Crypto Trading: The ultimate beginner’s guide

WARNING NOTE. In the United Kingdom, it is currently prohibited to trade Crypto Currency CFDs. If you are in the UK, please refrain from attempting to do so.

As we write this in April 2023, the crypto market as a whole is up around 50% year-to-date. Are crypto currencies as dead as many people thought during the winter of 2022? Perhaps not.

Cryptos are polarising to say the least. To some people, blockchain is the future of finance. To others, the whole market is just hot air and hype.

If you are interested in trading crypto currencies, then this beginner guide should help you get started.

We’re going to go through:

• What cryptos are (in case you’re new to them)
• What are the top 10 crypto-currencies
• Why trade them
• What the risks are
• How to handle crypto trading psychologically
• What the best ways to trade them are

And we’ll also cover how you can practise placing crypto CFD trades without risking capital through our free demo accounts .

So, what are crypto-currencies?

The dictionary definition is “a digital currency or decentralized system of exchange that uses advanced cryptography for security.”

In the real world, though, the simple way to think about cryptos is just as digital-only currencies.

For the purposes of trading, they differ from traditional currencies in 3 main ways:

1. Cryptos aren’t backed by any tangible securities or assets
2. They aren’t backed by any central body, such as a central bank or a government
3. Direct crypto trading doesn’t usually include a broker. Cryptos are usually traded between two consensual parties, directly.

The ledger

All crypto currency transactions are stored on a digital ledger which cannot be edited once the entry is made.

Essentially, there is a comprehensive record of all crypto transactions made, which cannot be changed.

(A good simple explanation of the ledger is to imagine it as a whiteboard, on which every crypto transaction is written down in permanent marker, un-erasable.)

So, why trade cryptocurrencies?

Given that cryptos are considered as high risk as any asset in the financial world right now, what are the potential benefits for traders?

Let’s take a look:

Volatility can mean bigger opportunities

Crypto-currencies are probably the most volatile asset you can trade, with the ability to skyrocket in price at lightning speed, and crash just as quickly. For example, a $1,000 trade in Dogecoin at the start of 2021 would have turned into more than $121,000 by May 5th of the same year.

But the flip side of that was demonstrated in TerraUSD/Luna, which disintegrated in a little over a week in May of the same year:

It’s estimated that traders lost a combined $60 billion in a matter of days on TerraUSD/Luna.

So, clearly, the risk/reward in crypto is simply massive. It is the wild west. About as high-risk as any market in history.

If you are comfortable with this level of risk and if you have capital you are preferred to lose, this extra-ordinary volatility does give you the opportunity for higher, faster returns than you’re likely to find in more traditional markets.

It’s a matter of your personal risk appetite and the capital you want to trade with.

Of course, the fundamental rule of all trading goes double within the crypto sector:

You should never trade with capital you cannot afford to lose.

Cryptos are a 24/7 market

Most key trading markets are closed at certain points. Even the ‘market that never sleeps’, Forex, closes at the weekend.

Because cryptos aren’t regulated by a central authority, the market operates 24/7, all year round. As long as crypto traders are awake somewhere in the world, the market is open.

In 2023, cryptos are more liquid than they were

During the early days, crypto currencies were considered illiquid. Even if your positions rose in value, it could be tough to cash in simply because there was no guarantee of finding a buyer. (Especially for the smaller coins.)

Because crypto is now at a much higher level of mainstream acceptance than it was, the markets in 2023 are more liquid. These days it’s easier for traders to buy and sell, especially the more well-know coins like bitcoin and Ethereum.

(Though it’s worth noting that bigger market movers can still shift the markets by buying or selling larger positions.)

It’s also now possible to trade cryptos using tools like spread-betting and CFDs, which enables you to trade on the value of the coins without actually needing to buy them. (We’ll cover this in more depth down the page.)

Even taking last year’s collapse into account, the crypto market is still on a massive upward curve growth wise

There are a lot of traders that consider crypto ‘finished’ after the bear market of the past couple of years.

But it’s worth remembering that the market cap as of April 2023 (when we write this) is still more than a trillion dollars.

