What are cryptocurrencies?
Cryptocurrencies are digital currencies. They can be exchanged or speculated against just like any traditional currency – or “fiat” currency, but they exist outside the control of financial institutions and governments.
There is a huge amount of cryptocurrencies, all of which have unique functions and applications. But those with a substantial market capitalization are – at the moment – in the minority and they include bitcoin, bitcoin cash, ether, litecoin and dash.
What is cryptocurrency trading?
Cryptocurrency trading involves speculating on the price movements of a cryptocurrency with a CFD trading account, or buying and selling the underlying coins via an exchange.
CFD trading with cryptocurrency
CFDs are derivative products that allow you to speculate on the price movements of a cryptocurrency without becoming the owner of the underlying coins. You can go long (buy) if you think a cryptocurrency will increase in value, or go short (sell) if you think it will decrease in value.
In both cases, you trade with leveraged products, which means that only a small investment (a so-called security requirement) is required to get full exposure to the underlying market. The profit or loss is calculated based on the total size of the position, so the leverage makes both profits and losses relatively larger.
Buy and sell cryptocurrencies through an exchange
When you buy cryptocurrencies through an exchange, you buy the coins themselves. You must open an exchange account, pay the total value of the asset to open a position, and store your tokens in your own wallet until you are ready to sell.
It can take time to learn how stock trading works, as you need to understand how the technology works and how to interpret the data. Many exchanges also have restrictions on how large deposits can be made and high fees for keeping accounts open.
How do cryptocurrency markets work?
Cryptocurrency markets are decentralized, meaning they are not issued or supported by any central body, such as a government agency. Instead, they are managed by a network of computers. However, cryptocurrencies can be bought and sold via exchanges and stored in digital wallets, so-called «wallets».
Unlike traditional currencies, cryptocurrencies exist only in a shared digital ledger that contains information about previous owners and is stored in a blockchain. When a user wants to send cryptocurrency units to another user, the units are sent to the user’s wallet. For the transaction to be considered completed, it must first be verified and added to the blockchain through a process called «mining». It is the same process normally used when new cryptocurrency tokens are created.
What is a blockchain?
A blockchain is a shared digital ledger where data is recorded. It contains the transaction history of each cryptocurrency unit, with information about previous owners. The blockchain records transactions in so-called «blocks», where new blocks are added to the front of the chain.
Consensus in the network
A blockchain file is always stored on multiple computers on a network rather than in a single location and can normally be read by anyone on the network. So the file is not only transparent and very difficult to change – it also lacks weak points that could make it vulnerable to hacking, human error or software failure.
Cryptography
The blocks are linked using cryptography based on advanced mathematics and computer science. Any attempt to make changes disrupts the cryptographic links between the blocks and can be quickly identified as fraudulent attempts by the computers in the network.
What is cryptocurrency mining?
Mining is the process by which the latest transactions of the cryptocurrency are verified and new blocks are added to the blockchain.
Verify transactions
Mining computers select pending transactions from a pool and verify that the sender has sufficient funds to complete the transaction. This is done by checking the details of the transaction against the history stored in the blockchain. Through a second verification, the computers then confirm that the sender has authorized the transfer of funds with their own key.
Create a new block
Mining computers compile approved transactions into a new block and try to generate the cryptographic link to the previous block by finding a solution to a complicated algorithm. Once one of the computers successfully generates the link, it adds the block to its version of the blockchain file and broadcasts the update to the entire network.
What affects the price of cryptocurrencies?
The price of cryptocurrencies is affected by supply and demand. However, because cryptocurrency markets are decentralized, they are generally not affected by many of the economic and political factors that govern traditional currencies. There is still a lot of uncertainty surrounding cryptocurrencies, but the following factors can be said to have a decisive impact on prices:
- Supply: the total number of coins and how quickly they are released, destroyed or lost
- The market value: the value of all existing coins and how users think it will develop
- Media: how and to what extent cryptocurrencies are covered in the media
- Integration: how easily cryptocurrencies can be integrated into existing infrastructures, such as e-commerce payment solutions
- Important events: major events, such as updates to rules and regulations, security issues, or financial setbacks
How does cryptocurrency trading work?
At IG, you can trade cryptocurrencies with a CFD account – a derivative product that allows you to speculate on whether the chosen cryptocurrency will rise or fall in value. The prices are quoted in traditional currencies, such as USD, and you never become the owner of the cryptocurrency itself.
CFDs are a leveraged product, which means you can open a position by putting out only a fraction of the total value of the transaction. While leveraged products can magnify your profit, they can also magnify your loss if the market moves against you.
What is the spread in cryptocurrency trading?
The spread is the difference between the bid and ask price quoted for a cryptocurrency. As with many other financial instruments, you will see two different prices when you open a position on a cryptocurrency. If you want to open a long position, you trade at the purchase price that is just above the market price. If you want to open a short position, you trade at the selling price, which is just below the market price.
What is a contract in cryptocurrency trading?
Cryptocurrencies are often traded in contracts, ie. larger volumes of tokens used as a standard for trade sizes. Because cryptocurrencies are highly volatile, contracts tend to be small – most consist of only one unit of the base cryptocurrency. However, there are some cryptocurrencies that are traded in larger contracts.
What is leverage in cryptocurrency trading?
Leverage makes it possible to gain exposure to larger amounts of cryptocurrency without having to pay the full value of the transaction outright. Instead, you reserve a smaller stake called a security requirement. When you close a leveraged position, your potential profit or loss will be based on the full value of the position.
What is the security requirement in cryptocurrency trading?
The collateral requirement is a fundamental part of leveraged trading. It is the initial deposit that you put out to be able to open and hold a position open when trading with leverage. When trading cryptocurrencies with security requirements, it is important to remember that the security requirement can change depending on the broker you trade with and the size of your trade.
The margin requirement is often expressed as a percentage of the entire position. For example, bitcoin may require you to reserve 50% of the total value of a position in order to open it. Instead of depositing SEK 5,000, you only need to lay out SEK 2,500.