Cryptocurrencies comprise a growing component of financial instruments, totaling well over 3000 digital currency options across 20,780+ markets globally. With a market capitalization in excess of £160 billion, there are plenty of reasons to get involved in this burgeoning contrarian industry. Bitcoin remains the dominant digital currency with 65% + dominance in the worldwide crypto market.
Established as a bulwark against conventional financial systems, and central bank hegemony, Bitcoin (BTC) was the creation of an enigmatic persona named Satoshi Nakamoto. Cryptocurrency and the blockchain upon which it is predicated is geared towards anonymity, security, frictionless transfers, and cost minimization. By eliminating the proverbial ‘middlemen’ from financial transfers, anyone, anywhere with secure Internet connectivity can freely transact on the blockchain and exchange value.
Owing to the widespread adoption and endorsement of blockchain-based technology by banks and financial institutions, et al, cryptocurrency has gone mainstream. While central banks and tax authorities may differ in their approach towards the regulatory frameworks necessary for the cryptocurrency market, the public is largely accepting of this non-fiduciary currency for transactions, trading, and investment purposes. Unlike fiat currency, cryptocurrency is not subject to a central bank’s authority, nor is its value dependent on gold reserves, the strength of the USD, EUR, GBP, JPY, or other reserve currencies.
These stand-alone financial instruments are extremely volatile and price is based exclusively on supply and demand. Consider that at the zenith of the ‘crypto boom’, the market was worth a staggering £623 billion +, with BTC trading around the £15,600 mark. Significant corrections have taken place in the interim, leading many to theorize that a period of consolidation is underway. Bitcoin commands tremendous respect among crypto enthusiasts, given its dramatic market share in the face of a cornucopia of new altcoins being brought to market. This begs the question: How do you trade cryptocurrency?
The FCA in the UK has ruled that Bitcoin has ‘no intrinsic value’ yet this has not deterred enthusiasts who believe in this new-age blockchain-based value-exchange alternative to fiat currency. It appears that governments around the world are more invested in protecting their national currency than they are accepting of the innovative solutions provided by blockchain-based technologies like Bitcoin and altcoin. However, if Bitcoin gains widespread acceptance in the UK, many believe that the BOE (Bank of England) and the FCA (Financial Conduct Authority) may reconsider their positions.
For those who have an affinity to Bitcoin, trading cryptocurrencies in the UK is relatively straightforward. Due diligence is required whenever real money changes hands with a broker. It is expected of traders to conduct the requisite research into the trading brokerage to ensure that it meets all the stringent criteria of the FCA (Financial Conduct Authority). Regulated brokerages are held to a high standard and their conduct is supportive of responsible trading practices.
The objective is to pick a digital currency pair and simply decide whether to buy or sell that instrument. There are notable differences between trading crypto and trading forex or stocks, indices, and commodities. The biggest difference comes in the amount of leverage that is offered to traders. With CFD trading, you do not actually own any crypto – you’re merely trading a contract which tracks the price of the underlying instruments.
Trading tips 101
Like any financial instrument, crypto can be traded in multiple formats. Conventional trading systems dictate that you buy low and sell high, but this hardly proves viable in a market characterized by dramatic whipsaw activity. Cryptocurrency markets are subject to wild price swings on a daily basis.
The general trend since 2017 has seen Bitcoin and altcoin markets falling precipitously, with periods of short-term appreciation, consolidation, and declines in no particular sequence. The single-best way to trade cryptocurrencies under these market conditions is by using a CFD format. A CFD is a contract for difference. It is a ‘derivatives trading instrument’ which allows profits to be generated when digital currencies appreciate or depreciate in value.
A reputable CFD brokerage also offers traders the added benefit of leverage. This means that the trading power of every unit of fiat currency is multiplied by the amount of leverage provided through the brokerage. For example, Plus500 offers a variety of cryptocurrency CFDs with leverage of 1:2, effectively allowing clients to trade crypto options with double their bankroll.
By placing a £500 trade on BTCUSD for example, the client gets to trade £1000 worth of Bitcoin/US dollar. It is worth pointing out that leveraged options are a double-edged sword. When the market is moving in your favor, leverage is great since it multiplies your profits. However, when the markets move against you, leverage multiplies your losses – so caution is the order of the day.
- Always trade with a reputable broker which is authorized and regulated by the FCA (Financial Conduct Authority), the Cyprus Securities and Exchange Commission, the FSCA, the Monetary Authority of Singapore, the FMA or the ASIC. Trusted brokerages boast regulatory authority approval in many or all of these jurisdictions.
- Contracts for difference are typically associated with over 76% investor losses (FCA), and with cryptocurrency that number could be higher given the extreme volatility of these financial instruments.
- Cryptocurrency can be traded against fiat currency in the form of BTCUSD, ETHUSD, LTCUSD, NEOUSD, XRPUSD, IOTUSD, XLMUSD, NEOUSD, et cetera. Other options include crypto/crypto pairs like ETHBTC. In any event, the CFD option requires traders to either ‘Sell’ or ‘Buy’ the underlying asset at the pre-stated price.
- If the leverage is 1:2, that indicates that a margin of 50% is required. If the leverage is 1:4 that indicates that a margin of 25% is required. The higher the leverage, the lower the margin, and the greater the risk/reward.