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Lesson 7: Cryptocurrency trading

Lesson 7: Cryptocurrency trading

With renewed interest in cryptocurrencies amid higher regulatory glare and mainstream media coverage, trading in crypto has become one of the most attractive forms of investing.

You might be interested in trading cryptocurrency CFDs if you want to speculate on the price of a cryptocurrency without owning the digital asset and to leverage your position so that you only put up a fraction of the cost upfront.

How to use this Guide?

  • Learn about crypto trading and the anatomy of a crypto CFD trade
  • Open a demo account and practice crypto trading strategy with virtual funds
  • When ready open a live account and start cryptocurrency trading

What is crypto trading?

Cryptocurrency trading is the act of speculating on cryptocurrency price movements via a contract for difference (CFD) trading account or buying and selling the underlying coins via an exchange. CFD trading is a type of derivative that allows you to bet on Bitcoin (BTC) and other crypto price changes without possessing the underlying currencies.

For example, you can go long (buy) if you believe the value of a cryptocurrency will rise, or short (sell) if you believe the value will fall. Both are leveraged instruments, which means that you only need a little deposit, known as margin trading crypto, to have total exposure to the underlying market. However, because your profit or loss is still determined based on the total size of your position, leveraging trading crypto magnifies both earnings and losses.

Before even thinking about venturing into crypto trading, it is important that one has a comprehensive understanding of the assets and technologies involved. Bitcoin is the soil from which thousands of other cryptocurrencies have grown.

As with stock trading, forex trading, and any other type of online trading, cryptocurrency trading can be complex, involving a variety of components and requiring knowledge. Over the years, however, an entire industry of other digital assets has come into existence with the assets being tradable for profit. All other cryptocurrencies that are not BTC are known as altcoins, the largest of which is Ether (ETH).

This guide will explain crypto trading strategies and familiarize you with crypto trading platforms and applications, the anatomy of trade, the styles of trading, and the role of technical and fundamental analysis in creating a comprehensive trading strategy.

Why trade cryptocurrencies?

When you trade cryptocurrencies via a CFD account with CAPEX, you are speculating on whether your chosen market will rise or fall in value, without ever taking ownership of the digital asset. Prices are quoted in traditional currencies such as the US dollar and Euro, and you never take ownership of the cryptocurrency itself.

The benefits of cryptocurrency trading include:

Volatility

Volatility is a measure of how much the price of any particular asset has moved up or down over time. The more volatile an asset is, the riskier it is as an investment — and the more potential it has to offer either higher returns or higher losses over shorter periods of time than comparatively fewer volatile assets.

The volatility of cryptocurrencies is part of what makes this market so exciting. Rapid intraday price movements can provide a range of opportunities to traders to go long and short but also come with increased risk. So, if you decide to explore the cryptocurrency market, make sure that you have done your research and developed a risk management strategy.

With CAPEX you benefit from a Negative Balance Protection policy, which means that you cannot lose more money than what is on your account.

Market hours

The cryptocurrency market is available to trade 24 hours a day, seven days a week because there is no centralized governance of the market. However, levels of liquidity can vary and your trades are more likely to be executed when there is the highest level of activity.

Cryptocurrency transactions take place directly between individuals, on cryptocurrency exchanges all over the world. However, there may be periods of downtime when the market is adjusting to infrastructural updates, or ‘forks’.

With CAPEX, you can trade cryptocurrencies against fiat currencies – such as the US dollar and Euro – Sun -Fri: 22:00-21:55.

Improved liquidity

Liquidity is the measure of how quickly and easily a cryptocurrency can be converted into cash, without impacting the market price. Liquidity is important because it brings about better pricing, faster transaction times, and increased accuracy for technical analysis.

In general, the cryptocurrency market is considered illiquid because the transactions are dispersed across multiple exchanges, which means that comparatively small trades can have huge impact on market prices. This is part of the reason cryptocurrency markets are so volatile.

However, when you trade cryptocurrency CFDs with CAPEX, you can get improved liquidity because we source prices from multiple venues on your behalf. This means that your trades are more likely to be executed quickly and at a lower cost (spread and slippage).

