What is Cryptocurrency Trading and How Does it Work?

No – unlike regular markets, the cryptocurrency market is open 24 hours a day, 7 days a week. However, when trading cryptocurrency CFDs with Axi, please consider the price movements based on the details in the product schedule.

In practice, trading cryptocurrency CFDs is no different to trading any other financial instrument, such as forex, gold, oil or stock indices. This is because you are only trading the price movements and are not investing the often significant sums needed to take ownership of the underlying asset itself. 

However, as a trader you must remember that every asset is subject to unique market forces and behaves in a different way (for example, some products are more volatile than others). This is why technical and fundamental analysis is important. And when trading any financial product, you should have an appropriate risk management strategy in place and make use of the features built into the trading platform that help protect your account, such as Stop Loss and Take Profit tools.

The spread is the difference between the Bid and the Ask price of a particular cryptocurrency, with the Bid price usually lower than the Ask price. The spread will change according to the amount of liquidity and volatility in the markets, so it’s important to check the latest prices before you commit to a trade.

Just like the days of the gold rush, ‘mining’ for cryptocurrencies is a way to extract money from a nominally free resource. However, cryptocurrency mining is a technologically complex undertaking.

Essentially, mining is the way a new unit of cryptocurrency enters circulation – you might think of it as being somewhat equivalent to minting a traditional currency. But the way it happens isn’t through a printing press – it’s by applying significant computing resources to solve complex mathematical equations. 

As the miners go about their work, what they are effectively doing is taking on a role of de facto auditor and verifying blocks of cryptocurrency transactions to ensure no one is trying to use the same unit of cryptocurrency twice. As a reward for helping ensure the validity of the cryptocurrency as a whole, the miner is paid through the creation of a new unit (or sub-unit) of the underlying cryptocurrency. 

Please note that this is an extremely simplified outline of cryptocurrency mining. Anyone interested in becoming a cryptocurrency miner should investigate it thoroughly first.

A ‘lot’ is a commonly used term in trading and it represents a standard unit of a particular asset. For example, when trading Forex, a lot is 100,000 units of a currency. So, if you bought 1 lot of USD, you would be buying $100,000 worth of USD.

For cryptocurrency CFDs, lots refer to a set amount of the individual cryptocurrency that a trader can buy or sell in each transaction. At Axi, 1 lot represents 1 ‘coin’ for the majority of the available cryptocurrencies, with the exception being Ripple (XRPUSD) where the contract size per 1 lot represents 1,000 coins.

Using the example of Bitcoin vs US Dollar (BTCUSD), if a trader entered a buy at the trade size of 1 Lot, for every tick increment of 0.1, the trader would be making US$1.

Essentially, leverage means borrowing funds from a broker to increase the size of an individual trading position beyond the cash balance the trader may have. Note that while leverage can present profits from relatively small price changes in currency pairs, it can amplify losses as well.

Let’s say you have $1,000 in your account and you decide to open a $10,000 position. This means you will be trading with 10 times leverage on your account (10,000/1000 = 10:1 leverage). In cryptocurrency trading, it’s not uncommon to see leverage going up to 100:1. This means, for every $100 in your account, an individual is allowed to trade up to $10,000 in value. In other words, the trader’s account now has a leverage ratio of 100:1.

If an individual has the option to open a trading account with a leverage of 500:1. That means for every $1 of deposit, the broker will effectively lend you $500. This in turn means that the individual is taking a much larger position then the initial amount that was deposited. 

It is for this reason that leverage can be a double-edged sword, amplifying both profits and losses. Hence, it is important to practice proper trade and risk management to ensure that leverage can be used to the trader’s advantage.

It is very common to see the term “margin” when trading with leverage in a trading account, where margin simply represents a percentage of the full amount of your trade. To continue the above example, based on a margin requirement of 10% and using a 100:1 leverage ratio, the margin required to open a $10,000 position will be $100. 

“Free margin” refers to the amount of funds that are available for a trader to open a position. On the other hand, “used margin” refers to the amount of funds that are used to maintain current open positions that are still running. You could think of “used margin” as a sum of money that is put aside from your account balance in case the position swings against you to the point of liquidation.

In the event that “free margin” has been used up and there isn’t enough margin left in the trading account, if an open trade has any drawdown against the trader, this is where the broker will issue a “margin call” warning to the trader. This alerts the trader that they need to add funds to their account in order to keep the position open. If no additional margin is added, the broker may close the position in order to prevent further losses.