As recently as 2017, it was in the tens of billions. That’s a near 10,000% increase in market cap in less than six years.

Even allowing for the last couple of years, the crypto market’s growth has been nothing short of remarkable.

And with a total 50% increase in 2023 so far, we may see another new peak before the year’s end.

Crypto currencies can be an unusual diversification hedge

Since crypto currencies hit the mainstream, traders have been searching for potential ‘correlations’ with other assets, to try and work out where they sit in the markets.

Most assets correlate. Either together (inflation usually means gold and bonds rise) or in reverse (stocks and bonds tend to go up when the other is down, and vice versa).

In the first few years of the crypto markets, they seemed to correlate well with stocks. Equities fell, cryptos followed suit.

Interestingly, though, the recent fall in bank stocks resulting from the fall and bail-out of Silicon Valley Bank saw an increase in crypto-currencies, indicating that perhaps traders are starting to see non-centralised coins as a hedge against the banking system.

Either way, crypto currencies certainly have the potential to become a very effective diversification option for traders looking to add something ‘different’ to their portfolios.

(As we’ve mentioned, though, only a small percentage of your trading capital should ever be dedicated to high-risk assets like crypto currencies. The FCA in Britain recommends you only ever keep 10% or less of your trading capital in high-risk trades.)

So, what are the risks of trading crypto currencies?

Volatility

As we’ve covered before, crypto currency volatility is unlike anything else in the trading world.

It’s more than possible for crypto currencies to suffer 20% ,30% and even 50% losses in a matter days (if not hours!).

Trading with conventional assets can be mentally tough. Crypto currencies, though, are next level in terms of volatility.

It’s worth asking yourself the very serious question as to whether you can really handle that level of volatility and still maintain your discipline.

Could you cope with a 30% loss in just a few hours?

Many traders can’t, and there’s nothing wrong with that. Plenty of successful traders know their limits and simply don’t trade crypto currencies due to the potential for massive price swings.

Needless to say, if high volatility isn’t something you’re comfortable managing, crypto trading is not for you.

Cryptos still aren’t proven ‘long-term’

The crypto markets have now been around for more than a decade, so it’s fair to say that the earlier critics calling it all a ‘flash in the pan’ are eating their words.

But ten years is still a relatively short time compared to most assets.

For some perspective, the London Stock Exchange was opened in 1801.

Commodity markets, meanwhile, have been around since before Jesus was born. (That’s not a joke. The earliest commodity markets date to around 2500BC!)

We’re not saying crypto-currencies won’t last, by the way. There are very solid arguments that the technology – especially the blockchain – will form a key part of the way our financial institutions manage their security in future.

We’re simply saying that as of now, no-one can be entirely sure what the future of this still-new market will look like. Which means, as always, trade with caution.

Regulations can change

Another key characteristic of the crypto sector is uncertain regulation.

Most regulators agree that at a certain point, crypto currencies will have to be regulated just like any other trading asset.

However, there remains a great deal of uncertainty as to how that will happen.

In some regions – the UK for instance – direct investment in crypto currencies is legally permitted, but trading through tools like CFDs and spread-betting is not.

And other governments have taken an even harsher view. Nations such as China, Egypt and Algeria have made crypto currencies illegal.

On the other side, some smaller nations – El Salvador and the Central African Republic – have made bitcoin a form of official currency, and there are rumours Nigeria will soon follow.

This level of uncertainty is likely to remain for some time still, as the crypto markets continue to find their place in the world.

How can you trade cryptos? (2 key methods that should cover everything you need)

Direct trading (through an exchange)

There are a number of well-known crypto exchanges online. (Because of legal reasons, we’re not allowed to link to them here.)

Through a crypto exchange, you can buy or sell cryptos using standard payment methods such as a credit card.

What are the benefits of trading directly?

Largely, trading crypto currencies directly means not using leverage. This makes it more suitable for more cautious traders focused on minimising risk where possible.

See, leverage is a fairly standard part of trading using CFDs (which we’ll cover in a second). It can magnify both your gains and your losses.

For some traders, however, the idea of being able to lose more money than you put in – which is a risk that comes from using leverage – simply isn’t worth the potential rewards.