Ability to go long or short

When you buy a cryptocurrency, you are purchasing the asset upfront in the hope that it increases in value. But when you trade on the price of a cryptocurrency, you can take advantage of markets that are falling in price, as well as rising. This is known as going short.

Bitcoin cryptocurrency trading
Bitcoin cryptocurrency trading CAPEX WebTrader

For example, let’s say that you have decided to open a short CFD position on the price of Bitcoin because you believe that the market is going to fall. If you were right, and the value of Bitcoin fell against the US dollar, your trade would profit. However, if the value of Bitcoin rose against the US dollar, your position would be making a loss.

Leveraged exposure

As CFD trading is a leveraged product, it enables you to open a position on ‘margin’ – a deposit worth just a fraction of the full value of the trade. In other words, you could gain a large exposure to a cryptocurrency market while only tying up a small amount of your capital.

The profit or loss you make from your cryptocurrency trades will reflect the full value of the position at the point it is closed, so trading on margin offers you the opportunity to make large profits from a small investment. However, it can also amplify any losses, including losses that could exceed your initial deposit for individual trade. Therefore, it is crucial to consider the total value of the leveraged position before trading CFDs.

It is also important to make sure that you have a suitable risk and money management strategy in place, which should include the appropriate stops and limits.

With CAPEX you can trade with leverage up to 1:30 for cryptocurrency and other assets, including crypto and blockchain-linked stocks and ETFs.

Faster account opening

When you buy cryptocurrencies, you will need to buy and sell via an exchange, which requires you to create an exchange account and store the cryptocurrency in your own digital wallet. This process can be restrictive and time-consuming.

But when cryptocurrency trading with CAPEX, you will not need access to the exchange directly because we’re exposed to the underlying market on your behalf. You will not need to set up and manage an exchange account, so you could be set up and ready to trade much more quickly. In fact, you could be trading in less than five minutes, with our simple application form and instant online verification.

Cryptocurrency trading examples

To help you understand how to trade cryptocurrencies, we have complied with two examples of cryptocurrency CFD trades and their outcomes.

CFD trading example: buying Bitcoin or going long

Let’s assume that Bitcoin is trading at a sell/buy price of 40.200/40.300 USD. You want to buy 1 CFD (units) because you think the price of Bitcoin will go up. Bitcoin has a 1:2 leverage or a margin rate of 50%, which means that you must deposit only 50% of the position’s value as position margin.

In this example, your CFD position margin will be $20.150 (50% x (1 units x $40.300 buy price)).

Crypto trading example - Buy Bitcoin
Crypto trading example CAPEX WebTrader

Outcome A: a profitable trade

If your prediction was correct, and the price of Bitcoin surges over the next hours or days, then you have made a profitable trade. If the sell/buy price is 42.200/42.300 USD when you decide to close your position by selling at 42.300 (the new sell price).

The price has moved $2000 (42.300 – 40.300) in your favor. Multiply this by the size of your position (1 unit) to calculate your gross profit which is $2.000.

If the position was closed during the day, there will not be any swap charges and the net profit is $2.000.

If the position was closed after a few days, there will be swap charges according to the overnight rollover specification.

Outcome B: a losing trade

If your prediction for the price of Bitcoin was wrong, the Bitcoin CFD trade will result in a loss. Let’s assume that the price of Bitcoin drops over the next hour to a sell/buy price of $38900/39.000. Because you want to limit the loss in the eventuality that the price continues to drop, you can sell at $41.000 (the new sell price) to close the position.

The price has moved $1.400 (40.300- 38.900) against you. Multiply this by the size of your position (1 units) to calculate your loss, which is $1.400.

CFD trading example: selling Ether

Crypto Trading Ethereum
Crypto Trading Example CAPEX WebTrader

Let's assume Ethereum EUR is trading at a sell/buy price of €3.542/3.544, and you want to sell 1.5 CFDs (units) because you think the price will go down. Ethereum has a 1:2 leverage or a margin rate of 50%, which means that you only must deposit 50% of the position’s value as position margin.

