Learn everything you need to know before you start trading bitcoin, Ethereum or any other cryptocurrency.
The value of cryptocurrencies is increasing. In 2017 bitcoin (BTC) grew from around £600/BTC to over £8,000/BTC. With such growth comes an increase in market trading, which in turn helps the currency keep growing.
It can be a good choice for cryptocurrency beginners because you don’t need your own cryptocurrency wallet, and you can get a feel for the market movements without needing to buy it outright.
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Where to trade cryptocurrency in the UK
A range of established forex exchanges and brand new platforms are embracing cryptocurrency trading. Find the one with the features that work for you, and that suits your trading style.
The value of investments can fall as well as rise, and you may get back less than you invested. Past performance is no guarantee of future results. Your capital is at risk.
Spread bets and CFDs are leveraged products and can result in losses that exceed deposits. The value of shares, ETFs and ETCs bought through a share dealing account, a stocks and shares ISA or a SIPP can fall as well as rise, which could mean getting back less than you originally put in. Please ensure you fully understand the risks and take care to manage your exposure.
All of the following platforms are available in the UK and offer cryptocurrency trading.
How to pick a trading platform
Some of the main differences you’ll find include:
- The currencies available: Bitcoin to USD is widely available, but other fiat and cryptocurrencies might not be available at all platforms.
- Leverage available: Leverage lets you trade beyond your initial deposit and multiply your gains, suiting those who prefer higher risks and higher rewards. You can often find leverage up to 20:1 with cryptocurrency, depending on your chosen platform and currency pair.
- Trading features: Hedging, stop loss features and other options can give you more control over your trading. Experienced traders might be able to benefit from these, while first-timers might prefer to keep it simple.
- Minimum investment: What’s the minimum (and maximum) amount you can invest? Does it work for you?
A word on risk
Market trading of any asset is risky and cryptocurrencies are very volatile. There is no guarantee of a return of investment. As always you should never trade with capital that you aren’t prepared to risk losing.
How cryptocurrency trading works
Market trading might sound like something reserved for the financial elite, but the growth of cryptocurrency is accompanied by the growth of online currency exchanges and trading platforms where anyone can take part in market speculation. You just need to know how it works.
What is forex market trading?
Foreign exchange (forex) market trading is the buying and selling of currencies between traders. In its simplest form, you’re betting on the changing price difference between two different currencies.
You open an account and deposit funds into it. These funds are then used to place buy and sell orders against another currency. You make profits from selling, or closing orders at a higher price than you bought.
Read a beginner’s guide to forex trading here.
How do you make a profit?
To start trading, you deposit funds into your account. When you bet correctly the funds in your account increase. When you bet incorrectly, the funds in your account decrease.
With leverage, you can magnify your profits and losses.
For example, say you placed a US$1,000 trade on bitcoin increasing in price, without leverage. If its price increased by 10%, compared to the US dollar, during the trade period your profits would be US$100, minus any trading fees.
But if you traded with 10:1 leverage, your profits would be 10 times that, minus the trading fees.
As you can see, the sharp price movements of cryptocurrencies, combined with leverage, can quickly produce substantial returns.
However it goes both ways. If the price starts dropping, leverage might chew through your deposited funds quickly.
Cryptocurrency trading
Trading cryptocurrencies works exactly the same, but instead of selling and buying fiat currencies, such as euros or US dollars, traders buy and sell cryptocurrencies, such as bitcoin, Ethereum or Litecoin.
For example, you might bet on the changing price difference between the US dollar and bitcoin. Or you might bet on the changing values between two different cryptocurrencies, such as by trading a BTC:ETH pair.
If you think bitcoin will increase in value you might “go long” on it. This means betting that it will increase in value relative to the US dollar.
If you think bitcoin will decrease in value you might “short” it instead. This means betting that it will decrease in value relative to the US dollar.
You’re not actually buying the cryptocurrency. Instead, you’re just placing an order on the market.
Just like forex market trading, cryptocurrency trading works by exchanging one currency into another and back. You will usually exchange a fiat currency into a cryptocurrency and then, at a later date, back into a fiat currency, although there are traders and exchanges that allow cryptocurrency-to-cryptocurrency trading.
