Bitcoin, mining, blockchain, ledgers, oracles and wallets. The technical names that describe various components of this technology can prove intimidating. With that in mind, here are five things you should be aware of before trading cryptocurrencies, and why spread betting or contracts for difference (CFDs) products could be a sensible introduction.
Cryptocurrencies: the basics
Cryptocurrencies are a form of digital currency, using cryptography for security and acting as a medium of exchange. They arent issued by a central authority and transactions are recorded on a public, decentralised ledger, typically a blockchain. This blockchain is theoretically immune to manipulation or corruption. So, what is a blockchain and how does it work?
A blockchain is a digitalised, decentralised public ledger of all cryptocurrency transactions. When each transaction is made, a new block is added, maintaining an up-to-date, chronological database of information. Users can keep track of their digital currency payments, without central record keeping. The original idea was to create immutable records that can be verified by entire communities, removing the need for oversight by a central, and potentially corrupt, authority.
Cryptocurrencies can be incredibly volatile; there have been significant swings in the value of cryptocurrencies over short periods in recent months. The advantage of spread betting or trading CFDs is that you dont own the underlying asset; you purely speculate on market price movements. Consequently, you dont have to purchase cryptocurrencies outright. The ability to open a sell position as well as a buy position means you can also profit from falling prices, rather than simply holding an asset that is declining in value. Spread bets and CFD trades also mean that you arent at risk from having your wallet hacked. However, speculating on price fluctuations carries its own inherent risks. Spread bets and CFDs are leveraged products, which can carry a high risk to your capital.
The influence of bitcoin
Seen as the original cryptocurrency, bitcoin has had a huge impact on the wider cryptocurrency market. Its value remains an instrumental force in driving the adoption of cryptocurrencies and the public hype surrounding them. An awareness of bitcoins performance will lend itself to a better understanding of the wider cryptocurrency market.
It's a learning process
Its easy to get lost in the intricacies of cryptocurrencies and lose sight of the basics, and this could impact your approach to trading. As with any asset class you are unfamiliar with, you should research the product and gain an understanding before you trade. We have a number of educational materials that are available to our clients to help expand their knowledge.
Take a position on cryptocurrencies at www.cmcmarkets.com.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 78% of retail investor accounts lose money when spread betting and/or trading CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.