What is a cryptocurrency?
A cryptocurrency (or “crypto”) is a digital currency that uses cryptography to secure online transactions. Cryptocurrencies are typically decentralised in nature rather than being controlled by a single authority like fiat currencies such as the USD or EUR. Blockchain technology is used to record all transactions in an online public ledger, separate copies of which are maintained by different users around the world.
Cryptos such as Bitcoin and Ethereum have become popular with traders due to their volatility, which has delivered huge profits to some traders and investors.
There are two main ways of trading cryptos: via a broker or via a cryptocurrency exchange. This article seeks to explain the advantages to traders of using a broker over an exchange. However, you should be aware that, with the rise in interest in cryptocurrency trading, unregulated brokers have sprung up to take advantage of unprepared newcomers. We recommend that you always trade with a well-regulated broker.
Advantages of using a cryptocurrency broker
The main choice facing traders who wish to enter the crypto sector is whether to use a broker or an exchange. The latter is a place where buyers and sellers meet to exchange cryptos for either fiat currencies* (such as the dollar) or for other cryptos, and where prices are based on market valuations. The exchange of fiat currencies and/or cryptocurrencies takes place directly between buyers and sellers, with the exchange operator providing the platform. This type of trading is most suitable for more advanced traders.
A broker, by contrast, acts as an intermediary but can also act as the other side of the trade, i.e. the counterparty. This type of trading is more suitable for beginners. Rather than selling cryptos directly to traders, brokers focus on allowing traders to speculate on cryptos using financial tools such as CFDs – a route into the crypto world that offers significant advantages.
The following subsections examine the main advantages of using a broker over an exchange.
More suitable for beginners
If you haven’t traded cryptos before, brokers offer a number of benefits over an exchange. They provide a wide range of educational materials, for example, that help you to learn all about cryptos and the various ways you can trade them, as well as successful strategies and how to implement them.
By contrast, many exchanges do not actively support those interested in crypto trading with the likes of educational lessons, news and blog articles. Many losses have been suffered by inexperienced traders simply because they didn’t have a basic knowledge of cryptos and/or trading, and didn’t understand how a cryptocurrency exchange works.
Critically, a broker will allow you to open a demo account where you can trade with virtual money rather than your hard-earned savings. You can practise on these demo accounts until you feel that you understand the market, know how to trade successfully and feel comfortable enough to risk your own money.
Figure 1: How to trade cryptos with a broker (Source: Bitpanda.com)
A wide range of trading tools
You can also use financial instruments, including Contracts for Difference (CFDs), to trade cryptos – a method that can be very advantageous for a variety of reasons:
Margins
When you trade cryptos using CFDs, you can exploit the concept of leverage to maximise your exposure and potential profits. That is because you only need to put down a relatively small amount of money (known as the margin) to make a trade, with the broker lending you the rest.
For example, if a broker offers a CFD leverage ratio of 2:1, you put down a margin of 50 per cent on each trade. If the price moves by 5 per cent, the CFD trader will actually make a profit of 10 per cent on that margin (or alternatively a loss of 10 per cent if the trade goes the wrong way). This means that CFD traders can earn a large amount of money quickly, but can lose money equally rapidly.
Trade both ways
Trading cryptos using CFDs allows you to speculate on whether the price of a crypto will rise or fall. If you go “long”, you use a CFD to buy the crypto and will profit if its price goes higher. When you go “short”, you are effectively selling the crypto at one price in the belief that it will go lower. You can then buy it back and pocket the difference between the sell price and the buy price.
Imagine, for example, you open a position to short-sell Bitcoin (BTC) via CFDs. If Bitcoin is trading at US$40,000 and you are offered leverage of 2:1, you could open a position to sell 1 BTC with a deposit or margin of US$20,000. If the market falls, as you anticipated, to US$35,000, you could then close your position by buying 1 BTC. To calculate your profit, you would just have to take the difference between the opening and closing prices: in this case, US$40,000 minus US$35,000 = US$5000.
By contrast, while some exchanges offer short-selling facilities, this involves borrowing the actual asset from the exchange or a third party and selling it on the market. If the market price did fall, you would then be able to buy the Bitcoin back at a lower price, return it to the owner, and profit from the change in price. You wouldn’t be offered margin, however.
Ability to hedge
You can also use CFDs to protect positions you have in cryptos. This involves opening trades so that a gain or loss in one position is offset by changes in the value of the other position. Using CFDs to hedge allows you to insure positions without owning the underlying crypto. This allows you to speculate on the price of the crypto without ever having to worry about opening an exchange account or creating a digital wallet.