For example, let’s take a look at the BTC to USD chart for 2017:
Bitcoin to USD price chart, November 2016 – November 2017Yahoo Finance
We can see here, that as 2017 progressed, the value of bitcoin in comparison with the dollar, grew from just under US$1,000/BTC on 1 January 2017 to over US$10,800/BTC in the last week of November 2017.
Two types of traders
There are two types of trading available to traders interested in market trading cryptocurrencies:
Long-term trading
Long-term traders buy and hold cryptocurrencies over a long period. They may hold a cryptocurrency for weeks, months or even years. Studying price trends over a long period allows long-term traders to make informed decisions and avoid suffering from short-term dips in value.
If you believe the value of a cryptocurrency will grow steadily over a long period and don’t want the stress that comes from short-term value dips, then this method might be your best choice.
Short-term trading (or intraday trading)
Short-term trading eschews the stability of long-term trading for the possibility of taking advantage of short-term price swings and involves buying and selling cryptocurrencies over the span of a day or a few hours.
If you’d rather take advantage of the characteristic volatility of cryptocurrencies by getting in and out of a trade quickly, then this method might be for you.
The advantages of trading cryptocurrencies
Trading cryptocurrencies, while similar to trading fiat currencies on forex, comes with its own set of advantages.
- Cheap fees and fast exchanges. For each trade, the exchange platform you’re using will take a small percentage as commission for the service they’re providing. This is inevitable. Where cryptocurrency trades differ from their fiat currency equivalent is in the size of this fee. Because the fees for transferring cryptocurrencies (typically via wallet payments) are cheaper than credit card and bank transfer fees, market-trading fees are cheaper than forex-trading fees.
- Extreme volatility. Traders make profits when the price of the currency takes large strides upwards, and cryptocurrencies often experience large price movements. While this increases the risk (large price movements happen downwards as well), you can often make a lot of profit with a relatively small bankroll.
- Open all week. You can only trade stocks and commodities during business hours, and you can often only trade forex during weekdays. Cryptocurrencies, on the other hand, can be traded 24/7, anytime and anywhere, depending on the exchange.
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Things to be careful of
If you’re not careful when it comes to cryptocurrency trading, you could find yourself gambling more than you’re trading, and eventually you might lose all your money. Trading is not a game, and just as there is real money to be made, there is real money to be lost. Doing your research and keeping the following concepts in mind when trading could help you avoid the pitfalls of cryptocurrency trading.
Cryptocurrency’s volatility
The number one thing you’ll need to keep in mind when it comes to cryptocurrency trading is that the price is extremely volatile. Where certain trade techniques used in forex might take months to come to fruition, in cryptocurrency trading, it could only take hours or days. While this is beneficial when it comes to making a profit, it could also be your downfall if the price moves the other way.
In September 2017, Litecoin’s value fell more than 50% in two weeks. The recovery to its previous value took more than two months. Cryptocurrencies not only take large steps in value both up and down, but they also do so in very short spans of time.
Compare this movement to the chart of euros to US dollars for the same time period.
In August 2017, US$1 was worth EUR€0.8457. In November 2017, US$1 is worth EUR€0.8375. That’s a difference of only EUR€0.0082 per US$1.
Patterns sometimes lie
Many market-trading books and guides cover certain chart-reading techniques and patterns used to predict the market by professionals. While the market does sometimes follow patterns, this is never a guaranteed outcome, and unless you limit your exposure, you could end up losing a lot of money over a pattern that does not exist.
Limit your exposure
Limiting your exposure comes down to two specific concepts:
- Never invest more money than you are willing to lose. You should consider any money you put into a trade as lost. If you’re uncomfortable with this notion, then you’re trading more money than you should be. Finding the point where you’re comfortable with this concept is key to helping you trade stress-free.
- Consider setting up “take profit” and “stop loss” orders. These limits are offered by many professional trading platform and can automatically liquidate and “cash out” your position at predefined prices.
Stay away from leverage
Leverage is money that a broker loans you. It’s wise to stay away from leverage until you’ve learned everything you can learn about making trades with your own money. While leverage can help you make greater profits with short cryptocurrency movements, it can also amplify your losses when the trade takes a wrong turn.
