6 things you need to know before trading Bitcoin and cryptocurrency

Posted: 30 November 2021 3:30 pm
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Practical tips for traditional market traders looking to gain exposure to crypto.



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CFDs and forex are risky investment products and most clients lose money trading. Consider whether this is right for you before making a decision.

As the crypto market goes mainstream, there's a group of users that has now placed their eyes on this new asset class. Traditional traders – those used to buying stocks, options, bonds and forex – are now eyeing Bitcoin and other cryptocurrencies as another asset to trade.

As this new asset class emerges, traders should understand a few things about the space. Although we consider these as the most important topics to understand, there is also plenty of nuance within the space in regards to basics.

The main issues surrounding volatility are well known to all, and this only makes risk and reward assumptions slightly more complicated. Keep in mind that even veteran crypto traders are learning the ropes of this new market, so don't worry about not knowing everything straight away.

Before beginning their journey down the rabbit hole, traders should take into account these 6 points.

1. Crypto is fractional.

Instead of thinking of buying a full Bitcoin, which costs roughly AUD$80,000 at the moment, you can buy a fraction, denominated as a Satoshi (SATS). The same goes for other cryptocurrencies on the market, from Ethereum all the way to Dogecoin. This means you can buy as little or as much as you like instead of a whole unit.

2. You need to look beyond market cap and unit price.

Another important metric to keep an eye on is market cap and supply. Like shares, the market cap of cryptocurrency is derived by the price of a single unit and multiplied by the circulating supply of coins. However, unlike shares the circulating supply of coins varies massively between different projects. That means you can have a coin with a tiny unit price (think as much as a 100th of a cent) but a huge market cap. As such, unit price is not nearly as significant as market cap.

Cryptocurrencies also have various supply schedules, which means that new coins may be minted over time. You can think of this as inflation. Inflation works differently for each coin, but it's important to know that you should keep an eye not just on the circulating supply but also the total or maximum supply, and consider how that may affect price in the future.

For instance, 6.25 new Bitcoins are created every 10 minutes, giving it an inflation rate of roughly 1.75% per year. However, this issuance rate halves every 4 years, until a cap of 21 million Bitcoin is reached (i.e., the maximum supply). This means that the issuance rate itself is deflationary.

3. Crypto works in cycles.

In the short but intense history of this new asset class, there are distinct 4-year cycles that traders should keep in mind. They are usually 2-year bull cycles and 2-year bear cycles, although these are variable.

As of right now, we are – by what history tells us – midway through a bull cycle, which historically tends to end in a parabolic rally leading vertical in prices across the board. However, once the transition moves towards a bear market, the crash can be just as rapid, potentially lasting for years. Now, there are theories of a supercycle underway with an extended uptrend. This might be "hopium", so prepare for anything and do your own research.

4. There are other options beyond buying the asset itself.

We know that understanding wallets, addresses, public and private keys can be daunting, but the crypto market has matured to the point of offering myriad financial instruments.

For those involved in brokerage, one of them is a contract-for-difference or crypto CFD. For example, Capital.com offers more than 200 crypto CFDs - another option to increase exposure into the digital asset space without having to learn too much on the technical storage side of crypto.

5. Technical analysis is worth learning.

As this new asset class emerges and users try to find a "true" value for it, fundamental analysis can be misleading due to hyper-speculation. Instead, focusing on charting, risk management and other technical tools that can be more rewarding keeps you responsive to short-term fluctuations. Be sure to brush up on some of these concepts before trading in the crypto market.

Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, CFDs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Trading CFDs and forex on leverage comes with a higher risk of losing money rapidly. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades.

6. Get ready for some leveraged plays.

Crypto, and in particular Capital.com, allows for leveraged shorts and longs. For crypto CFDs, Capital.com allows regular traders to choose 1:1 and 2x leverage. Verified pro accounts can go up to 20x leverage.

Keep in mind that this is a very volatile market. These types of tools should only be used by experienced traders with a strict understanding of risk. As a high-risk endeavor, be sure to understand the consequences and the possibility of losing your capital.

There are plenty of other concepts that traders should know about before diving into the crypto arena, but these 6 are some of the most important.

The crypto market offers a lot of trading possibilities. And this industry isn't afraid of using leverage and it can see easy double-digit percentage gains and losses in a day. So take your time and learn the ins and outs of this new ecosystem. The crypto market has a tendency to humble those who don't really know what they are doing. It's well worth your time to understand how to trade in it.

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