Trading Digital Currencies
Digital currencies are the newest form of money that does not have physical notes/coins, but is stored in electronic form and it is used as a form of exchange. It is a peer-to-peer (P2P) transaction system, which has avoided third parties like banks, exchanges or financial institutions. Transactions are added to a public digital ledger called blockchain through a process called mining.
Digital currencies differ dramatically in concept from the traditional form of currencies, which are known as fiat currencies. Fiat currencies are characteristic of countries, issued/printed by central banks and circulate among central/commercial banks, people, businesses, financial institutions, exchanges through transactions and in physical form also. The supply of fiat money is defined/manipulated by central banks in order to maintain the economy healthy. In contrast digital currencies are a decentralized money system, which have avoided government control and surveillance. Digital currencies value is defined by other factors like: supply, demand, how much is being mined, news, restrictions in different countries/governments.
Decentralised – no central authority, cryptocurrency transactions are processed and validated by an open and distributed network
Immutable and irreversible – all transactions are recorded on the blockchain, which makes it impossible to hide or change any transaction.
Limited supply – Fiat currencies have an unlimited supply, digital currencies, in turn, have a limited and pre-defined supply, coded into the underlying algorithm, which makes them deflationary in nature.
The results of digital currencies trading comes from the difference between the opening and closing price of the asset. In long trading, the profits come from the price rise, and in short trading the opposite happens, the profits are earned from the falling prices.
Let’s make some calculations:
Profit = ((Opening Price – Closing Price) / Current Price) * Capital Invested * Leverage – Commissions
For example, a trader opens a long trade for Gold. The opening price is $33,845. The closing price is $33,725. $250 was invested. Leverage used 1:100. In these conditions the volume is $25,000, with a commission of $4.
Profit = ((33,845 – 33,725) / 33,725) * 250 * 100 – 4
Profit = $84.95
If you choose to trade without leverage, skip the multiplying part with the leverage.
Digital Currencies market hours run from 12:00 to 12:00 UTC and are open 24 hours a day, 365 days a year.
A leverage multiplies your invested capital, growing your trading exposure in the market. The leverage shows how many times the volume he invested will increase.
Let’s suppose you invest $250 applying a 1:100 leverage. The total trading volume will be $25,000 ($250 * 100 = $25,000).
Keep in mind that the leverage increases both, potential profits and risk level.
A high leverage is suitable for active traders who open and close their trades during the day, meanwhile, for long-term investors, using smaller leverage would be a smarter and safer choice.
The leverage values vary in different types of assets. The larger leverage scopes can be applied while trading currency pairs, and smaller ones while trading digital currencies.