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What is Cryptocurrency Trading and How Does It Work?

Bitcoin Revolution - How Do Cryptocurrency Markets Work?

How Do Cryptocurrency Markets Work?

The biggest thing to remember? There’s no actual “currency.” Instead, crypto is a digital record of ownership on the blockchain. This decentralized currency system runs across a shared network of computers, and shares are bought and sold through traditional exchanges.

When you send cryptocurrency to another user, the transaction is verified, adding another “block” to the digital record for that particular unit. The record is publicly available and impossible to counterfeit.

New cryptocurrency tokens are created through this verification “mining” process.

Bitcoin Revolution - What is Blockchain?

What is Blockchain?

Blockchain is a shared record of data. The system of transaction histories shows the trajectory of each cryptocurrency, records of ownership added as new blocks to the previous record. No information is altered. Instead, the genesis block shows the original data, and each new piece is added until a chain forms.

Blockchain has two unique security features standard computer files don’t have.

Network Consensus - files are stored across a network with everyone on the network given access. It’s transparent, challenging to alter, and offers no single weak point.

Cryptography - The blocks are held together using a complex system of math, so attempts to alter the information in the links create such a disruption that it’s easily identified. Right now, it’s one of the most secure systems we have.

Bitcoin Revolution - How Does Trading Work?

Cryptocurrency Trading Key Ideas

When you decide to take the plunge with cryptocurrency, there are a few key things to keep in mind.

How Does Trading Work?

IG allows you to trade with a CFD account. We quote prices in a traditional currency such as the US dollar, and you can speculate on futures based on rising or falling prices. You don’t have to take possession of a single crypto coin.

CFDs allow you to open a position with a fraction of the trade value. Leveraged products magnify your profits because they’re calculated based on the whole value of the position, but keep in mind they can also magnify losses if you miscalculate.

What’s The Spread?

When you open a position, you’ll be given two numbers - the buy price at just above market value and the sell-price at slightly below market value. Long positions trade at the buy price, and short positions trade, of course, at the sell-price. The difference between these two positions is called "the spread."

What Are Lots?

Lots are batches used to standardize trading size. Most lots in crypto-trading are small (sometimes even single coins) because the market is still volatile. A few cryptocurrencies exist in much larger lots, however.

What is a Margin?

Margin is the deposit required to open and maintain a leveraged position in cryptocurrency. These requirements change based on factors like your broker and the size of your lot.

Typically, it’s a percentage of the full value of the position. For example, opening a leveraged position with Bitcoin may require only 15% of the full value - $5000 and $750 to get started.

What Is Leverage?

CFDs give you leverage because you’re allowed access to large amounts of cryptocurrency without having to put up the entire value. You put down your margin, and when you close, the result is based on the full size of the traded lot.

What is a Pip?

Pips measure movement in price. Different cryptocurrencies measure at different fractions, but typically, valuable cryptocurrencies are traded at the dollar level. A move from $199 to $200 is a movement of a single pip.

Dollar amounts are the standard. Some cryptocurrencies use different scales, like a cent or even a fraction of one. You must read all the details of your chosen platform to ensure that you understand the scale baseline.