How cryptocurrency trading works

Confused by cryptocurrency trading? Find out what it is, how it works, and which method will suit you best with this useful guide from AltSignals.

If you are interested in investing in cryptocurrency but don’t know where to start, you’re not alone. The world of cryptocurrency can be confusing and even a little intimidating for first time buyers, especially if you don’t fully understand how cryptocurrency trading works. With several different trading methods available when it comes to cryptocurrency, understanding which suits you best and how it works is paramount before investing.

In this handy guide, here at AltSignals, we explain how trading cryptocurrency works. We’ll go through some of the essentials you need to know before you begin to trade, and let you know how to actually get trading today.

How does trading cryptocurrency work?

As we explained in our recent blog looking into what cryptocurrency is, cryptocurrencies are simply a form of digital money. From Bitcoin (BTC) to Dogecoin (DOGE), these digital assets do not have a physical form and are designed to be used to pay for items online, regardless of location. However, unlike traditional centralised currencies, such as the British Pound, US Dollar and Chinese Yuan, cryptocurrencies are not based on any actual asset, meaning that in theory they have no intrinsic value.

Instead, the value of cryptocurrency is determined exclusively by global supply and demand. While this makes these currencies unpredictable, speculative and highly difficult to accurately value at any one time, their volatile nature and rapid price fluctuations offer the opportunity to make a significant profit if traded skillfully. But how does crypto trading work?

Well, unlike traditional currencies which are controlled centrally and regulated, cryptocurrencies  operate on an open network. This is to say that all transactions of cryptocurrencies are conducted via peer-to-peer interactions rather than occurring between banks, governments or other central authorities. Due to this, cryptocurrencies are sold and bought online via brokers or special crypto exchanges, and stored in digital ‘wallets’. Instead of a physical form, each ‘coin’ traded has a shared digital record of ownership which is stored on something called a blockchain. In order for a trade, or transaction, of cryptocurrency to be finalised, it must be verified and added to the blockchain through a process known as ‘mining’.  

How to understand cryptocurrency trading

In order to get to grips with how crypto trading actually works, it is important to understand the two primary methods of trading. These are, through a contract for difference(CFD) trading account or by trading using a specialist cryptocurrency exchange, such as Coinbase, Binance and Gemini, to buy and sell coins. The key to understanding cryptocurrency trading is to recognise how these two methods work, what each actually involves, and which suits you best.

How do you trade cryptocurrency?

As mentioned above, there are two separate ways in which you can get involved with cryptocurrency trading - CFD trading and exchange trading. We look at both trading methods in more detail below. Understanding how both trading methods work can help you decide which one is for you.

 -      CFD trading

CFD trading is when you sign a contract with a cryptocurrency broker and agree to exchange the difference in price of a certain cryptocurrency from when you first open your position to when you close it. This is to say, you never actually own any crypto coins yourself when you trade in this way -instead you are speculating on the value of a certain cryptocurrency as it fluctuates. If you choose to start in a ‘long position’ and the currency increases in value, you’ll make a profit. However, if the value drops, you’ll lose money. Naturally, if you choose to ‘short’ a crypto market, the opposite is true.

 -      Trading via an exchange

If you opt to trade using a specialist cryptocurrency exchange, you are actually purchasing the coins themselves. To do this, you simply need to set up an exchange account with a recognised platform, deposit money into your account and use this to purchase a crypto asset for the full value it is listed at at a specific time. These cryptocurrency tokens will then be stored in your digital wallet until you choose to sell them. This is typically done with the intention of holding on to them to sell on for a profit if/when their value increases.

However, it’s worth noting that learning how to use different platforms, opening an account, and creating your own cryptocurrency wallet can involve many steps and be very time consuming. You may even have to join awaiting list in order to open an account with some exchanges. 

Want to learn more about cryptocurrency, how to trade it and where to get the latest tips, advice and signals? As crypto experts, AltSignals can help you get trading and make ap rofit, all while improving your understanding of the markets in the process.Click hereto find out more.

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