While cryptocurrencies may not have any physical presence, they are like any other commodity from fiat currencies through to coal or precious metals: they can be traded for profit, and traded they are. Like the foreign exchange (forex) markets, the cryptocurrency markets see millions and millions of pounds whizzing by at breakneck speeds every day – and anyone can get involved.
Before making the leap, though, it’s important to understand the terminology – or a potential new career can quickly become an easy way to lose money.
The Candle Chart
Also known as the candlestick chart, the candle chart is the default price visualisation for almost all trading floors in the world. It is designed to offer a view of how a value changes over time, and at its heart it’s effectively a line chart: time is charted along the X axis in user-selectable increments, and value along the Y axis. The line goes up, the value has gone up; the line goes down, the value has gone down.
Where a candle chart differs from a line chart is that it is able to display considerably more information, tracking not only the value at the point of each time unit but by how much it changed along with its peak and trough. Each unit of time is represented by a block, typically coloured green or red: green tells you that the value rose during the time period, red that it fell. The size of the block indicates how far it rose or fell during that time: a cryptocurrency that ended one time unit at £100 and the next at £1000 will show a large green block, and if it ends the next time unit at £900 will mark the occasion with a smaller red block.
Each block is bisected by a line, appearing at the top and the bottom. This represents the peak and the trough: if the cryptocurrency that ended a time unit at £1000 actually reached £1500 before dropping down to its final value, it will have a large line reaching from its top; if it sank as low as £50 during that time, a smaller line at its bottom. By reading these lines, along with the size and colour of the block, you can get an idea of the volatility of the value during the trading period – a key indicator of whether now is a good time to make a trade.
The majority of candle charts also include a bar chart element which tracks trading volume. At its simplest this shows how much value is trading hands at any given time period. This can be represented as a pure trading volume, or split into sell and buy volume: high sell volume indicates the price is being driven down, while high buy volume indicates the opposite. More detail on volume is usually made available on a separate chart, known as the “depth chart”, which is drawn as an area chart indicating the value of buy and sell orders on the book and the market price where they meet in the middle.
Market, Limit, and Stop Orders
The simplest way to buy or sell on an exchange is to make what is known as a “market” order, or “taker”. This places your order at the current market price, and is at risk of “slippage”: a particularly large order may drive the price up or down, resulting in your buy or sell taking place at a different price than expected. Many exchanges also charge higher fees for market orders.
A “limit” order is a form of “maker” order: rather than saying “I wish to buy/sell X amount of Y cryptocurrency at the best available price,” a limit order says “I wish to buy/sell X amount of Y cryptocurrency at Z price.” If the price is some distance away from the current market price, you might be waiting a while for it to be filled – if it’s filled at all – but when filled it will be done without slippage and at a lower fee rate.
Some exchanges also feature “stop” orders which automatically place a market or limit order when a particular value is reached. Setting a stop order allows you to choose a trigger point which is higher or lower than the actual market or limit order you want to make, depending on whether you’re buying or selling, making it a powerful tool, but one which must be used with care.
KYC and AML
If an exchange offers on and off-ramps into fiat currency, it is legally obliged to register as a money handling business and abide by regional banking laws. In countries including the UK and US, this means two things: Know Your Customer and Anti Money Laundering.
Under KYC regulations, exchanges are required to verify your identity. How this is done varies from exchange to exchange, but it typically involves sending across personal documents including proofs of address and a copy of your driver’s licence or passport. Without KYC verification, exchanges may only let you deposit or withdraw small amounts of cryptocurrency at a time, or prevent you from using the service at all.
AML, meanwhile, is used to detect possible money laundering attempts. If you are a heavy investor depositing or withdrawing more than £10,000 – a rule of thumb, not a hard limit – you will likely be asked to prove the source of your funds and their legitimacy. For new investors who get lucky on the cryptocurrency markets, this can be a real issue: an account which is subject to AML investigations can be frozen for months at a time, making it important to get in touch with your exchange – and, if withdrawing, your bank – as soon as possible to work through the process.