What is Crypto & How Does it Work?
With Tradu you can trade crypto via CFDs.
Cryptocurrency trading is one of the more volatile markets available with Tradu. Read on for more information about this constantly evolving ecosystem and how to start crypto trading with confidence today.
In this guide to how to get into crypto, we cover:
- What is cryptocurrency and how does it work?
- Key crypto terminology
- What moves crypto prices?
- What is crypto trading?
- How crypto trading works with Tradu
- Pros of crypto trading
- Cons of crypto trading
- Crypto trading strategies
- How to start crypto CFD trading
- Crypto trading FAQs
What is cryptocurrency and how does it work?
Cryptocurrencies are digitally created forms of currency that operate outside of traditional financial institutions such as government banks. This 'decentralisation' means that transactions are carried out peer-to-peer, enabling a user to send funds to anyone else in the world without barriers.
Coins and tokens are created and distributed over online technology known as blockchains. These are secured by complex lines of computer code called cryptography – the term from which cryptocurrency originates. Blockchains are publicly available, meaning that it is possible to access information on transactions without the need for third-party assistance.
New units of cryptocurrency are created in a process called mining. It is also possible to purchase previously mined crypto, as well as perform trades relating to the performance of a cryptocurrency. Cryptocurrency that has been purchased is stored in a wallet – which can be either an online program or physical hardware.
It is possible to purchase all kinds of items using cryptocurrency. Bitcoin is the most popular and widely accepted form of cryptocurrency in the world.
Other popular types of cryptocurrency include Ethereum, Tether and US Dollar Coin .
Key crypto terminology
You might feel like you're reading a foreign language when you first research cryptocurrency, so here are some important terms that will help you to understand how crypto works. Check out our trading glossary for a rundown of more general market terms.
- Altcoin: A general term for lower-value or newer cryptocurrencies. This can also be used as a term to describe any cryptocurrency other than Bitcoin.
- ATH/ATL: All-Time High or All-Time Low. This refers to the maximum and minimum values of a coin in its lifetime.
- Bitcoin Cash: A distinct currency from Bitcoin that was created on the same blockchain technology as its near-namesake in August 2017 after a split in views over its future.
- Blockchain: A publicly available digital ledger of all transactions made with a cryptocurrency. 'Blocks' are formed as new data is created with highly sophisticated levels of digital security. Once data has been entered onto a blockchain, it is irreversible. This makes it easier to spot when attempts have been made to tamper with these systems.
- Coin: A unit of a cryptocurrency. Most coins share names with the currency, such as Bitcoin.
- Cold (or Hot) Wallet: A crypto wallet is a place to store the digital data of cryptocurrencies held by its owner. Cold wallets are external devices that store this information offline for extra security. Hot wallets are typically cost-free online solutions that make it easier for investors to access their crypto.
- Consensus: There are two main types of consensus mechanisms used in crypto – proof of stake and proof of work. These methods are used by peers on a blockchain network to approve transactions and the creation of new currency. Proof of stake involves miners putting up a 'stake' of their own digital currency to be validated. The higher your stake, the better your chances of validation. Proof of work differs in that miners compete against each other to solve the complex equations required to add blocks to the chain. Rewards are given to the winner of this digital race. PoW is used by many major cryptos including Bitcoin, although the significant computing resources needed to do this have raised environmental concerns.
- Decentralization: Arguably the biggest core tenet of cryptocurrency is its removal from 'centralised' financial systems. Many terms surrounding crypto are based on these decentralised systems and processes.
- embers casting votes, rather than one owner or a board of stakeholders making decisions. Cryptos by their very nature are DAOs.
- dApp: Decentralised Applications. These are applications and programs that are run on a blockchain network. The Ethereum platform is where most dApps are built.
- DeFi: Decentralised Finance. This developing form of financial technology – largely based on existing blockchain platforms – removes geographical barriers and lowers interest fees for people trying to access finance.