So, they prefer to trade directly.

CFDs

CFD stands for ‘Contract for Difference’ and it’s a financial agreement between you and an authorised broker to exchange the difference between an asset’s value when the contract opens and the value when the contract closes.

To calculate profit and loss, this difference in price will be multiplied by your position size (how many CFD contracts you choose to open on that trade).

Let’s go through a basic CFD crypto example trade:

You decide to place a CFD trade on Bitcoin, which is worth $28,129.00 when you open the contract.

You choose to open 4 CFD contracts, which makes your total trade size $112,516.

Over the next few hours, the price of bitcoin rises to $28,500. This is an increase of $371.

You opened four contracts, so your total profit on this trade is $1,484.

CFDs – the buyer and the seller

CFDs allow you to go long or short on the trade, depending on how you believe the asset will move. In CFDs this means being either the ‘buyer’ or the ‘seller’:

Ø If you think your crypto will go up in value, you want to place a long trade, which means being the buyer

Ø If you think your crypto will go down in value, you want to place a short trade, which means being the seller.

Why this way around?

The principle is fairly simple to understand:

If you buy a crypto currency for $500, and the price increases to $750, you can then sell it and profit the $250 difference.

If you sell a crypto currency for $750, and the price falls, you can buy it back for $250 less than you paid for it, again profiting on the $250 difference.

(With CFDs, you don’t own the underlying asset, so you don’t own the crypto, but the principle is the same.)

The most important thing to remember with CFDs is that:

Ø If you want to go short, be the seller.

Ø If you want to go long, be the buyer.

Why use CFDs at all?

CFDs allow you to use leverage, which can enable you to place higher value trades without you needing to front 100% of the capital.

So, let’s say you place a trade on Ethereum that’s worth $25,000.

Your broker allows you to use leverage of 1:50.

To calculate how much capital you’ll need upfront, you simply divide the size of the trade, which is $25,000 here, by the larger second number in the leverage figure (which is 50).

So, to place a $25,000 trade using 1:50 leverage, you would need to supply $500 in capital. (Plus your margin.)

[H3] The benefit of leverage is also the risk

When you place a CFD trade using leverage, your profits and losses are calculated based on the size of the trade, not on your initial capital.

So, let’s calculate this based on the Ethereum example we just went through:

You place a $25,000 trade using $500 in capital, based on 1:50 leverage.

Your trade turns a 20% profit.

20% is calculated on the $25,000, not on the $500.

So, in this case, your profit would be $5,000. The return on the money you actually traded with would be 900%.

Obviously, this kind of return on capital would be exceptionally rare in a non-leveraged trade, so it’s not hard to see why leveraged trading can be popular.

However, it’s very important to understand the substantial risk you take when using leverage in CFDs, because losses are also calculated on the total value of the trade.

So, let’s assume you lost 20% on this same trade.

In this case, you would lose $5,000. A 900% loss on your capital.

As you can see, leverage offers substantial risk and reward potential. Whether you choose to use it will decide on what capital you have available as well as your own personal risk appetite.

As always, you should never trade with capital you cannot afford to lose.

In summary:

• Crypto currencies are non-centralised digital currencies, with transactions stored on a digital ledger
• Unlike traditional currencies, crypto currencies aren’t backed by tangible assets or by any central bank or government
• Crypto currencies are highly volatile, which means potential for strong, fast price movements in both directions
• Two key methods for trading crypto currencies are trading them directly or using derivative instruments like CFDs, which allow for leverage but not actual ownership
• Crypto currencies can be potentially lucrative, but they are extremely risky and you should never trade crypto currencies using money you can’t afford to lose

So, how can I start to trade crypto CFDs?

When you open a trading account with markets.com, you automatically get access to a demo account, complete with artificial funds.

This way, you can practise making as many crypto CFD trades as you need to feel comfortable, without risking any real money.

Then, when you do feel ready to trade for real, you can do so confidently using the same platform you practised on.

You don’t have to fund your real account to start using the demo, so if you want to get started trading crypto CFDs this week, just click here to start using the demo account.