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 currencies, like Bitcoin, Ethereum, Litecoin, Ripple, and Bitcoin Cash.
Cryptocurrencies are ‘mined’ by people who have substantial computer processing power who 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.
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 which fluctuates.
Why is Cryptocurrency trading so popular?
Crypto trading has become popular because of the massive press coverage they 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 Cryptos. 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 against what they are worth against different currencies. This means you can go long or short on a particular Cryptocurrency against the US dollar, GBP 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
- 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:
- How anonymous are the owners? This varies between Cryptos but has always been one of their main attractions
- Are consumers and/or banks using it? Some Cryptos have more use outside their own networks, becoming more like real currencies
- What is the Crypto being used for? 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
- How much of the Crypto is in circulation? Some Cryptos may reach a point where no more are produced while others have a potentially unlimited supply
What affects the price of Cryptocurrencies?
Cryptocurrencies are extremely new, consequently not much is known about what really drives the price. They are often sensitive to news stories, for example the prospect of further regulation, or news that attacks the credibility of a currency. Changes to the way a Crypto is produced have the biggest short term impact.
Traders can use CFDs to trade Cyptocurrency markets without having to buy ‘coins’ or ‘tokens’ which can be a lengthy process. Buying physicial Cryptocurrenices requires the submission of applications to specialist Crypto platforms which can take days or weeks to execute a trade. A Crypto CFD works in a similar way to CFDs based on other currency pairs, you trade the value of the Crypto of your choice against a mainstream 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. 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 other types of currency trades, 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
In the event that 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.
Is Cryptocurrency trading risky?
The price of Cryptocurrencies can surge and fall dramatically and this represents one of the biggest risks to traders, the extreme volatility within Cryptocurrency markets. Cryptocurrency markets are currently much more volatile than almost any other market and when excess volatility crashes, you can be faced with significantly larger losses than you anticipate.
Because there are often a limited amount of reputable digital asset exchanges and no single reliable price source for Cryptocurrencies, this could, in theory, cause prices to tumble sharply. Cryptocurrencies are also very new assets so we don’t yet know how they may perform in a major financial crisis.
It is also possible that certain governments may ban its citizens from holding Cryptocurrencies with the effect that the price may collapse.
Furthermore, there is a possibility for large scale cyber-attacks on digital asset exchanges which are likely to have a strong, short-term impact on the price of Cryptocurrencies.
Investors involved in trading Cryptocurrencies should also be aware of the potential for a so-called “51 percent attack”. A 51 percent attack refers to one centralized mining operation gaining over 50% control of a blockchain which would allow the operation to reverse transactions making the entire blockchain unusable.
Cryptocurrencies are not legal tender currency and trading of derivatives on Cryptocurrencies are currently not covered under any regulatory regime in Singapore. Consequently, investors should be aware they do not have protection under the Securities and Futures Act (Cap. 289). Please ensure that you are fully aware of the risks.
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