- DEX: Decentralised Crypto Exchange. A platform where crypto trades are made peer-to-peer rather than through the use of an intermediary. DEXs provide user anonymity and publicly available transaction data for transparency. Centralised exchanges are common. These platforms give users the ability to trade crypto against other currencies, unlike DEXs, and have more stringent security controls.
- Fiat: Currency that is issued by a central government and not backed by a commodity, such as gold or oil. The US dollar, euro and pound sterling are all fiat currencies.
- Fork: When miners have differences of opinions over the future of a cryptocurrency, it can result in forks – where one blockchain takes on separate paths. Bitcoin Cash is an example of a 'hard fork' from Bitcoin.
- Gas: 'Gas' fees cover the costs required to create transactions on the Ethereum blockchain. They are typically very small percentages of Ether, in denominations known as gwei.
- HODL: 'Holding On for Dear Life'. The term originated from a misspelling of 'hold' on an internet forum and is used to describe refusing to sell coins – typically Bitcoin – in the face of harsh market conditions.
- Halving: A term relevant to Bitcoin. As more coins are mined, inflation is controlled by periodically cutting the rewards on offer for doing so. This is done roughly every four years, with the next halving due in 2024. The reward for mining Bitcoin will reach zero at some time in the next century when Bitcoin reaches its maximum supply of 21 million coins.
- Hashing: A key facet of cryptography, the digital security process that underpins cryptocurrency. The process of hashing converts readable text into long strings of undecipherable data.
- ICO: Initial Coin Offering. Similar to an IPO in stocks and shares. Organisations offer ICOs in an attempt to raise funds for products and services by selling new coins. It is common for the coin to relate to the product or service that is in the pipeline.
- Mining: The process of creating new coins. Miners solve hugely complex mathematical problems to create the secure chains that tie together blocks on a crypto platform. In return, they earn rewards such as units of cryptocurrency and transaction fees. Fancy having a go at mining Bitcoin on your home PC? Don't bother. It takes vast networks of specialised devices to perform this process, and this is why energy consumption is a key concern for the future of cryptocurrencies that are created in this way.
- NFTs: Non-Fungible Tokens. These assets are created on a blockchain with unique sets of data. They have typically been linked to tangible items such as artwork and other collectables. An NFT of Twitter's first post fetched a price of $2.9 million in March 2021. Its value has since slumped dramatically.
- Private Key: This is the most valuable thing that you own when you store crypto in your wallet. Only those who have access to the private key – a cryptographic variable used to encrypt data – can spend associated cryptocurrency. If you lose your private key, you lose your crypto.
- Public Key: Your public key is paired with your private key and allows you to receive transactions over blockchain platforms. Sharing your public key means that people can pay you in crypto and has no impact on anyone's ability to take your coins from you.
- Satoshi Nakamoto: The name of Bitcoin's creator. It is assumed to be a pseudonym and theories vary wildly as to Nakamoto's real identity – or identities. The cent form of Bitcoin is known as satoshis or sats. One Bitcoin is made of one million satoshis.
- Smart contracts: These work in much the same way as any legal document but they run entirely on blockchain platforms. They are essentially lines of code that follow rules of "if/then" or "when/then" – so a specific action is performed when set conditions are met or created. An example of a smart contract could involve an agency receiving automatic payments from clients when certain tasks and goals are performed and met.
- Stablecoin: A cryptocurrency that has its value connected – or pegged – to another currency or commodity. Tether is an example of a Stablecoin. Its value is pegged to the US dollar so changes in the fiat currency's value alter the crypto accordingly. This limits the kind of volatility that many cryptocurrencies experience.
- Token: Any cryptocurrency that is not built on its own blockchain platform is known as a token. Tether is also an example of a token as it is built on the Ethereum blockchain. Ether is the platform's coin.
- Whale: An individual or organisation that holds a significant enough amount of currency to influence changes in its value. Buying/selling the asset or merely commenting on it may be enough to move the market.
What moves crypto prices?
As cryptocurrency is not connected to central banks, the kind of sociopolitical factors that can cause significant shifts in forex markets are not typically a factor in crypto investments.
