Crypto Trading: A Comprehensive Guide for UK Investors

This article discusses how to trade cryptocurrency, starting with opening an account on a crypto exchange, then funding the account with fiat currency and selecting a cryptocurrency to trade. It further elaborates on various trading strategies, including day trading, swing trading, and position trading. The article also highlights factors that influence cryptocurrency prices, such as supply and demand, before offering advice on storing crypto securely in hot or cold wallets. Finally, it touches upon the regulatory landscape and the importance of being aware of the risks involved in crypto trading, as there is currently no government protection for investors.

Forbes Advisor has provided this content for educational reasons only and not to help you decide whether or not to invest in cryptocurrency. Should you decide to invest in cryptocurrency or in any other investment, you should always obtain appropriate financial advice and only invest what you can afford to lose.

According to a recent survey carried out by Forbes Advisor, almost two-thirds (65%) of the investing public has money in cryptocurrency. Cryptocurrency is like a form of digital money. It is a way of making payments from person to person without any organisation or institution in the middle to facilitate it.

For example, if you want to pay a dog groomer, you’d either need to use cash minted and distributed by the state, or a bank transfer facilitated by the payer and payees’ banks.

If, however, your dog groomer accepted Bitcoin, the largest and best known of all the thousands of cryptocurrencies in existence and referred to by the ticker code ‘BTC’, you’d be able to make payment from your digital wallet to theirs without any fees to a middleman, or any delays that might cause.

With cryptocurrency, the infrastructure which makes payment possible is decentralised – no single person, group or interest controls it.

How to trade crypto currency

Here’s a step-by-step guide explaining how to trade cryptocurrency:

1. Open a crypto exchange account

Most crypto traders buy and sell crypto assets via a crypto exchange. Those new to crypto trading will need to choose an exchange and sign up for an account.

Each platform has its own set of features, services and fees. Choosing a platform is a matter of balancing things like cost and accessibility. To help would-be traders, we’ve produced a guide to some of the best crypto exchanges

Once a trader has chosen which exchange they want to use, they’ll need to create an account. This involves sharing some basic personal information and, increasingly, passing some light identity verification checks.

This might mean uploading a photograph of an official identity document like a passport, or following a series of prompts in front of a webcam or smartphone camera.

2. Fund the account

Before a user can begin trading, they first need to credit their account with some fiat currency. In the UK that means pounds Sterling.

Many exchanges ask for a minimum deposit of around £10 to begin trading. This applies even if the trader wants to buy assets worth pennies. For example, if they wanted to buy one Dogecoin for £0.13, they’d likely still need to deposit the exchange’s required minimum.

Once the account is credited, the user will be able to begin buying and selling crypto assets.

3. Select a cryptocurrency to trade

Users can navigate to the page of the asset they want to trade within the exchange’s website or app. For would-be traders who don’t yet know which assets they want to trade, we’ve covered some of the biggest cryptocurrencies, how they work and what they’re worth:

• Our Pick Of The Best Cryptocurrencies
• Our Pick Of The Top Artificial Intelligence (AI) Cryptocurrencies
• Large Altcoins Of 2024

4. Establish a trading strategy

There are several different ways to trade cryptocurrency. Further down this page we’ve outlined some of the main ways to engage with the market. Click here to read more.

5. Initiate trading

Once a user has chosen which assets to trade and which trading strategy to employ, they can then navigate to the relevant page(s) within their exchange’s website or app and then execute the trades.

6. Securely storing cryptocurrency

While many exchanges offer built-in crypto wallets (known as custodial wallets) some investors prefer more control over the public and private keys used to execute crypto trades. This is where third-party wallets  or ‘non-custodial’ wallets come in.

There are two main types:

Hot wallets are convenient online applications that provide storage for public and private keys. However, they are more susceptible to hacking.  The good news is, many hot wallet providers offer customer support to help recover funds if people lose their login credentials.

Cold wallets are offline devices, like a USB drive, that provide arguably higher levels of security. Hackers can’t access keys stored in a cold wallet as easily because the wallet isn’t connected to the internet.  However, the downside is that if someone loses access codes to their cold wallet, there’s limited customer service to help them regain access.

