technical techniques that you would in forex or stock trading, bearing in mind the characteristics of the market – high numbers of retail investors, herd behaviour, strong momentum. Fundamental analysis is often much less suitable for crypto trading, although news and world events can still be seen in crypto price action. Overall, traders can be confident using the same strategies they would use anywhere else: candlestick patterns, momentum indicators, and news sentiment.
Cryptocurrency trading for beginners works in much the same way as any other financial asset. You open an account, fund it, and begin trading CFDs on popular cryptocurrencies including Bitcoin, Ethereum, Litecoin, and Bitcoin Cash. But although cryptocurrencies follow the same price dynamics as other markets, there are significant differences which should impact both your trading style and risk management procedure. First, some traders claim trend following strategies have an advantage over mean reversion in this volatile market. This makes sense in the context of high momentum, with lots of retail investors chasing gains. Whatever strategy you use, the most important thing to be aware of is crypto’s extreme volatility, with massive price moves taking place over very short periods. That means position sizes should be smaller, stop losses should be closer, and perhaps most important of all, crypto assets should never take up a significant portion of your overall portfolio. Instead, diversification should be across asset classes, since most cryptocurrencies are strongly correlated with one another. It is also worth noting that cryptocurrencies have sometimes shown a correlation with the overall equity market, as a form of extreme risk on asset. This relationship is not perfect, and has broken down at points, but could indicate appropriate hedges for crypto positions would be things like the US Dollar, Swiss Franc, or gold. With these simple precautions, you should be ready to get started in the crypto markets. If you want to practise risk-free, consider opening a demo account with ADSS today.
I’m new to cryptocurrencies. How can I start trading crypto?
You can begin crypto trading the same way you would any other financial asset. Consider using a demo account initially to practice without risking real money. Educate yourself on cryptocurrency basics, including how to read charts and analyse market trends. It may be a good idea to start with a small amount of capital and focus on well-known cryptocurrencies like Bitcoin and Ethereum to avoid illiquid, smaller coins. Use stop-loss orders to manage risk and diversify your investments across different cryptocurrencies, and remember that crypto shows more intraday volatility than any other asset. This creates lots of opportunities, but also requires diligent risk management.
Why is risk management important when trading cryptocurrencies, and how can I implement it?
Risk management is crucial in cryptocurrency trading due to the high volatility of these assets, which far exceeds any other asset class. Risk management in crypto involves strategies to minimise potential losses while maximising gains. Key techniques include setting stop-loss orders to automatically close a position if it reaches a certain price, diversifying your portfolio across different asset classes to spread risk, and using proper position sizing to avoid overexposure to any single cryptocurrency. Additionally, never risk more than you can afford to lose on any single trade. Traders typically limit risk to 1-2% of their total trading capital per trade, but it also depends on how much risk you are willing to take, which you must decide for yourself – most traders reduce their risk limits when dealing with crypto assets.
How can I day trade cryptocurrencies?
Day trading crypto and long-term cryptocurrency investing are two distinct approaches to participating in the cryptocurrency market. Day trading, the most popular style with CFD traders, involves making multiple trades within a single day, aiming to profit from short-term price fluctuations. This strategy requires constant market monitoring, quick decision-making, and a solid understanding of technical analysis. Learning how to day trade crypto is no different from day trading in the forex or commodity markets, with the main difference being the enhanced volatility of cryptocurrencies. This is not a bad thing, as day traders require intraday price moves to enter and exit positions, but needs to be managed with prudent risk controls.
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Investing in CFDs involves a high degree of risk that you will lose your money due to the use of leverage, particularly in fast moving markets, where a relatively small movement in the price can lead to a proportionately larger movement in the value of your investment. This can result in loses that exceed the funds in your account. You should consider whether you understand how CFDs work and you should seek independent advice if necessary.
ADS Securities LLC – S.P.C (“ADSS”) is authorised and regulated by the Securities and Commodities Authority (“SCA”) in the United Arab Emirates under First Category: Dealing in Securities and Fifth category: Arrangement and advice (Introduction). ADSS is a Limited Liability Company – Sole Proprietorship Company incorporated under United Arab Emirates law. The company is registered with the Department of Economic Development of Abu Dhabi (No. 1190047) and has its principal place of business at 8th Floor, CI Tower, Corniche Road, P.O. Box 93894, Abu Dhabi, United Arab Emirates.
The information presented is not directed at residents of any particular country outside the United Arab Emirates and is not intended for distribution to, or use by, any person in any country where the distribution or use is contrary to local law or regulation.
ADSS is an execution only service provider and does not provide advice. ADSS may publish general market commentary from time to time. Where it does, the material published does not constitute advice, or a solicitation, or a recommendation to a transaction in any financial instrument. ADSS accepts no responsibility for any use of the content presented and any consequences of that use. No representation or warranty is given as to the completeness of this information. Anyone acting on the information provided does so at their own risk.