Imagine, for example, you own 2 BTC and, although you believe the asset’s price will rise in the long run, you are concerned about short-term volatility. Instead of selling the BTC, you could open a CFD trade to short BTC. Once any negative price movement is over, you could close your direct hedge, and any profits you make would help offset any losses to your cryptocurrency holding. Alternatively, if the price of BTC rose, the profits from your holdings would offset any loss incurred by your BTC CFD.
Security
Trading cryptocurrency can be a risky business and not just because of the vagaries of the marketplace. If you trade cryptos directly, rather than through CFDs, you need to know they are stored safely. While broker’s accounts have insurance and other protections in place to keep your money safe, the same is not always true of digital currency exchanges. Moreover, if you trade cryptos via CFDs, you need not be concerned about security since you never own the underlying asset.
Flexibility
An exchange allows you to buy and sell, for example, Bitcoin for dollars or to exchange it for another crypto, such as Ethereum. Different exchanges offer different trading pairs, so the one you choose is a matter of personal preference. But if, for example, you open an account in dollars, you can only trade related pairs, such as the US dollar against Bitcoin (USD/BTC) or the US dollar against Ethereum (USD/ETH). By contrast, if you use a broker, you deposit money into your account and can then use various trading pairs, not limited to the currency of deposit.
Trading cryptos via CFDs allows you to close a position at any time during the trading day. That means you can hold a position for as long as you want, be it seconds, minutes or hours – an important consideration given the severe price volatility cryptos can experience. You can even hold a position overnight, although there will be a charge for doing so. Moreover, many brokers offer a variety of options when it comes to trade size, allowing a wide range of traders to access the market. This includes beginners and casual traders seeking to experiment with investment strategies while limiting their risk by focusing on small trades.
Buying and selling cryptos directly via an exchange requires the creation of an exchange account and a digital wallet to store the asset. This process can be restrictive and time-consuming. None of this is necessary when trading cryptos via CFDs because you don’t own the underlying asset.
*A government-issued currency that is not backed by a commodity such as gold.
What are the advantages of trading cryptocurrencies?
The crypto market is relatively new but has experienced significant volatility due to huge amounts of short-term speculative interest, making it highly attractive to traders. The higher the volatility, the greater the potential profits.
Huge profit potential
The higher the volatility, the greater the potential profits, while rapid intraday price movements can provide a range of opportunities for traders to go long and short. But remember, it is important to have a risk strategy in place. Fortunately, you can implement a variety of such strategies when using CFDs.
BTC/USD price 2019-2024 from TradingView
Ability to go long/short
When you buy crypto directly via an exchange, you purchase the asset upfront in the hope that it increases in value. But when you trade the price of a cryptocurrency via a CFD, you can take advantage of markets that are falling in price, as well as those that are rising.
Leverage maximises profit potential
By using CFDs to trade cryptos, you can trade on margin and boost your exposure to the underlying asset. The profit or loss you make from your cryptocurrency trades will reflect the full value of the position at the point it is closed, so trading on margin offers you the opportunity to make large profits from a relatively small investment.
Convenience and security
If you use CFDs, you don’t have to worry about how to store your cryptocurrency safely. Cryptos don’t have the same type of protection as money in a bank account or investments made through a broker. So, if you lose access to your crypto, it’s most likely gone for good. Studies suggest that around 20 per cent of all Bitcoins, for example, have been lost.
Flexibility
When you trade CFDs, you can close a crypto position at any time during the trading day. That means you can hold a position for as long as you want, be it seconds, minutes, or hours. That is an important consideration given the sometimes extreme volatility exhibited by cryptos.
What are the disadvantages of trading cryptocurrency CFDs?
Just as the volatility offered by cryptos offers traders huge potential for profit, it also amplifies the potential for huge losses. This is especially true when trading leveraged crypto CFDs.
Volatility
Just as the wild ride offered by cryptos offers traders huge potential for making profits, the flip side is equally true. Fortunately, trading cryptos via CFDs means you can take out some form of insurance by hedging your positions, such as selling short as well as long and instituting stop-loss orders.
Leverage
While leverage magnifies the profit potential of trading cryptos, the reverse is also true: it significantly increases the risk that you could lose a lot of money. Indeed, the losses could exceed your initial deposit for an individual trade, which is why it is vital you consider the total value of the leveraged position before trading CFDs.
