Cryptocurrency trading is gaining momentum among retail traders. There are thousands of digital coins available and a vast choice of exchanges, platforms and resources on how to trade these digital assets.
What is crypto trading exactly, and how can you start your journey?
In this guide, we answer some of the pressing questions you may have, from what moves cryptocurrency markets to what tradable instruments and strategies are available, and more.
What is cryptocurrency trading?
Cryptocurrency trading is speculating on the price of cryptocurrencies against the US dollar and other fiat currencies, or against other cryptocurrencies, in an attempt to benefit from their highly volatile fluctuations. Increased volatility makes cryptocurrencies risky. Their price can move suddenly against your trade, causing losses.
Crypto trading may also mean buying and selling derivatives to speculate on price fluctuations.
A cryptocurrency is a decentralised digital currency. It works through a system of peer-to-peer (P2P) transaction checks, with no central server. As cryptocurrencies run on decentralised computer networks, they are not issued or controlled by a central authority.
Currency trading is different from cryptocurrency trading meaning that cryptocurrencies differ from fiat currencies such as the British pound sterling (GBP) or US dollar (USD). A fiat currency is issued by a government and guaranteed and controlled by a central bank.
There are various exchanges where retail traders can buy and sell cryptocurrencies – from P2P exchanges to centralised and decentralised exchanges (DEX), the options are vast.
Unlike traditional currencies, cryptocurrencies exist as a shared digital record of ownership stored on a blockchain. When a user wants to send cryptocurrency units to another user, they send it to that user’s digital wallet.
Traders can also choose derivatives such as contracts for difference (CFDs), options and future contracts to speculate on the prices of coins without actually owning them. With CFDs, traders can open both long and short positions, speculating on rising or falling prices.Note, however, that CFDs involve the use of leverage, which magnifies both profits and losses.
Basics of cryptocurrency trading
As with any other tradeable asset, a cryptocurrency trade has a buyer on one side and a seller on the other. When there are more buy orders than sellers the price for a cryptocurrency typically rises on the higher demand. When there are more sell orders the price typically falls on the lower demand.
The value of bitcoin and altcoins changes every second on an open market that never closes. There are different ways of trading cryptocurrencies, from buying coins and tokens via an exchange and then selling them for fiat currency, trading pairs of cryptocurrencies to potentially profit from fluctuations in the price spread, or buying and selling derivatives.
Note that cryptocurrencies are highly volatile. Their price can quickly move against your position, triggering losses. The more complex a trade is, the more risk is involved.
How does cryptocurrency work?
A cryptocurrency is a digital coin running on a blockchain network that uses cryptography to secure transactions, control supply and corroborate transfers.
Blockchains are digital databases that store cryptocurrency transactions in blocks requiring complex mathematical calculations to record and verify. Cryptocurrency coins and tokens are stored in exchanges or electronic wallets, which are highly secure as they use a unique public-private key pairing to verify the owner of the currency.
Cryptocurrencies allow you to use applications and services on a blockchain, pay for goods and services, and trade them.
The cryptocurrency story began in 2009 with the launch of bitcoin (BTC). The first decentralised cryptocurrency was created by an individual or group using the pseudonym Satoshi Nakamoto. Cryptocurrencies have become popular among traders and an asset class in their own right.
Their total market capitalisation reached an all-time high of $2.954trn in 2021, spreading over 9,929 digital tokens available for trading. By November 2022, the number of coins grew to 21,612.
The success of bitcoin paved the way for many other alternative cryptocurrencies, known as altcoins, which look to improve on bitcoin’s weaknesses, such as its energy-intensive mining and high usage costs, reduce transaction fees and create competition.
Although various cryptocurrency projects differ in how they operate and what they aim to do, bitcoin and altcoins share four key features:
Cryptocurrencies have no central authority, which differs them from fiat currencies that are controlled by authorities and central banks. Instead, cryptocurrency transactions are processed and validated by an open and distributed network.
Immutable and irreversible
Cryptocurrency’s immutability is based on several principles: it should be impossible for anyone but the holder of a private key to move crypto assets. All transactions are recorded on the blockchain, and its consensus mechanism should prevent hiding or changing any transaction.