In this example, your CFD position margin will be €2,656.5 (50% x (1.5 units x €3542 sell price)). Remember that if the price moves against you, it is possible to lose more than your initial position margin of €2.656.5.

Outcome A: a profitable trade

Your prediction was correct, and the price falls later to a sell/buy price of 3340/3342 EUR. You decide to close your trade by buying back at €3.342 (the new buy price).

The price has moved €200 (3542-3342) in your favor. Multiply this by the size of your position (1.5 units) to calculate your profit, which is €300 gross.

If the position was closed after more than 1 day, the overnight swap will be added to the profit according to the overnight rollover specification.

Outcome B: a losing trade

Unfortunately, your prediction was wrong, and the price of Ethereum EUR rises over the next hour to a sell/buy price of 3680/3682 EUR. You feel the price is likely to continue up, so to limit your potential loss you decide to buy at €3682 (the new buy price) to close the position.

The price has moved €140 (3682-3542) against you. Multiply this by the size of your position (1.5 units) to calculate your loss, which is €210.

Cryptocurrency Trading for Beginners

Crypto Trading Styles

There is a range of styles used to accomplish a cryptocurrency trading strategy, each with appropriate market environments and risks inherent in the strategy.

Crypto Trading Strategies

There are many techniques traders use to speculate on the price fluctuations in the crypto markets. A crypto trader should devise a powerful strategy backed by research, with well-laid plans for when to enter and exit their positions.

  • Trend Trading
  • Range trading
  • Breakout Trading
  • Arbitrage trading
  • News Trading

Relying on social media for news on cryptocurrencies is among the mistakes that new investors tend to make. Investment decisions should never be based on the hype created on social media. Since digital currency is a hot topic, false information on this topic tends to travel very quickly.

Crypto Trading Tools

Being able to detect patterns and cycles is crucial for having clarity from the market behavior perspective. Knowing where you are positioned in relation to the whole is paramount. You want to be the experienced surfer who knows when the perfect wave is about to arrive instead of paddling listlessly in the waters hoping for something great to happen.

The micro perspective is also crucial in determining your actual strategy. There are a vast number of technical indicators used by traders to gain insight into the supply and demand of securities and market psychology.

The core idea behind technical analysis is that historical price action may indicate how the market is likely to behave in the future.

But how do we determine the potential of a particular crypto asset beyond or preceding its behavior in the trading market?

Whereas technical analysis involves studying market data to determine one’s trading strategy, fundamental analysis is the study of the underlying industry, technology, or assets that comprise a particular market.

How does one determine if an asset is based on sound fundamentals rather than hype, exaggerated technology, or worse — nothing at all?

For cryptocurrency analysis, several factors should be considered:

Technical Analysis

Technical analysis uses the concept of price patterns from the past and technical indicators to analyze the charts and predict the future movements in price. This can be applied to any market, including cryptocurrencies such as Bitcoin (BTC).

Among the main tools used in the technical analysis, the following can be useful for beginners:

  • Market Cycles
  • Trends (directions, lengths)
  • Support and resistance (trend line, moving average, Bollinger Bands, Fibonacci retracements, Pivot Points, The Ichimoku Cloud).
  • Oscillators (Stochastics indicator, Relative Strength Index -RSI, Moving average convergence divergence - MACD).
  • Chart patterns (Japanese candlesticks and Western-style chart patterns like Head and Shoulders, Double top and bottom, Cup and handle, Triangles, Rising and falling wedge, Flag and pennant)

Fundamental analysis

Fundamental analysis is an approach used by investors to establish the "intrinsic value" of an asset or business. By looking at several internal and external factors, their main goal is to determine whether said asset or business is overvalued or undervalued. They can then leverage that information to strategically enter or exit positions.

In the case of crypto markets, the fundamental analysis offers the potential to analyze the external reality that affects them.

Cryptocurrency networks cannot really be assessed through the same lens as traditional businesses. If anything, the more decentralized offerings like Bitcoin (BTC) are closer to commodities. But even with the more centralized cryptocurrencies (such as those issued by organizations), traditional fundamental analysis indicators cannot tell us much.

