Cryptocurrencies have been nothing if not exciting for many investors. They have natural appeal: they have gone up a long way, and investors are lured by the apparently chunky returns on offer. Their volatility also offers lots of opportunities for those looking to trade on price movements. If you want to try your hand, here are the steps you need to take.
Decide whether you want to buy or trade
You can decide to own units of cryptocurrency, or to trade on the price of cryptocurrency. By trading, you can speculate on the price without ever taking ownership, using derivatives trading instruments called cryptocurrency CFDs.
With a unit of cryptocurrency, you have to pay in full for the price of the asset. With trading, you only have to put up a small proportion of your total position size. This allows you to take a leveraged position on the price, gaining a greater exposure than might otherwise be available with your investment amount. This approach can also be cheaper – investors don’t have deposit or withdrawal fees to access the currency, for example.
There are a number of tax advantages to trading over investing. You don’t have to pay capital gains on the profits of trading cryptocurrencies, whereas you do if you profit from buying and selling cryptocurrency direct.
On the other hand, the trading approach can magnify losses if you get your strategy wrong.
Set up your account
To buy cryptocurrency, you need to buy and sell via an exchange. This means you need to create an exchange account and store the cryptocurrency in your digital ‘wallet’.
If you simply want to trade cryptocurrency you just need a brokerage account, rather than accessing the underlying exchange directly. The broker will be exposed to the underlying market on your behalf. This is usually quicker and easier to set up.
Decide which currencies you want to buy and sell
In reality, you won’t be able to trade all 1,500 cryptocurrencies. However, you should be able to trade all the major currencies – including bitcoin, bitcoin cash, Ethereum, Ripple XRP and Litecoin – and new currencies are being added all the time. With so many around, it can be best to choose those that you know something about, and become an expert in their price movements, rather than taking a broad-brush approach.
Decide on your trading strategy
You need to make sure you know and understand your market. The pricing of cryptocurrencies depends on a whole host of factors. In the past 12 months prices have been influenced by concerns over government regulation, media coverage of the sector and the fortunes of the US Dollar - as well as statements from influential business people or government ministers. The more people become involved in cryptocurrencies, the more influential these different factors will become.
Apply your strategy by placing trades
Having settled on a trading strategy, you will need to define your ‘close’ conditions – i.e. the point that you will exit a trade. This can be an important discipline. Cryptocurrencies are volatile and running large open positions is risky. Once a position has reached your target, or you have hit your maximum loss, you will need to close out your position. These filters can be put in place to happen automatically. Starting small or testing your knowledge with a demo/practice account can help you get a feel for how these markets work and what influences them.
Digital money decoded
Cryptocurrencies are no longer the inaccessible trading grounds of tech-insiders, offering real investment possibilities to real people.
For 30 years, City Index customers have enjoyed fast, reliable trading and actionable ideas alongside access to a wealth of research. Today, cryptocurrency forms a major part of their portfolio as experts in trading, spread betting and managing risk effectively.
Try trading risk free using a free demo account with City Index and for more trading ideas visit the City Index Cryptocurrency trading hub.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. Capital at risk.
If you’re thinking of investing in cryptos, consider whether buying or trading will suit your needs best. Here’s what you need to know
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