Usually there is no need for cryptocurrency holders to identify themselves when making transactions. They use their digital identities and digital wallets to authenticate transactions securely. You should note that blockchain wallet addresses that store cryptocurrencies are not completely anonymous – they are pseudonymous, which means they act as a placeholder for the wallet owner’s identity. However, there are cryptocurrencies that have increased levels of anonymity, for example, the privacy coins zcash (ZEC) and monero (XMR).
Scarcity or limited supply
Fiat currencies have an unlimited supply, which enables central banks to manipulate their value through monetary policy. In contrast, many cryptocurrencies have a limited and pre-defined supply coded into the underlying algorithm, which can make them deflationary in nature. Some of the most popular cryptocurrencies, like bitcoin, have a fixed or capped maximum supply, while others increase their supply on a predetermined schedule or have the option to add new supply in the future depending on how the project develops.
How are cryptocurrencies created?
Cryptocurrency mining is a process by which new coins enter circulation on blockchains using a Proof-of-Work (PoW) consensus mechanism to verify transactions and add new blocks. Bitcoin, for example, uses PoW to mine new bitcoins.
Mining computers choose pending transactions from a pool and ensure the sender has enough funds to complete the transaction.
New block creation
Mining computers compile valid transactions into a new block and try to produce the cryptographic link to it by solving a complicated algorithm. When the computer creates the link, it adds the block to the blockchain file and shares the update across the network.
Each time a new block is added to the blockchain, new coins are created and paid as a reward to the miner of the new block.
Cryptocurrency staking is an alternative process by which new coins enter circulation using a Proof-of-Stake (PoS) consensus mechanism. Ethereum has been running PoW originally, but has completed the transition to PoS in 2022.
Rather than solving complex cryptographic algorithms to process new blocks, computers on PoS blockchain networks stake cryptocurrency coins by locking them to the network in exchange for the right to become a validator. When a validator is chosen to process a new block, new coins are created and paid as a staking reward.
Types of cryptocurrencies
Cryptocurrencies fall into three major categories: bitcoin, altcoins and tokens.
The first cryptocurrency, bitcoin remains the world’s leading cryptocurrency by market capitalisation or value. It is a global peer-to-peer digital payment system that allows parties to transact directly with each other with no need for an intermediary such as a bank. Bitcoin is often referred to as the digital alternative to fiat currencies and gold, but regulators argue it is significantly riskier and cannot be compared.
Altcoins are defined as alternative cryptocurrencies to bitcoin. Altcoins can differ from bitcoin in a variety of ways. Some may have a different economic model and others may use different underlying algorithms or block sizes.
Altcoins encompass a wide range of different uses. For example, Ethereum, the world’s first programmable blockchain, enables developers to build and deploy decentralised applications (dApps) and smart contracts. IOTA (MIOTA) is specifically designed to be a new data transfer and transaction settlement layer for the machine economy and the Internet of Things (IoT).
Unlike bitcoin and altcoins, tokens do not operate on their own blockchain. They are built on top of an existing cryptocurrency’s blockchain. The Ethereum blockchain has by far the most tokens deployed on it, including chainlink (LINK) and basic attention token (BAT). NEO is often referred to as the Chinese rival to Ethereum and a platform for dApps and smart contracts. It also hosts many tokens, including gas (GAS) and nash exchange (NEX).
Besides the major types of cryptocurrencies, there are various subtypes that you will likely come across in the crypto world. Here are four terms commonly used to categorise cryptocurrencies that have specific characteristics:
Stablecoins are cryptocurrencies that do not fluctuate in value but aim to provide a digital form for fiat currencies. Stablecoins are pegged to fiat currencies or other assets at a value of 1:1. For example, tether (USDT), USD coin (USDC) and binance USD (BUSD), the biggest stablecoins by capitalisation, are pegged to $1.
Stablecoins can be backed by fiat or cryptocurrency reserves, or algorithms, which ensure the peg value. However, the depeg of terraUSD, an algorithmic stablecoin, in 2022 showed that this backing mechanism may not be the most reliable.
Privacy coins such as zcash (ZEC), monero (XMR) and dash (DASH) focus on providing private transactions. They use various mechanisms to process transactions on the blockchain without publicly attaching information that would identify the sender and recipient.
Exchange tokens are cryptocurrencies created by crypto exchanges to be used primarily on their own platform for trading crypto and paying for services. Examples include binance coin (BNB), huobi token (HT), and kucoin (KSC).