Furthermore, once a cold wallet is plugged into a web-connected computer, the ‘air gap’ is closed and the keys once again become vulnerable to hackers.

Chain of command

This whole works using blockchain technology. Blockchains are indelible, digital ledgers maintained by volunteers, governed by communities of ordinary people and distributed to anyone who wants to get involved.

Volunteers offer their time and effort in exchange for the chance to earn cryptocurrency, and encryption technology makes it practically impossible to cheat the system.

When you carry out a transaction with cryptocurrency, volunteers around the globe make a record of it in their copy of the relevant ledger. When a certain number of transactions are recorded, a block of those transactions are added to a long chain of previous blocks which represent the canonical history of transactions in that currency.

To add a block to the blockchain you first need to validate it. To do this, you need to either: correctly guess a 64-character, alphanumeric string with trillions of possible combinations, or stake your own cryptocurrency for the opportunity.

Investors lucky enough to be chosen – either because their computer rig was powerful enough to make the correct guess (or the closest guess within a 10-time limit), or they staked enough of their assets to tip the odds in their favour – will need a 51% majority of the volunteers to agree that theirs is an accurate record of transaction.

If an investor tried to claim there was more cryptocurrency in an account than there actually was, the majority would reject it. In order to cheat the system, they’d have to control at least 51% of the votes on the network. In either case the cost would be prohibitive.

When the investor’s block is added to the blockchain, they are rewarded with a small amount of a given cryptocurrency.

There are no cryptocurrency coins or notes, there are only records of transactions keeping track of who owns which assets.

Cryptocurrencies can be used to pay for goods and services, traded for other cryptocurrencies, or held onto for speculative purposes.

What is crypto trading?

Crypto trading is the process of speculating on cryptocurrency prices, and buying and selling them accordingly.

Crypto traders typically use crypto exchanges such as eToro and Uphold. These are marketplaces where traders meet to track prices and make transactions.

The idea is to buy crypto assets expected to increase in value, typically because of events in the news, the economy, in regulation and so forth, and sell them for a maximum profit before prices drop.

Ways to trade cryptocurrency

Within a chosen crypto exchange, a trader will be able to check current prices for a range of tokens, and see how they’ve been performing over the past hours, days, weeks, months and even years.

Exchanges will generally show users the tokens that are trending upwards and downwards in price, new tokens, popular tokens and so forth. Users can use all of this information to decide which coins to buy and sell.

Buying a cryptocurrency means someone else is selling with both parties just using the exchange as an intermediary. When there are more buyers than sellers, the price of a token tends to rise – and vice versa.

How and when an investor chooses to buy most likely depends on his/her approach to investing, what they may hope to gain, and the risk each trader is happy to tolerate as part of the transaction.

Day trading

Day traders buy and sell tokens within the same day to take advantage of movements in the market. This offers the potential for quick returns and mitigates risks of big price drops from one day to the next.

On the other hand, day trading is such a short-term strategy that it prevents investors from riding out price dips that might correct themselves over longer periods.

Swing trading

Swing traders hold coins for longer periods of time, monitoring prices of assets over a period of weeks to determine the best assets to buy, sell and hold. 

Observing price movements over longer periods can help traders to make more informed decisions, but potentially requires more discipline and the ability to not act impulsively on changes.

Position trading

Position trading takes a long-term view on crypto investing. Position traders buy coins in anticipation they’ll make gains over the longer term, and are less concerned with day-to-day volatility.

Position trading also has the benefit of being able to build a portfolio over time, starting with a small investment and increasing it over time. The trade-off is that investors cannot make quick returns.

What makes prices change?

There are countless factors that can affect the price of a cryptocurrency, but supply, demand and sentiment are useful bellwethers for predicting trends.

When demand is met with sufficient supply, or more supply than is needed, prices tend to remain flat or fall. In crypto, supply is determined by how coins are mined.

For example, the amount of Bitcoin given to miners who successfully add a block to the blockchain just halved, going from 6.25 BTC to 3.125 BTC.

