Learn cryptocurrency trading

• What is cryptocurrency trading?
• Why is cryptocurrency trading so popular?
• Is cryptocurrency trading right for me?
• What affects the price of cryptocurrencies?
• Cryptocurrency volatility
• Cryptocurrency forking policy

What is cryptocurrency trading?

Cryptocurrencies are an emerging type of currency market first made popular by Bitcoin. There are dozens of cryptocurrencies (also known simply as ‘cryptos’) available but most traders are interested in the leading coin like Bitcoin, Ethereum, Litecoin, Ripple, and Bitcoin Cash.

Cryptocurrencies are ‘mined’ by people who have substantial computer processing power, and they receive the virtual coins in return for leasing that power. Unlike traditional currencies, the supply of cryptocurrencies is controlled and most have a maximum total supply – once that is reached, no new coins will be produced (minted).

Cryptocurrencies are increasingly becoming more mainstream and it is now possible to trade the price of the leading cryptos against other currencies like the US dollar. Like other currencies, cryptos have an exchange rate that fluctuates.

Why is cryptocurrency trading so popular?

Crypto trading has become popular because of the massive press coverage Bitcoin and Ethereum have generated. In addition, cryptos are not subject to the same dynamics as conventional currencies.

Cryptos have no central bank regulating how much of a currency is in circulation. They are not tied to a particular interest rate and it is not possible for a central bank to ‘print’ more coins. The traditional forces that influence other currencies – e.g. economic factors like inflation data – generally don’t affect cryptos.

Like other currencies, the value of cryptos is measured by what they are worth against different currencies. This means you can go long or short on a particular cryptocurrency against the US dollar, British pound or Euro.

Is cryptocurrency trading right for me?

Cryptocurrencies are a new and rapidly evolving market. Several key factors make them attractive as a potential trading opportunity:

• Go long and short: you can take advantage of both rising and falling cryptocurrency prices
• Trade without owning: you can trade the price of cryptocurrencies without having to buy them yourself
• Volatility: cryptocurrencies can be much more volatile than ‘normal’ currencies
• Range: the price band within which a cryptocurrency’s price can trade
• 24 hours: cryptocurrency markets on City Index are open 24 hours a day, Monday-Friday.
• Leveraged trading: leverage can be used to enhance profits – and losses – from cryptocurrency trades

The characteristics of the leading currencies differ in a number of key ways:

• Anonymity: this varies between cryptos but has always been one of their main attractions
• Use by consumers/banks: some cryptos have more use outside their own networks, becoming more like fiat currencies
• Utility: cryptocurrencies have been invented for different reasons, but for the main part, they were either intended to make financial transactions easier or to support the development of alternative finance and data networks
• Supply of coins in circulation: some cryptos may reach a point where no more are produced while others have a potentially unlimited supply

Interested in cryptocurrency trading? Get started today by opening an account with City Index. 

What affects the price of cryptocurrencies?

A variety of factors can affect the price of a cryptocurrency. They are often sensitive to news stories - for example, the prospect of further regulation or news that attacks the credibility of a currency. In addition, they are more heavily influenced by market sentiment than other asset classes.

Cryptocurrency volatility

Traders can use CFDs to trade cryptocurrency markets without having to buy ‘coins’ or ‘tokens’, which can be a lengthy process. Buying physical cryptocurrencies requires the submission of applications to specialist crypto platforms, which can take days or weeks to execute a trade. A crypto CFD works in the same way as a CFD for other asset classes, such as FX and stocks - you trade the value of the crypto of your choice against a fiat currency like the US dollar.

Cryptocurrencies can see very sudden swings in price, for example, from news regarding possible further regulation of this market. That is why it important that you protect your profits and manage risk smartly with stop losses and take profit orders.

Another aspect of cryptocurrency trading to be aware of is ‘forking’. A ‘hard fork’ is when the software supporting a cryptocurrency needs to be updated, or when the community disagrees on its future direction. Traders are protected from most of the risks involved when a cryptocurrency forks though it can still lead to sudden and unexpected price movements.

As with any CFD trade, it is important to manage your margin and the amount of leverage you are using as it is possible to lose more money that you have allocated to the trade at first.

Cryptocurrency forking policy

If the current cryptocurrency splits into two, new cryptocurrencies are created; this is known as a hard fork. We will generally follow the cryptocurrency that has the majority consensus of cryptocurrency users and will therefore use this as the basis for our prices. In addition, we will also consider the approach adopted by the exchanges we deal with, which will help determine the action we take.

We reserve the right to determine which cryptocurrency unit has the majority consensus behind them.

As the hard fork results in a second cryptocurrency, we reserve the right to create an equivalent position on client accounts to reflect this. However, this action is taken at our absolute discretion, and we have no obligation to do so.

If the second cryptocurrency is tradeable on major exchanges, which may or may not include the exchanges we deal with, we may choose to represent that value, but have no obligation to do so. We may do this by making the product available to close based on the valuation, or by booking a cash adjustment on client accounts.

If, within a reasonable timeframe, the second cryptocurrency does not become tradeable, then we may void positions that had previously been created at no value on client accounts.

Over periods of substantial price volatility around fork events, and we may take any action as we consider necessary in accordance with our terms and conditions including suspending trading throughout if we deem not to have reliable prices from the underlying market.