Central bank digital currencies (CBDCs)
Central bank digital currencies (CBDC) are created or backed by a central bank. The People’s Bank of China (PBoC) is currently developing its digital yuan. The Bank of England suggested it might promote a digital pound it cheekily called Britcoin.
What moves the cryptocurrency prices?
The value of a cryptocurrency is mainly determined by supply and demand, just like any other asset or product. There are several factors that influence traders’ and investors’ interest in cryptocurrencies and the supply of coins and tokens in circulation.
Supply and demand
As with any tradable asset, its price is shaped by supply and demand dynamics. When demand outstrips supply, the prices rise. When demand recedes, the price falls. Similarly, limited supply supports the price.
Each cryptocurrency project sets out its supply mechanism when it launches – typically, in a whitepaper or on its website. Cryptocurrencies such as bitcoin have a cap on their maximum supply and the rate at which new coins are mined. Other coins have no cap on supply, and some release a specific number of coins over periods of months or years.
The price for bitcoin, for example, has climbed in recent years as growing interest from individual and institutional investors has increased demand faster than the rate at which new coins are mined. Cryptocurrencies can see their demand increase in response to announcements such as new features, upgrades, exchange listings and partnerships that drive their adoption.
Coin burning has become a popular mechanism for limiting the increase in circulating supply from new coins being created. Burning coins removes them from circulation permanently by sending them to a dead wallet address on the blockchain.
Cost of production
Cryptocurrency mining requires expensive computer hardware and large amounts of electricity supply. The more miners there are on a blockchain, the harder the cryptographic calculations become to solve and the more difficult it is to mine a cryptocurrency. This is to maintain a stable rate of block creation. But the harder a cryptocurrency is to mine, the more the cost increases.
If the price of a cryptocurrency falls below the cost of production, some miners may stop mining, in turn reducing the rate at which new coins are added to the supply. If a cryptocurrency price rallies above the cost of production, more miners may join the network to generate profits from selling the coins they mine.
Availability on exchanges
Smaller cryptocurrencies tend to be listed on a few exchanges, limiting access for traders. If they are thinly traded, they may have wide bid-offer spreads that deter some investors. If a small cryptocurrency is listed on larger exchanges with more users, demand can increase and lift the price as it becomes accessible to more traders.
New cryptocurrencies are being launched continually, and while it can be hard for a project to differentiate itself from the pack, some have succeeded in providing an improvement or alternative to an existing network or offering a new service. As adoption of the new cryptocurrency grows it usually drives up the price and can reduce demand for competing projects.
Inflation of fiat currency
Cryptocurrencies with stable governance mechanisms tend to encourage more investor confidence than a project without a transparent system for decision-making and protocol changes. However, if a governance system is too slow to introduce improvements, it can make investors less interested in the project.
Investors attracted by the decentralised nature of cryptocurrencies can be resistant to the prospect of the industry becoming regulated by government bodies, reducing their interest in buying coins and tokens if they expect regulations to be introduced.
Strict regulatory rulings in China have caused cryptocurrency prices to crash several times in recent years as they have restricted trading. They have also seen mining capacity shift to other countries such as the US.
The potential for regulation in the US has created uncertainty among investors, so the adoption of clear regulations could provide clarity and increase demand as investors that had held back would enter the market.
How to trade cryptocurrency
There are several different trading instruments you can use. Your knowledge, experience and approach will determine how to trade crypto in a way that works for you.
|Timeframe||Long-term and short-term||Long-term and short-term||Short-term||Short-term||Short-term|
|Platforms||Cryptocurrency exchanges||ETF exchanges||Options exchanges||Futures exchanges||CFD broker|
|Ownership of the underlying asset||Yes||No||No||No||No|
|Direction of trading||Long only||Long and short||Long and short||Long and short||Long and short|
An alternative way to trade cryptocurrency without owning the underlying asset is via CFDs.
A CFD is a derivative product where a broker agrees to pay a trader the difference in the value of an underlying security between two dates – a contact's opening and closing. You can either hold a long position, speculating that the price will rise, or a short position, speculating the price will fall.
For instance, when trading a bitcoin CFD, you speculate on the BTC/USD price movement. Note that CFDs involve using leverage, or trading on margin, meaning that a trader can open a position worth more than their initial capital by borrowing the rest from their broker. Leverage therefore can magnify losses and lead to margin calls.