Always remember, leverage amplifies your winnings and your losses equally. As a beginner, the risks presented when using leverage are typically not worth the possibility of amplified profits.
Leverage example
You decide to trade US$2,000 to BTC. Additionally, you leverage another US$10,000 from your broker. Now you can buy 1.6 BTC at US$7,500/BTC. Later you sell at US$8,500/BTC, return the US$10,000 and you are left with US$3,600, a profit of US$1,600 on your initial US$2,000.
Unfortunately, this works the other way around. If the price of bitcoin had fallen to US$6,500/BTC instead, you would have lost US$1,600.
Always remember, leverage amplifies your winnings and your losses equally. As a beginner, the risks presented when using leverage are just not worth the possibility of amplified profits.
Know when to cash out
What market trading really comes down to is knowing when to close a trade. This is the crux of the operation. Getting into a trade is easy, knowing when to get out is hard, and that is where you should focus most of your learning. This again involves two different aspects:
- Closing a trade in profit. It is important to take your winnings out of a trade. Cryptocurrencies can move down more quickly than they move up and you don’t want to be late cashing out of a trade. You also don’t want to be too early and miss out on extra profits. There are a lot of techniques to help you make this decision that are out of scope of this beginner’s guide.
- Cutting your losses. Similarly, you want to be ready to cut your losses if a trade goes too wrong while also not getting out too early in case the cryptocurrency recovers. Again, there are countless guides and books to help you make this decision.
How to get started trading cryptocurrency
Some trading platforms will suit your needs much better than others. It’s worth comparing them in detail and trying demos where available to find the one you like.
The value of investments can fall as well as rise, and you may get back less than you invested. Past performance is no guarantee of future results. Your capital is at risk.
Spread bets and CFDs are leveraged products and can result in losses that exceed deposits. The value of shares, ETFs and ETCs bought through a share dealing account, a stocks and shares ISA or a SIPP can fall as well as rise, which could mean getting back less than you originally put in. Please ensure you fully understand the risks and take care to manage your exposure.
After that:
Step 1. Learn the platform
Cryptocurrency brokers usually offer their own trading platform, and each broker’s system will be slightly different from one another. You will need to put in the time to learn how the platform works, where each feature is and how to utilise it.
When you first access a broker’s trading platform, you might feel overwhelmed. This is normal. Spend some time with it and continue doing your research. You will get comfortable with it in no time.
Step 2. Is it the right time?
The old adage of “buy low, sell high” holds for cryptocurrencies just as it holds for any other sort of investment or trading. Cryptocurrency markets move up and down, and large movements up are often followed by sudden dips.
Step 4. Get in there
The best way to learn how to trade is to actually trade. There is no secret. Once you’ve learned all the theory, you’ll need to get your feet wet. Buy some cryptocurrency, set your limits and get started.
Just remember that it’s gambling. Go in expecting to lose your money and you’ll never be disappointed.
What affects the price of a cryptocurrency?
Cryptocurrencies are volatile by nature. They are not as stable as currencies that have had centuries to develop. Bitcoin is the oldest coin on the market, and it has only been around since 2009. Nevertheless, there are a number of things that can affect cryptocurrencies:
- Regulation. If a government makes a statement or pushes for a particular regulation that affects cryptocurrencies, you can bet that the price will react to it (sometimes positively, often negatively). When China banned ICOs, the price of Ethereum fell by 41% in 15 days (from US$386.83/ETH to US$228.06).
- Media influence. Just like government regulation, exposure in the media greatly affects a cryptocurrency’s price. Whenever a public figure makes a statement regarding cryptocurrencies or a major retailer starts accepting cryptocurrency as a form of payment, you will see the market respond.
- Changes to the technology. When a cryptocurrency’s core technology is affected (either via an update or the finding of a flaw), the cryptocurrency’s price is also affected.
In conclusion
Trading cryptocurrencies works almost exactly the same as trading fiat currencies, and it will benefit you greatly to learn the theory behind trading currencies. While profits are never guaranteed when trading, you can take steps to protect yourself from heavy losses and to improve your understanding of how markets move.
There’s more to know than can be crammed into this guide, but the only real way to learn is by doing. This generally means picking a platform, setting aside some money that you don’t mind losing, and getting to learning.
Good luck!
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