How to trade cryptocurrencies

Cryptocurrency trading steps

The cryptocurrency market can be daunting for beginners and seasoned traders alike due to the vast amount of jargon and processes involved. We’ve broken it down into six simple steps to help you better understand the cryptocurrency market and how to trade it:

1. Decide how you’d like to trade cryptocurrencies
2. Learn how the cryptocurrency market works
3. Open an account
4. Build a trading plan
5. Choose your cryptocurrency trading platform
6. Open, monitor and close your first position

Decide how you’d like to trade cryptocurrencies

There are two routes to dealing on cryptocurrencies: speculating on their prices using CFDs, or buying the digital currencies in the hope they increase in value.

Trading cryptocurrencies using CFDs

A CFD is a contract in which you agree to exchange the difference in the price of a cryptocurrency from when you first open your position to when you close it. You are speculating on the price of the market, rather than taking ownership of the cryptocurrency. If you open a long position and the cryptocurrency does increase in value, you’ll make a profit, but if it falls in price, you’ll make a loss – the opposite is true for a short position.

Buying cryptocurrencies via an exchange

Alternatively, you might decide to buy a cryptocurrency, which means that you take ownership of a portion of the digital currency outright, with the intention of holding it in a digital wallet and profiting if it increases in value.

Before you can start, you would need to open a cryptocurrency wallet, and an account with a cryptocurrency exchange. There can be a lot of steps to this process, and you might have to join a waiting list for an account.

Learn how the cryptocurrency market works

The cryptocurrency market operates in a different way from other financial markets, which makes it vital to learn how it works, and understand the jargon used to describe it, before you start trading.

The cryptocurrency market is a decentralised digital currency network, which means that it operates through a system of peer-to-peer transaction checks, rather than a central server. When cryptocurrencies are bought and sold, the transactions are added to the blockchain – a shared digital ledger which records data – through a process called ‘mining’.

Cryptocurrencies are also famously volatile, which makes it important to know what is likely to move the market – this could be anything from ICOs and blockchain forks, to breaking news and government regulation.

Build a trading plan

Having a trading plan is crucial to success for any trader but even more so for cryptocurrency traders because the market can see high amounts of volatility. This is a double-edged sword: volatility makes the market extremely attractive, but difficult to trade. This is why your trading plan should include risk management tools, as well as an outline of your goals, which cryptocurrency you want to trade, and a methodology for entering and exiting trades – known as a trading strategy.

Your plan should also include the way you will analyse the cryptocurrency market: either through technical or fundamental analysis. Technical analysis focuses on the price movement of a cryptocurrency and its historical patterns, while fundamental analysis looks at the external factors and macroeconomic data that impact the digital asset. Whichever method you choose, it is important to remain up to date with any news that could impact the market, as cryptocurrencies are especially sensitive to market sentiment.

Choose your cryptocurrency trading platform

Our trading platforms can provide you with a smarter and faster way to trade cryptocurrencies – with personalised alerts, interactive charts and built-in risk management tools. You can trade via the IG trading platform using:

• Your web browser
• One of our mobile apps
• Advanced third-party platforms such as MT4

Open, monitor and close your first position

As there is no need to own a digital wallet, once you have opened your account with IG and chosen your platform, you can start trading cryptocurrencies straight away.

Whether you have decided to trade bitcoin, ether, litecoin, all you need to do is open the deal ticket for your chosen market, and you’ll see both a buy and a sell price listed. You’ll be able to decide the size of your position, and then select buy to open a long position or sell to open a short position. Remember, you can add stops or limits to close your trade once it hits a certain level and protect your trade from unnecessary risks.

You can monitor the profit/loss of your position in the ‘open positions’ section of the dealing platform. And when you have decided that it’s time to close your position, you just need to place an equivalent trade in the opposite direction.

Cryptocurrency trading example

To help you understand how to trade cryptocurrencies, we’ve complied an example of a cryptocurrency trade and its possible outcomes.

CFD trading example: buying bitcoin

Let's say you are interested in trading bitcoin and decide to open a long CFD position against the US dollar (bitcoin/USD).

The current market price is 40,000. Since you expect the value of bitcoin to increase, you decide to buy 1 contract, equivalent to one bitcoin, at the buy price of $40,050. Due to the spread, this is slightly higher than the market price.

Your total exposure is $40,050 and you would need to deposit 20% of this as margin.

If your prediction is correct

If you are right and the price of bitcoin rises against the US dollar, your trade will make a profit. Suppose the market rises to a new value of 41,000 and you decide to close your position to realise your profit by selling at the sell price of 40,950. Due to the spread, this is slightly below the market price.

The calculation of your profit is as follows: 1 x (40,950 - 40,050) = $900.

If your prediction is incorrect

If the market moves against you and the value of bitcoin falls, your position would suffer a loss. Suppose the market falls to 39,000 and you decide to close your position at the new sell price of 38,950 to avoid further losses.

The calculation for the loss on your trade is: 1 x (38,950 - 40,050) = -$1100.

CFD trading example: selling ether

In this example, you believe that the price of ether – the token of the Ethereum network – is going to fall in value, and decide to go short by selling ether against the US dollar (ether/USD).

The current market price is 3000, but you would sell at 2995 – slightly below the market price, due to the spread. You decide to sell 2 contracts (each equivalent to 1 ETH) to open a position at this price.

If your prediction is correct

If you were right, and the value of ether fell against the US dollar, your trade would profit. Let’s say that the new market price is 2900, you could close your position and take your profit by buying 2 contacts to close your position at the buy price of 2905, which is slightly higher than the market price due to the spread.

Because the market has moved 90 points in your favour, the profit on your trade would be calculated as follows: 2 x 90 = $180.

If your prediction is incorrect

However, if the value of ether rose against the US dollar, your position would be closed at a loss. Let’s say that you decide to exit the trade after the market rose by 100 points to 3100 – so buy back 2 contracts at the buy price of 3105. This would mean the loss to your position was 2 x 4110 = $220.