It is easy to take on too much risk
Because the cost of trading CFDs is low, due to leverage, it is easy for investors to be lulled into a false sense of security and take on more trades than is prudent. This can leave them overexposed to the markets at any given time, such that their remaining capital would be insufficient to cover losses across the portfolio. If multiple positions go wrong, it can spell financial ruin for those who adopt a less-than-cautious approach to CFD trading.
Lack of ownership
This is another characteristic of CFDs that has benefits and disadvantages. Because you don’t own the underlying asset, you can’t gain from the benefits of ownership, such as the income provided at set periods by shares or bonds. Even if you factor in forthcoming dividend declarations when buying CFDs in shares, for example, you will only benefit at a fractional rate compared with the payout involved in actual share ownership.
Limited advantages over time
Because of the above point and others, you should only view CFDs as a short-term trading strategy, rather than a long-term investment option. Overnight financing charges alone can render the cost of long-term ownership of long positions prohibitive.
Counterparty risk
This relates to the risk that the counterparty to the trade, the broker in the case of CFDs, could default on the deal. Such risk is minimised by choosing a reputable broker in a well-regulated legal environment, but it still cannot be overlooked.
Cryptocurrency vocabulary
There is a wide range of terms you should know before you try trading cryptos. The main ones are listed below.
Altcoin
This refers to any crypto that is not Bitcoin. Altcoins share similarities with Bitcoin but can also vary in key respects, such as using a different mechanism to validate transactions.
Bitcoin
Bitcoin was the first cryptocurrency. It was created in January 2009 when an unknown author using the pseudonym Satoshi Nakamoto mined the genesis block. The total value of the crypto market is now estimated at around US$2 trillion. Interest among small traders and investors took off in 2017 after the price of Bitcoin reached US$20,000 per coin.
Bitcoin Cash
Bitcoin Cash is a peer-to-peer crypto created in August 2017 as a “fork” (see below) of Bitcoin. While Bitcoin is believed to be too volatile to be useful as a currency, Bitcoin Cash is designed for transactions.
Block
Blocks are where the data related to the Bitcoin network are permanently recorded. Blocks contain the records of valid transactions that have taken place on the network, so a block is effectively like a page of a ledger or record book.
Blockchain
A blockchain is a digital form of record-keeping and the underlying technology behind cryptocurrencies. It is a system of recording information in a way that makes it difficult or impossible to change, hack or cheat the system. The blockchain is composed of sequential blocks that build upon one another, creating a permanent and unchangeable ledger of transactions.
Coin
A coin is a crypto or digital currency that is independent of any other blockchain or platform. As a single unit of currency, a coin can be traded for an agreed-upon value, depending on current market conditions. Some blockchains, like Bitcoin, have the same name for both the network and the coin.
Coinbase
Coinbase is an exchange that offers a secure online platform for buying, selling, transferring and storing digital currency. In April 2021, it became the first crypto exchange to go public on the NASDAQ.
Cold wallet/hardware wallet/cold storage
A cold wallet, also known as a hardware wallet or cold storage, is a physical device that offers a secure method of storing your crypto offline. Many look like USB drives.
Cryptocurrency
Cryptocurrency is decentralised digital money based on blockchain technology. The most well-known cryptos are Bitcoin and Ethereum, but there are more than 5000 different cryptocurrencies in circulation. Cryptos can be used to buy and sell things, as a long-term store of value, or for speculative purposes.
Decentralisation
In blockchain technology, decentralisation refers to the transfer of control and decision-making from a central authority to a distributed network, so reducing the level of trust that participants must place in one another. It also undermines the ability of one entity to exert authority or control over others. Blockchains require majority approval from all users to operate and make changes.
Decentralised finance (DeFi)
DeFi aims to provide financial services without intermediaries, such as banks or governments, using automated protocols on blockchains and stablecoins (see below) to facilitate fund transfers.
Decentralised applications (Dapps)
A decentralised application is an application built on a decentralised network that combines a smart contract, a programme that runs on blockchain, and a front-end user interface. The vast majority of dapp development is on the Ethereum blockchain. Dapps allow users to carry out transactions with each other without intermediaries.
Digital gold
This term can have two meanings. One is a form of digital money based on units of gold. However, cryptos are often referred to as digital gold because they share some of the characteristics of physical gold, having a limited supply and acting as a haven in times of trouble and a store of value and protection against inflation.
Ethereum
The second-largest cryptocurrency by trade volume, Ethereum is a decentralised, blockchain-based platform that facilitates the use of smart contracts and the creation of decentralised apps or “dapps”. It also has a native cryptocurrency called Ether (or “ETH”).