So, we need to turn our attention to different frameworks.

Among the main factors observed by the fundamental analysis in cryptocurrencies, the following can be mentioned:

  • Usability and adoption. This point is intended to examine the level of usability and adoption of a cryptocurrency. The simpler the use and the greater the adoption of the cryptocurrency, the greater its real value.
  • Government position and regulations. This point is aimed at studying how governments see a certain cryptocurrency and whether it complies with regulations. A favorable regulatory framework will obviously increase the potential of the cryptocurrency or if it is unfavorable, it will limit its potential.
  • Project development and media coverage. Find out how the development of the cryptocurrency project is progressing. Cryptocurrency development activity, its software, its community, and increased media coverage will indicate that the cryptocurrency has potential for greater value.

How risky is cryptocurrency trading?

Risk management is also a significant aspect of crypto trading. Prior to entering a trade, it is important to know how much you are willing to lose on that crypto trade if it goes against you. This can be based on a few factors, such as your trading capital. For example, a person might wish to only risk losing 1% of their overall trading capital either in total or per trade.

Cryptocurrency trading is simply a risky endeavor in and of itself. It’s almost impossible to predict any future market activity with certainty. At the end of the day, it’s important to make your own decisions, using available information and your own judgment, as well as to make sure you are properly educated.

Additionally, cryptocurrency trading strategies can vastly differ from person to person, based on preferences, personalities, trading capital, risk tolerance, etc. Trading crypto comes with significant responsibility. Anyone looking into cryptocurrency trading must evaluate their own personal situation before deciding to trade.

Visit CAPEX Academy for advanced online courses on online trading and investing.

FAQs

What is the spread in cryptocurrency trading?

The spread is the difference between the buy and sell prices quoted for a cryptocurrency. Like many financial markets, when you open a position on a cryptocurrency market, you will be presented with two prices. If you want to open a long position, you trade at the buy price, which is slightly above the market price. If you want to open a short position, you trade at the sell price – slightly below the market price.

What is a lot in cryptocurrency trading?

Cryptocurrencies are often traded in lots – batches of cryptocurrency tokens used to standardize the size of trades. As cryptocurrencies are very volatile, lots tend to be small: most are just one unit of the base cryptocurrency. However, some cryptocurrencies are traded in bigger lots.

What is leverage in cryptocurrency trading?

Leverage is the means of gaining exposure to substantial amounts of cryptocurrency without having to pay the full value of your trade upfront. Instead, you put down a small deposit, known as margin. When you close a leveraged position, your profit or loss is based on the full size of the trade.

What is margin in cryptocurrency trading?

Margin is a key part of leveraged trading. It is the term used to describe the initial deposit you put up to open and maintain a leveraged position. When you are trading cryptocurrencies on margin, remember that your margin requirement will change depending on your broker, and how large your trade size is.

Margin is usually expressed as a percentage of the full position. A trade on bitcoin (BTC), for instance, might require 15% of the total value of the position to be paid for it to be opened. So instead of depositing $5000, you’d only need to deposit $750.

What is a pip in cryptocurrency trading?

Pips are the units used to measure movement in the price of a cryptocurrency and refer to a one-digit movement in the price at a specific level. Valuable cryptocurrencies are traded at the ‘dollar´ level, so a move from a price of $190.00 to $191.00, for example, would mean that the cryptocurrency has moved a single pip. However, some lower-value cryptocurrencies are traded at different scales, where a pip can be a cent or even a fraction of a cent.

It’s important to read the details on your chosen trading app to ensure you understand the level at which price movements will be measured before you place a trade.

What are good cryptocurrency pairs for beginners to trade?

There is no right cryptocurrency to trade for beginners because each is different, providing a range of benefits and risks to the trader. The best cryptocurrency for you will also depend on your trading goals, attitude to risk, and interests more generally.

With CAPEX, cryptocurrencies are traded against fiat currencies. Our cryptocurrency list includes the most traded digital assets, including the newly launched Bitcoin ETF.

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