Cryptocurrencies are a new asset class which are prone to extreme volatility. Find out what affects their prices and how you can trade them.
What moves cryptocurrency prices?
Due to their decentralised nature and independence from government institutions, cryptos tend to be unaffected from the usual macroeconomic and political factors that impact other asset classes such as forex or shares.
Supply and demand
This fundamental economic principle still applies to cryptos and it is the biggest factor that affects their price.
For example, if many people want to buy Bitcoins, then this will drive up the price as there is a limited supply.
If no one wants to buy them, then the value will drop as there will be an excess of supply of Bitcoins.
Perception
How a cryptocurrency is perceived by investors and the public will affect the price. For example, bad publicity over its security, uses in criminal activity and negative news sentiment will drive down the value. And vice versa.
Mining costs
Mining cryptos has a real-world cost. And if the difficulty of the mining process is increased, then this will restrict supply and therefore increase the price.
For example, Bitcoin’s algorithm is purposely designed to increase the difficulty of the computational puzzle that adds new blocks to the chain and rewards the users with a new Bitcoin. This is done to restrict the number of Bitcoins that are released over time.
Competition
With thousands of cryptocurrencies vying for investor attention and Bitcoin’s crown as the most dominant crypto, this competition helps to reduce prices.
Acceptance
How widely accepted the crypto is with businesses, its integration with existing financial systems, and how it is viewed in the regulatory environment can all impact the price.
How do I trade cryptocurrencies?
A step-by-step guide on how to trade Bitcoin.
Step 1
You research the crypto markets. You see on the news that analysts expect the value of Bitcoin to rise as there has been a big increase in demand from investors.
You decide to buy Bitcoin.
Step 2
To place your trade:
- Log into the FOREX.com web platform
- Type ‘Bitcoin’ into the top-left search bar
- Choose ‘Bitcoin (£)’
Already you can see the ‘SELL’ and ‘BUY’ buttons. Selecting either of these will open the deal ticket and enable you to choose how much you want to trade.
Step 3
But first, we will select ‘Market 360’. This will give you all the information about Bitcoin – from charting tools, news and margin requirements in one convenient place.
Step 4
To buy Bitcoin, select the green ‘Buy’ button. This will open the deal ticket.
In the quantity section, you enter how many CFDs you want to buy.
You enter 0.1.
The pip value in the deal now says GBP 0.10. This means you will earn 10p for every point Bitcoin increases, and lose 10p for every point the Bitcoin price falls.
The margin is 618.04 GBP. This is how much money you must have in your account to place this trade.
Select ‘Place Trade’
Congratulations. You bought 0.1 Bitcoins at 12,405.2
Step 5
In turns out that your analysis was correct. In a matter of hours, the value of Bitcoin leaps 1,000 points to 13,405.2
You decide it’s time to close your trade and take your profit.
- Log into the FOREX.com web platform
- Select the ‘Default Workspace’ tab
- Choose ‘Close’ in the ‘Positions’ subtab
This will launch the deal ticket.
Step 6
As you can see, the deal ticket shows that if you close the trade now, you will make a profit of £100.
To close your trade, simply select ‘Close Position’.
Alternative scenario
However, no trader gets it right every time. Bitcoin could’ve dropped 1,000 points and you would’ve lost £100.
Financing charges
Please note, if you hold a crypto position overnight you incur a financing charge of 0.08219%.
It is calculated as:
Position size x Closing rate x Financing charge = Financing cost
In the case of the above example, your financing charge could’ve been £105.2 (0.1 x 12,800 x 0.08219%)
In times of high volatility, we strongly advise against holding crypto positions overnight
There’s more to learn about cryptocurrencies in our Trading Academy