At Capital.com, for example, we offer 50% margin (or 2:1 leverage), which means that to open a BTC position worth $100, traders only need $50.
CFDs differ from futures contracts in that they do not have a set expiry date. Plus, due to overnight charges to maintain contracts for difference positions, CFDs are not typically considered long-term investments.
Spot cryptocurrency trading involves buying and selling coins and tokens on an exchange at the current market price. While investors might focus on ‘hodling’, or holding, a cryptocurrency for a long time before selling, a spot cryptocurrency trader will focus on short-term transactions.
Spot trading cryptocurrencies on exchanges does not give traders access to leverage as with CFD trading. And unlike CFD trading, spot traders own the cryptocurrency directly rather than trading a derivative contract.
Futures and options
Futures are derivatives contracts between two traders that speculate on the future price of an underlying asset on a specified date. Cryptocurrency futures contracts trade on crypto exchanges. Bitcoin futures also trade on the Chicago Mercantile Exchange (CME). They allow a crypto trader to speculate on the price of certain cryptocurrencies without having to purchase them.
The first futures contracts for bitcoin were listed on the Chicago Board Options Exchange (CBOE) in December 2017 but were soon discontinued. The CME also introduced bitcoin futures in December 2017, which continue to trade on the Globex electronic trading platform. The CME added ether futures for trading in February 2021.
An options contract is another form of derivative that gives the trader the right to buy or sell an asset at a specified price. However, unlike a futures contract, they are not obligated to buy or sell. A buy contract is known as a call option, while a sell contract is called a put option.
If a trader expects the bitcoin price to rise they can buy a call option and profit if the bitcoin price moves up. If they expect the price to fall they can buy a put option and profit if the bitcoin price moves down. Note that bitcoin price can experience significant price fluctuations and move against your expectations, provoking losses.
A cryptocurrency exchange traded fund (ETF) tracks the price of cryptocurrency coins or tokens. Shares in an ETF trade on stock exchanges and fluctuate throughout the trading session.
The ProShares Bitcoin Strategy ETF (BITO) was the first cryptocurrency ETF to launch on a US exchange in October 2021. BITO tracks bitcoin futures contract prices rather than the spot bitcoin price. In June 2022, it was followed by a short Bitcoin ETF, the ProShares Short Bitcoin Strategy ETF (BITI) that speculates on the cryptocurrency’s price falling. It is based on future contracts.
Applications for spot cryptocurrency ETFs have so far been rejected by the US Securities and Exchange Commission (SEC). Several bitcoin ETFs and exchange-traded products (ETPs) were previously launched in Canada, and there are bitcoin and ether ETFs and ETPs trading on European exchanges such as the Euronext.
What is a cryptocurrency trading strategy?
There are numerous trading strategies you can choose from to build your own trading framework. Traders build a cryptocurrency trading strategy based on research, which may include setting stop-loss and take-profit orders, restricting the size of trades and having a balance of assets, like traders do with stocks, commodities, indices, and forex. Although there is no best crypto to trade, speculating on the cryptocurrency markets with a solid trading strategy may help you decide which one fits your trading objectives and limit your risk.
Day trading strategy
One of the most popular active trading crypto strategies, day trading involves constant position monitoring. Day trading presupposes entering and exiting positions during a single day to speculate on an asset's intraday price movements.
Swing trading strategy
Swing trading is a longer-term trading strategy. Traders usually hold positions for longer than one day, but usually no longer than a month. Swing traders usually try to benefit from volatility waves, which can often last for several days or weeks. They use a combination of fundamental and technical analysis to make thorough trading decisions.
Trend trading strategy
Also referred to as position trading, a trend trading strategy suggests traders hold positions for a longer timeframe, usually a couple of months. Trend traders try to benefit from the cryptocurrency’s directional trends.
One of the fastest trading strategies, scalping does not wait for big moves or clear trends to play out, speculating on small changes in the price. Scalpers determine entry points for positions without the use of technical or fundamental analysis, but based on the market depth, benefitting from the non-stop activity of the markets.
Range trading strategy
In range trading, traders focus on using technical analysis to identify support and resistance levels for a cryptocurrency price as the price trend is likely to remain within that range for a period of time.
