An Investors's Guide to Trading Crypto Currencies
If you are new to crypto currencies, its important to understand the driving forces behind these products. Crypto currencies have been around for a decade starting with the most popular crypto currency - bitcoin. There are several different crypto currencies you can trade, but many are illiquid and do not provide the necessary bandwidth, to enter and exit the market. There are several ways you can trade the crypto currency market, including holding the address in a digital wallet to using a CFD broker to trade specific crypto currency pair.
What is a Crypto Currency?
A crypto currency is a decentralized currency that is not run by a sovereign central bank. Crypto currencies are not attached to countries and therefore there is no interference by an authority to manage the currency to enhance the trade balance within the country or union. Each crypto currency is designed to perform a specific function. For example, some are geared to payments, allowing users to buy and sell goods and services. Other crypto currencies allow users to purchase smart contracts on certain platforms.
How is a Crypto Currency Traded?
Crypto currencies are purchased and sold by users and investors. The value of a crypto currency is determined by the market. Most crypto currencies are traded versus fiat currency, such as the dollar, the euro or the yen. For example, Bitcoin, the most popular crypto currency, might be quoted in dollar terms.
There are two main ways that crypto currencies are traded. The first is via a wallet. To purchase a crypto currency you need to deposit fiat currencies into an account. You can then exchange your fiat currency for a cryptocurrency. When you do this, you receive an address with an amount of crypto currency. If you plan to purchase items with your crypto currency this process is a must.
An alternative way to trade crypto currencies is to trade contracts for differences (CFD), on a crypto currency trading platform. Several reputable brokers offer crypto currency CFDs. A CFD tracks the movements of the underlying asset allowing a trader to invest in this financial instrument without owning the underlying asset. Additionally, the liquidy in CFDs can be significant allowing traders to easily enter and exit the crypto currency market without experiencing significant slippage. The commissions on CFDs are also low relative to crypto currency commissions. Some digital wallet operators will charge up to 3% per transaction, compared to CFD brokers which offer a very tight bid/offer spread.
What Strategies Can You Use to Trade Crypto Currencies?
While there are some fundamental strategies that focus on crypto currencies, such as new ETFs, or payment processing alliances, the most complete strategies are technical analysis strategies. You can use trend following strategies, momentum strategies or mean reversion strategies. Many traders use moving average crossover strategies to capture trends, the MACD (moving average convergence divergence) index to captures momentum, and the fast stochastic or the relative strength index to measure mean reversion.
There are several different crypto currencies you can trade and there are several ways you can trade the crypto currency market, including holding the address in a digital wallet to using a CFD broker to trade specific crypto currency pairs. If you plan to purchase goods or services with crypto currency, then you will need to open a digital wallet. If your goal is for investment purchases, the best way to trade is to transact crypto currency CFDs.