Cryptocurrencies continue to gain popularity, even though during 2018 valuations have decreased substantially. Due to their volatile nature, more and more people are tempted to try how to trade cryptocurrency, but still, some basic principles are not being followed, which leads to people making the same mistakes over and over again.
What is cryptocurrency trading?
Almost all the online retail brokers have included CFDs (Contracts for Difference) based on cryptocurrencies. In order to avoid the whole process of using a cryptocurrency exchange platform, where profiting from short-term price movements is harder, it is much easier to use a brokerage account and trade cryptocurrency just as you can trade stocks, bonds, and ETFs.
Advantages and disadvantages
Since cryptocurrencies are very volatile instruments, a traditional buy-and-hold strategy could deliver weak returns. One of the advantages of trading cryptocurrency is that it enables you to profit from price movement without having to physically own assets.
Secondly, brokers allow the use of leverage for this type of contracts, which means you will be able to buy more contracts and increase the profit potential, and also the risk.
Thirdly, since prices move so fast, you need to get in and out of the market as quick as possible. Doing that on a traditional exchange platform is hard. You’ll have to transfer cryptocurrency from a wallet to the exchange (which generally takes a few minutes, or more if there is a huge volume of transactions pending on the blockchain) and only then you can transact with them.
There are also some disadvantages involved which must be discussed. Volatility combined with the excessive use of leverage could result in losses. It’s very important to initially develop and test on a demo account a well-structured trading strategy and only after you see consistent results, you can move on start to invest money.
It’s also worth to mention that spreads are generally higher when it comes to cryptocurrency trading, as compared to other asset classes like stocks or forex. The spread is the cost of a transaction, so you, as a trader, must take it into account.
Focusing on the situations when prices are trending in a well-defined direction, carefully choosing the time to get into the market, and trading responsibly, with long-term objectives and expectations, are key parts of any trader’s mindset, and you must also learn to incorporate them in your trading regime. Last but not least, a great degree of research is required, as the blockchain technology is not widely familiar to the general public.