- Supply and demand: Like any commodity, the number of items available to purchase and the line of potential purchasers have an immediate impact on the value of crypto.
- Regulatory changes: Cryptocurrencies remain unregulated around the world – something that makes them highly valued by some investors. However, there is an increasing push for central governance to have a role in the future of crypto. For example, Bitcoin reached an all-time high value of nearly $69,000 in November 2021, shortly after the United States Securities and Exchange Commission approved exchange-traded funds (ETFs) linked to the currency, allowing investors to trade futures contracts predicated on market movements.
- Production costs: Mining Bitcoin is a larger consumer of electricity per year than many small countries. This coupled with the increasing complexity of machines required to mine the likes of Bitcoin can lead to fluctuations in a currency's value.
- Media coverage: Crypto's desirability is perhaps influenced by human opinion like no other currency can be. Established as a joke alternative to Bitcoin in 2013, Dogecoin has a market cap in the billions and was briefly the sixth-most valuable cryptocurrency in the world after it was supported on social media by billionaire businessmen Elon Musk and Mark Cuban.
What is crypto trading?
There are two main methods of trading cryptocurrency; buying and selling the coins themselves via an exchange or broker or utilising derivatives like contracts for difference (CFDs) to speculate on the market movements of a cryptocurrency.
Buying and selling cryptocurrency
It is possible to simply purchase cryptocurrency; however, it remains a complex process that you should research thoroughly before committing. You will need to consider which currency you want to purchase and what kind of wallet in which you will store it, as well as devise robust security systems that keep your private keys safe.
If you want to turn a profit from your crypto investment, you will also need to monitor the market's movements fairly regularly and execute sales of crypto assets at the right time.
Trading cryptocurrency
CFDs enable you to seek profits in the crypto sphere without owning any coins or tokens. Depending on which direction you think the value of a cryptocurrency will move, you can set your position accordingly.
If the market moves in the direction you predicted, you stand to earn a return. However, you lose your funds – and potentially more – if the movement is in the other direction.
How crypto trading works with Tradu
It's easy to start crypto trading with Tradu.
Sign up for a CFD trading account and you can start speculating on the future movements of a number of cryptos including major players like Bitcoin and Ether, as well as altcoins such as Cardano and Dogecoin.
Once you've selected your crypto, decide whether to go long ('buy') if you foresee value rising or short ('sell') if you think prices will drop.
Then set your margin – the amount that you will pay to enter the contract – and see if the market moves in the way in which you predicted. You stand to profit if your prediction is correct but you could lose all of your invested capital if it goes in the opposite direction. You will never own any part of the crypto when you enter a CFD.
Get a full rundown of how CFDs work in our handy guide.
Pros of crypto trading
- Large movements: Though it can be unpredictable, the crypto market is renowned for its fast-moving, volatile nature. If things head in the same direction as your position on a CFD, it can magnify returns at quicker rates than other instruments.
- Trade when you want: It's possible to buy and sell crypto at any time of day due to its decentralised nature. We also offer excellent availability, and you can trade crypto CFDs on our platform during market hours.
- Flexibility: Owning cryptocurrency is a bet that the market will move in a positive direction. However, with crypto CFDs, you can take a position in either direction. See choppy waters on the horizon for a cryptocurrency? Take a short position and you stand to gain if you are right.
- Leverage: The capital required to open a position on crypto – your margin – is much lower than the costs of owning and storing the currency. Leveraged products such as CFDs also increase your exposure to the whole value of trades and your potential profits and losses. Learn more as we explain what leverage and margin are.
Cons of crypto trading
- Volatility: Just as the speed at which the crypto market moves can be beneficial if it aligns with your strategy, that same volatility can also put your capital at increased risk.
- Time-consuming: If you don't already know your Cardano from your Solana and hashing from halving, it can take time to get to grips with everything crypto. Investing in crypto without putting in the time and effort to research it properly can greatly increase your exposure to risk.