High-frequency trading strategy
High-frequency trading (HFT) is an advanced trading strategy that uses algorithms and bots to automatically enter and exit trades. HFT encompasses computer science, complex market concepts and mathematics and is not suitable for individual beginner investors.
Dollar-cost averaging strategy
As it is so difficult to time the market perfectly, entering a position precisely at the bottom and exiting exactly at the peak, even with the best technical analysis tools, an alternative is dollar-cost averaging. This approach is typically used for long-term investing rather than short-term price speculation.
As with stock investing, dollar cost averaging refers to buying a cryptocurrency at regular intervals. In this way, you will buy continuously whether the price is high or low, resulting in an average purchase price that is lower than the highs and still gives you scope to potential profit. This takes away the stress of deciding when to buy, although you would still need to analyse market trends to decide when to sell and take potential profits.
How to trade cryptocurrency CFDs
Are you interested in trading cryptocurrency CFDs? Sign up for an account with a CFD provider like Capital.com. You can trade CFDs on cryptos along with stocks, commodities and forex all in the same trading account.
Follow these steps to get started:
- Create, verify and login to your trading account
- Deposit funds in your chosen fiat currency and choose which cryptocurrency CFD you want to trade
- Use your preferred trading strategy and charting tools to identify buy and sell opportunities
- Open your first long or short position and consider using risk management tools such as a stop loss or a guaranteed stop loss to manage risk
- Monitor your trade using technical and fundamental analysis based on your strategy
- Close your position when your trading strategy indicates
Cryptocurrency trading CFD example
How does a cryptocurrency CFD trading work in practice? We’ve compiled a simple example and outlined the possible outcome.
CFD trade: Selling ether (ETH)
The price of Ethereum’s coin, ether, hit its all-time high of $4,362 on 12 May 2021. It fell to around $1,800 in August 2022. Let’s assume you believe the price of ether is going to rebound and decide to go long, buying ether against the US dollar (ETH/USD).
In our example, the current market price of ether is $2,500 and you decide to buy five contracts (each equivalent to one ETH) to open a trade at this price (without leverage at 1:1).
Result A: A winning trade
If your prediction was right, and ether’s price moves up, your trade would be profitable. Let’s assume that the new ETH price is $3,008. You could close your position and take your profit by selling five contacts to close your position at the sell price of $3,000 (slightly lower than the mid-price due to the spread).
Because the market has moved $500 in your favour ($3,000-$2,500), the profit from your ETH trade would be: 5 x $500 = $2,500
Result B: A losing trade
Cryptocurrency markets are extremely volatile and the market could go against you. If the price of ether fell, your position would be closed at a loss.
Let’s assume you decide to exit the trade after the market falls to $2,008. You sell five contracts at the sell price of $2,000 (which is a bit lower than the mid-price due to the spread).
The market moved $500 against you ($2,500-$2,000), which means your loss will be: 5 x $500 = $2,500
Pros and cons of trading cryptocurrency CFDs
There are several peculiar features of using CFDs for cryptocurrency trading, including liquidity in CFD markets, the use of leverage and the ability to go both long and short.
CFDs trading pros
Liquidity measures how easily an asset can be turned into cash, without impacting the market price. If an asset is more liquid, it brings about better pricing and faster transaction times. The cryptocurrency market is considered illiquid, partly due to the distribution of orders across exchanges, as noted by price disparity.
This means a relatively small number of trades can have a large impact on market prices – a factor contributing to cryptocurrency volatility. However, when trading CFDs on cryptocurrencies, you can gain exposure a lot easier because you are not trying to buy the underlying asset, simply a derivative product.
CFDs can be traded on margin. This means a trader only needs to put down a fraction of the value of their trade, and, in essence, borrow the remaining capital from their broker. This allows for more accessibility, greater exposure and amplified results. This can be particularly useful for cryptocurrencies, given the volatility the asset class witnesses, but this also brings increased risks. Note that leverage can magnify losses too.
Ability to go long or short
In purchasing a cryptocurrency, you can only potentially profit when the market is rising. However, with Capital.com’s CFD offering, you can speculate on both falling and rising markets due to the ability to short sell CFDs on cryptocurrencies. However, if the trade goes against your position, you can make losses.