Exchange
An exchange is a digital marketplace where you can buy and sell cryptos.
Fork
A fork occurs when a blockchain’s users make changes to the rules (known as protocols) of the blockchain. This often results in the creation of two paths: one follows the old rules, while the other is a new blockchain that splits off from the previous one.
Gas
The term “gas” refers to the fee that must be paid to successfully conduct a transaction or execute a contract on the Ethereum blockchain platform.
Genesis block
The genesis block is the first block of a cryptocurrency ever produced.
HODL
This term means “Hold On for Dear Life”. It originated from a user typo (intended to be “HOLD”) in an online Bitcoin forum in 2013 and refers to a buy-and-hold investment strategy executed in the belief that the cryptocurrency will increase in value over the long term.
Halving
Halving is a method of controlling the supply of Bitcoin (in contrast with traditional currencies like the US dollar, which are essentially unlimited in supply and lose value when governments print too much of them). Halving involves cutting in half the number of new units entering circulation. Bitcoin last halved on 11 May 2020, and the next halving is expected in 2024.
Hash
A hash is a function that generates a fixed-length character string from data records of any length. A data record can be a word, a sentence, a longer text or an entire file. A hash is used for security purposes and constitutes the backbone of crypto security.
Hot wallet
A hot wallet is a form of cryptocurrency storage that is connected to the internet and can be accessed through your computer or phone. Because they are online, hot wallets are more susceptible to hacking and cybersecurity attacks than offline wallets (also known as cold wallets – see above).
Initial coin offering (ICO)
An initial coin offering is a method of raising funds for a new cryptocurrency project. ICOs are similar to initial public offerings (IPOs) of stocks.
Market capitalisation
The market capitalisation of a cryptocurrency is the total value of all the coins that have been mined. It is calculated by multiplying the current number of coins by the current value of each coin.
Mining
Mining is the process whereby new cryptocurrency coins are created and the log of transactions between users is maintained.
Node
A node is a computer that connects to a blockchain network.
Non-fungible tokens (NFTs)
“Non-fungible” refers to something that is unique and cannot be replaced by something else. NFTs have unique identification codes and metadata that distinguish them from each other, and, unlike cryptos, they cannot be traded or exchanged at equivalency.
NFTs are most often held on the Ethereum blockchain. They can be used to represent real-world items such as artwork and real estate. NFTs are created through a process known as minting and, once minted, they cannot be deleted or edited. The value of NFTs is subjective and this is why they are usually issued through auctions on digital marketplaces.
Peer-to-peer
The term “peer-to-peer” refers to two users interacting directly without a third party or intermediary. A peer-to-peer platform is a decentralised platform that allows individuals to interact directly with each other.
Public key
A public key is a unique cryptographic code used to facilitate transactions between parties, allowing users to receive cryptocurrencies in their accounts. It is effectively a wallet address, and similar to a bank account number. It can be disclosed to other users so that they can send you money.
Private key
A private key is an extremely large encrypted code that allows direct access to your cryptocurrency. Like a bank account password, it should never be shared.
Smart contract
A smart contract is a program stored on a blockchain that runs when predetermined conditions are met. Smart contracts are typically used to automate the execution of an agreement, so that all participants can be immediately certain of the outcome without the involvement of any intermediary or loss of time. They can also automate a workflow, triggering the next action when the defined conditions have been met.
Stablecoin/digital fiat
A stablecoin is a digital currency that is pegged to a “stable” reserve asset like the US dollar or gold. Stablecoins are designed to reduce volatility relative to unpegged cryptocurrencies such as Bitcoin. They are also known as digital fiat.
Token
The word “token” has several meanings. It can be used as another word for a crypto, or to describe all cryptos other than Bitcoin and Ethereum, or as a name for certain digital assets that run on top of a crypto blockchain. Tokens have a huge range of potential functions, from helping make decentralised exchanges possible to selling rare items in video games. But they can all be traded or held like any other cryptocurrency.
Vitalik Buterin
Vitalik Buterin is the programmer who created Ethereum in 2015.
Wallet
A wallet is a place to store your cryptocurrency holdings. Many exchanges offer digital wallets, which can be hot (online, software-based) or cold (offline, usually on a device).
Cryptocurrency assets: how to trade cryptos
Just as when you trade any other currency, you trade cryptos in pairs, either against fiat currencies such as the US dollar or against another crypto. For example, you could trade Bitcoin against the euro (BTC/EUR) or against Ethereum (BTC/ETH).