- Long-term doubts: Cryptocurrency is still just in its second decade of existence, meaning that any trends for even the longest-standing of coins pale in comparison to fiat currencies and other commodities. With new cryptos emerging regularly and dates with regulatory destiny likely on the horizon, it's nigh-on impossible to say what the future holds for any crypto investment in the long term.
- Security risks: As with just about all things in the online world, crypto investments are at risk of hacking attempts that other kinds of investments generally aren't. Storing crypto in a hot wallet could leave you vulnerable. Using a cold wallet but losing your private key likely spells the end of your investment.
Crypto trading strategies
How you go about trading crypto will depend on several factors such as your available capital and appetite to risk. Depending on those, you could apply many different strategies to your investments.
- Dollar Cost Averaging: Investing a set sum on a regular basis; for example, £20 every month. This strategy is useful for beginners as it teaches discipline and can quickly and clearly illustrate how market forces impact investments.
- Day trading: Opening and closing positions across a day's trading session, monitoring trends throughout. Our guide to day trading has more information.
- Trend trading: With crypto's volatility often being so closely linked to news cycles, periods of overbuying and overselling are not uncommon. Using a Relative Strength Index formula, you can more easily spot when the market is moving at uncommon speeds. Get more info on trend trading in our guide.
- Position trading: A longer-term strategy following the direction of a cryptocurrency over a period of time. It could be weeks, months or even years. Check out this guide to position trading.
Learn more about these approaches and how you might apply them in our guide to crypto trading strategies.
How to start crypto CFD trading
- Set up your account. Signing up for a Tradu account can be done in just a few minutes.
- Get familiar with the system. Our market, trading and platform guides are useful reads before you make your first trade.
- Plan your strategy. Choose the cryptocurrencies on which you want to take a position – and what position you'll take.
- Execute your first trade. With our intuitive platform, you can pick your moment and take a position on crypto in seconds.
- Monitor movements and close your position. Whether you analyse the markets manually or take advantage of our automated stop orders, we make it easy for you to get out when the time is right.
- Diversify your portfolio. Research other trading instruments such as listed stocks and CFDs on forex, stocks, commodities and indices. You can build a fully diversified portfolio all from one account with Tradu.
Crypto trading FAQs
Is crypto trading profitable?
Like any kind of investment, trading crypto can be a profitable venture if you develop the right strategy and the market moves in the direction that you predicted.
However, you will be exposed to considerable risk, especially as crypto markets are so volatile. It's estimated that more than three-quarters of crypto holders lose money on their investments.
Is crypto trading safe?
As crypto is unregulated, buying and selling coins or tokens can carry extra risks of fraud if you are not careful about the platform on which you choose to operate.
When you trade crypto CFDs with Tradu, however, we carry the exposure to the crypto market for you. You do not need to purchase ownership of any currency to execute trades involving cryptocurrency on our platform.
Can you day trade crypto?
Day trading in crypto is a type of trading strategy where investors seek to capitalise on the movements of an asset across a single day of trading. It is possible to day trade stocks, forex... and crypto.Day trading typically requires significant knowledge of crypto markets and trading techniques. This method can magnify the market's volatility even further.
What is spot trading in crypto?
Spot trading is so-called because deals are settled 'on the spot'. If you're familiar with the age-old maxim of 'buy low, sell high', that is the fundamental theory behind spot trading. In a crypto spot trade, you would purchase an amount of your chosen crypto and wait until it rises in value sufficiently before selling it for profit. Of course, this relies on market movements going in your favour and the asset gaining value.
What is cryptocurrency market cap?
Market capitalisation is the total value of all coins of a particular cryptocurrency that have been mined. Similarly, in stocks, market cap refers to the total dollar value of a company's shares.
Do you pay tax on crypto trading?
If you are unfamiliar with your tax obligations for crypto investments you make, it may be worth your while to seek assistance from a financial advisor to get clarity on what taxes you can expect to pay.
With Tradu you can trade crypto via CFDs.