Leverage and the level of risk
Leveraged trading can magnify the size of your profits but also increases the risk and magnifies the size of your losses, leading to margin calls. CFD trading is considered a high-risk endeavour. It is important to do your own research and understand how leverage works before you start trading.
CFDs brokers usually charge overnight fees to finance the loan borrowed by the client as part of the leverage trading process. This makes CFDs positions expensive for leaving overnight and more suitable for short-term trading.
Not owning the underlying asset
CFD traders have no rights as holders of an asset, as they do not own it. This also means they cannot transfer their CFD positions to another broker or exchange.
Why trade cryptocurrency with Capital.com
Advanced AI technology at its core: A personalised news feed provides users with unique content depending on their preferences. The neural network analyses in-app behaviour and suggests videos and articles that fit your trading strategy. This will help you to refine your approach when you trade cryptocurrency CFDs.
Trading on margin: Thanks to margin trading, Capital.com provides you with the opportunity to trade cryptocurrency CFDs even with a limited amount of funds in your account. Keep in mind that CFDs are leveraged products, which means both profits and losses can be magnified.
Trading the difference: By trading cryptocurrency CFDs, you don’t buy the underlying asset. You only speculate on the rise or fall of the cryptocurrency price. A CFD trader can go short or long, set stop and limit losses and apply trading scenarios that align with their objectives.
CFD trading is similar to traditional trading in terms of its associated strategies. However, CFD trading is usually short-term in nature, due to overnight charges. Plus, there are extra risks associated with leverage as it can magnify both profits and losses.
All-round trading analysis: The browser-based platform allows traders to shape their own market analysis and make forecasts with sleek technical indicators. Capital.com provides live market updates and various chart formats, available on desktop, iOS and Android.
Sign up at Capital.com and use our web platform or download the trading app to trade CFDs on the go. It will take you just three minutes to open an account and view the world’s most traded markets.
Cryptocurrency trading hours
When is the best cryptocurrency trading time? Unlike stock or commodity exchanges that close at weekends, there is no set cryptocurrency market time. Cryptocurrency market hours are 24/7 around the world. But the most active crypto trading hours are usually between 08:00 and 16:00 local time.
Transactions are more likely to be executed faster when liquidity in the market is high. When the market is thinly traded, it can be more difficult to open and close positions at your desired price.
At Capital.com, cryptocurrency CFDs are available for trading on (UTC):
Mon to Fri: 00:00 - 21:00 21:05 - 00:00
Sat: 00:00 - 05:00 07:00-21:00
Sun: 22:05 - 00:00
You can always check the trading hours for a particular cryptocurrency on a dedicated market page at our website or on the platform.
Is crypto trading profitable?
Cryptocurrency prices are highly volatile, creating potential for traders to speculate on price fluctuations. However, this high volatility also means trading cryptocurrencies carry a high risk of losing money if prices collapse.
How can I trade cryptocurrencies?
There are several different instruments you can use to trade cryptocurrencies, including buying and selling the coins directly on exchanges, trading futures, options and contracts for difference (CFDs), or trading exchange traded funds (ETFs).
Is trading cryptocurrencies safe?
Cryptocurrency markets are not regulated and there is a risk that some coins or tokens are scams. You can consider using a reputable cryptocurrency exchange that implements security steps such as identity verification.
Is crypto riskier than stocks?
Trading a cryptocurrency is riskier than trading stocks, as the market is less established and prone to extreme volatility. In addition, unlike cryptocurrencies, stock exchanges and public companies that sell their shares are subject to regulation by financial authorities. However, all trading is risky and can result in losses, if the market goes against your position.
How do you start trading cryptocurrencies?
If you want to get started trading cryptocurrencies, you can open an account and fund it with your fiat currency. Decide which coins or tokens you want to trade, choose an appropriate trading strategy to follow, then use technical and fundamental analysis tools to help you decide when to open and close a position.
How do you predict cryptocurrency prices?
You can use technical and fundamental analysis tools to try to predict how a cryptocurrency price might move in the future. However, it is important to keep in mind that high market volatility makes it difficult to come up with accurate predictions. Analysts’ and algorithm-based predictions can go wrong.
What was the first cryptocurrency?
Bitcoin was the first cryptocurrency, launched in January 2009 by an anonymous developer known by the pseudonym Satoshi Nakamoto. It remains the largest cryptocurrency by market value as of August 2022.