WHAT ARE CRYPTOCURRENCIES AND HOW DO THEY WORK?

With new crypto products regularly arriving on the market and the tendency of the wider asset class to have high volatility, cryptocurrencies have become an increasingly attractive form of investment.

Some of the most popular cryptocurrencies include Bitcoin (BTC), Ethereum (ETH) and Litecoin (LTC), but there are many others. With each of these cryptos having subtle differences, it’s near-impossible to describe ALL cryptocurrencies collectively. So, for the sake of simplicity, we’ll focus on the original cryptocurrency, Bitcoin.

As with other cryptocurrencies, Bitcoin is not recognised as an official legal tender in the same way as a fiat currency (e.g. the government-issued US dollar). With no intrinsic value, Bitcoin is worth only what others are prepared to pay for it in the open market. This largely influences its volatility, as a sudden event – such as a public figure speaking negatively against Bitcoin – can create negative market sentiment and a flood of sell-orders, which in turn drive its price and value down.

The initial purpose of Bitcoin was to serve as a global, incorruptible transfer of value that was significantly cheaper, more secure and faster than any other means available at the time. It still remains one of the most popular choices for this purpose, and can be used to purchase almost anything – including houses and cars.

THE TECHNOLOGY BEHIND BITCOIN

Bitcoin’s blockchain is its “brain,” an open-source ledger that keeps public record of every transaction ever made in its ecosystem. Just as Facebook is built on top of the internet, Bitcoin is built on top of its blockchain – despite common misconception that they are the same thing.

The system is secured through high-level cryptography. Each transaction is confirmed numerous times by the network and contains a unique ID through which it can be traced. This makes it virtually impossible to support duplicate or fraudulent transactions in bitcoin, even though the currency is digital and accessible worldwide.

Not managed or directly regulated by any government or central authority, Bitcoin is termed a decentralised platform and is run by its peers. This works on the principle that a thousand individuals combined will always be more scrupulous than any one individual, regardless of individual stature or political position.

Another misconception is that bitcoin transactions are anonymous. While no personal information is provided, each account used to send and receive bitcoin can be traced back to its source and the owner identified, which is important in criminal cases. It is also noteworthy that unlike with debit and credit cards, any transaction made in any cryptocurrency cannot be reversed after it has been completed. Consequently, bitcoins sent to an incorrect address are irretrievable and very difficult to trace.

WHAT IS CRYPTOCURRENCY TRADING?

Trading cryptocurrencies is similar to other well-known trading products like Forex and Gold, where profits are made by trading price fluctuations of the underlying asset. For example, if you think the price of Bitcoin is going to go up, you can open a trade speculating on that result for a specific time frame. If the price has gone up when your trade position closes, you would earn a profit. However, if the price had gone down, you would incur a loss.

And because trading cryptocurrencies is only based on price fluctuations and does NOT involve investing directly in the underlying asset, it presents the opportunity to profit when the market price is falling as well as rising. If you were buying Bitcoin, as opposed to simply trading its price movements, the only way to make a profit would be for the price to have increased above the price you paid for it at the time you wanted to sell. Similar to traditional stock investing, if the price had fallen below the price you paid, you would incur a loss.

USING LEVERAGE OR MARGIN IN CRYPTOCURRENCY TRADING

Margin trading offers the ability to open trades of higher value than the capital in a person’s trading account. This ‘leverage’ is applied proportionally. For example, applying margin of 200:1 with a $10 investment would support a trade worth $2,000. It’s important to know that while using leverage does offer the potential for significantly higher returns, it also has the potential for higher losses.

To help make your money go further, One Financial Markets now offers leverage of 200:1 on Bitcoin and Ethereum trades, and 100:1 leverage on all other crypto products.

Because of the potential for high returns, trading with leverage can be emotionally overpowering for some traders, so it requires discipline and careful use of risk management. You should only trade with money you can afford to lose, choose a leverage of leverage appropriate to your account size and make use of tools like Stop Loss which can prevent or reduce losses before they become unmanageable.

FINDING THE RIGHT TRADING PLATFORM FOR CRYPTOCURRENCY

Finding a BTC online trading platform is the easy part, as the hype surrounding the cryptocurrency sparked a boom of competition in the market. The challenge is finding one that is legitimate, legal in your country, and accepts your preferred methods of deposits and withdrawals.

Before making a decision, research the trading platforms that are available and read the reviews and user experiences for each one. Also be sure that the platform of your choice offers the cryptocurrency trading pairs that you require, and check their policy on deposits and withdrawals. It is always better to enter into a new initiative with an informed mind than to find out deal-breaking information first hand at an inopportune time.

ONE FINANCIAL MARKETS AS AN ONLINE BITCOIN TRADING PLATFORM

One Financial Markets offers Bitcoin (BTC) trading alongside other major cryptocurrencies. We offer up to 200:1 leverage on Bitcoin and Ethereum, and up to 100:1 leverage on Litecoin, Stellar, Ripple, Chainlink and other coins. Leverage is flexible to give you choice about how much risk you want to be exposed to in a particular trade.

If you’re new to cryptocurrency trading, consider opening a risk-free Demo trading account which lets you learn to trade using virtual funds in a replica of the live trading environment. This allows you to get a feel for the markets, and experience the wins and losses, without risking any real money.