The US dollar is by far the most traded fiat currency globally, and BTC/USD (where BTC is the base currency) is the most popular crypto-to-fiat pair. When, for example, the price of the BTC/USD pair is 40,000, it takes US$40,000 to buy one Bitcoin. According to the broker AvaTrade, this pair serves as the de facto gold standard for the cryptocurrency market, providing the price direction cue for virtually the entire crypto market.
The advantage of trading cryptos against major currencies like the dollar or the euro is that these are relatively liquid markets, so it is fairly easy to find a buyer and a seller for your trade. This in turn means that such markets are less volatile than other pairings (such as crypto-to-crypto pairs) and the spreads tend to be narrower.
FAQs
Is Trading Crypto Profitable?
Like all trading, you can make a profit if you’re on the right side of the market. However, if you’re on the wrong side of the market with cryptocurrencies, you can lose a lot of money in a short period.
The cryptocurrency market is very volatile, and it’s not uncommon to see 20%, 30% and even 50% swings every single day. If you are day trading, this can translate to good profits if you can capitalise on the short-term fluctuations.
Is Crypto Trading Safe?
Trading cryptocurrency is a very high-risk market. In part, this is because the market doesn’t have a long history, so we can’t refer to previous market behaviour, but also because it does not have the same oversight and controls as fiat currencies. This lack of control makes the market an unpredictable asset to trade.
Cryptocurrency CFD trading is also only as safe as your broker. The same rules apply when looking for a broker to trade crypto CFDs, as they do for fiat currencies. Finding a well-regulated broker, with an acceptable account choice, trading conditions and reputation is key to your trading safety.
When Can I Trade Cryptocurrency?
Because there is no central cryptocurrency exchange, and all trades use a broker as a counterparty, cryptocurrencies can be traded 24/7. Crypto CFDs are the only assets that trade around the clock, seven days a week, 365 days a year, which is very rare in the financial world.
In contrast, the stock markets operate 8 hours a day, 5 days a week, while the Forex market pauses trading over the weekend.
The main advantage of a 24/7 market is that you can buy and sell cryptocurrencies anytime, making them accessible to all traders.
Are Profits From Crypto Trading Taxable?
Yes, like any other regular income, cryptocurrency trading is taxable. If you’re transacting any cryptocurrency, you need to be aware of the tax consequences. No matter where you live, if you have significant money invested in cryptocurrencies, you should always seek guidance from a financial adviser regarding legal issues and taxes.
Forex Risk Disclaimer
Trading Forex and CFDs is not suitable for all investors as it carries a high degree of risk to your capital: 75-90% of retail investors lose money trading these products. Forex and CFD transactions involve high risk due to the following factors: Leverage, market volatility, slippage arising from a lack of liquidity, inadequate trading knowledge or experience, and a lack of regulatory protection. Traders should not deposit any money that is not considered disposable income. Regardless of how much research you have done or how confident you are in your trade, there is always a substantial risk of loss. (Learn more about these risks from the UK’s regulator, the FCA, or the Australian regulator, ASIC).
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Editorial Team
Chris Cammack
Head of Content
Chris joined the company in 2019 after ten years experience in research, editorial and design for political and financial publications. His background has given him a deep knowledge of international financial markets and the geopolitics that affects them. Chris has a keen eye for editing and a voracious appetite for financial and political current affairs. He ensures that our content across all sites meets the standards of quality and transparency that our readers expect.
Alison Heyerdahl
Senior Financial Writer
Alison joined the team as a writer in 2021. She has a medical degree with a focus on physiotherapy and a bachelor’s in psychology. However, her interest in forex trading and her love for writing led her to switch careers, and she now has over eight years experience in research and content development. She has tested and reviewed 100+ brokers and has a great understanding of the Forex trading world.
Ida Hermansen
Financial Writer
Ida joined our team as a financial writer in 2023. She has a degree in Digital Marketing and a background in content writing and SEO. In addition to her marketing and writing skills, Ida also has an interest in cryptocurrencies and blockchain networks. Her interest in crypto trading led to a wider fascination with Forex technical analysis and price movement. She continues to develop her skills and knowledge in Forex trading and keeps a close eye on which Forex brokers offer the best trading environments for new traders.
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4.56
Accepts UK Clients. Average spread EUR/USD 0.10 pips with 7 USD commission round turn on the trading account with lowest minimum deposit. Max leverage 30:1. Islamic account available. MT4, MT5 & cTrader platforms supported. IC Markets is regulated by CySEC and ASIC.