This drastic slowdown in the rate of new Bitcoin issuance could, in theory, push prices up as supply becomes constrained. In fact, we’ve seen Bitcoin prices rally in the lead up to the halving event. However, if demand were to drop significantly, the supply squeeze would be insignificant.

Public backing

Demand is the other side of the coin. When more people are interested in buying something, the more those who can afford it are willing to pay for its relative scarcity. If, for example, a major public figure were to say they believed a coin would become very valuable, their support could pique interest and lead demand to outstrip supply, pushing prices up.

On the other hand, if a coin begins to be seen as less valuable – perhaps if there were rumours of liquidity issues behind the scenes – demand could fall and sellers would need to accept lower prices in order to get rid of their coins, hence prices fall. According to a Forbes Advisor survey, 58% of respondents said the recent cryptocurrency crashes affected their investments.

Keeping abreast of the news

Monitoring the news for changes in these three factors can help to predict how prices might change, but countless external factors are also at play.

Storing crypto

To make trades with crypto assets, investors need to provide their public and private keys. They can’t authorise a trade without these long alphanumeric strings,  the latter of which should be known to the owner alone.

Crypto owners’ keys need to be stored in a secure wallet to prevent their unauthorised use. Most, if not all, crypto exchanges offer a free wallet in which to store keys.

These ‘hot’ wallets live online, which makes them vulnerable to hackers. On the other hand, they’re convenient and come with support from the provider via account recovery if a user were to, for example, forget their crypto exchange password.

Investors can store their keys offline to keep them at arms’ length from hackers, but they’ll have to pay for a USB device and they won’t get third party support if they lose their device or forget their passwords for it. Plus, the protection from hackers is weakened once one plugs their ‘cold’ wallet into a web-connected computer.

The table below, from Statista (November 2023) shows the most popular methods to store cryptocurrencies in the UK.

How to read the crypto markets

Crypto markets are volatile and unpredictable. Traders typically monitor the four forces of demand, supply, sentiment and competition to guess

Constrained supply can inflate prices, while increased supply tends to have the opposite effect. Demand behaves similarly. The more demand there is for an asset with limited supply, the higher prices tend to climb. When demand falls, prices usually fall too.

The performance of existing crypto assets and the introduction of new crypto assets can affect the level of competition in the market, which in turn moves prices.

Finally, the way people feel about crypto can also affect prices. For example, recent moves to launch a Bitcoin ETF has lent mainstream credibility to a market that some investors see as too volatile and unpredictable. As a result, prices went up.

Crypto exchanges offer swathes of graphs and charts that reflect these four factors. Traders can interpret these data sets to read crypto markets.

Wealth warning

Whatever investors decide to trade in, wherever they choose to do it and whenever they buy or sell, they should be aware that crypto is extremely volatile and, for the time being, unregulated.

This means they’ll get no support from the government if they’re scammed or lose money because an exchange or token collapses.

The government is currently consulting on bringing the crypto market into regulation, which would force providers to play by the same rules as traditional financial services companies or else lose their trading licences. This would offer consumers much greater protection if implemented.

Either way, the Financial Conduct Authority (FCA) – the UK financial regulator – has taken great pains to remind would-be investors they should be prepared to lose all of the money they put into crypto.

The advantages and disadvantages of trading cryptocurrencies are almost completely subjective, and depend entirely on how you feel about crypto as a concept.

Enthusiasts often argue crypto can serve as a hedge against inflation, that it’s faster and cheaper than centralised fiat currencies, that it’s free of interference from vested interests and that it’s private.

Detractors say cryptocurrencies are volatile, unpredictable and lack real-world utility. Environmentally-minded critics say certain cryptocurrency systems are unsustainable because of the huge amounts of energy they use.

Without regulation, some people also fear investors are exposed to rogue traders, scams, platform collapse and other risks. Some say the relative privacy of cryptocurrency, coupled with a lack of regulation, makes it a haven for fraudsters, money launderers and criminals.

Cryptocurrency is unregulated in the UK. The UK regulator, the Financial Conduct Authority, has repeatedly warned investors that they risk losing all their money if they buy cryptocurrency, with no possibility of compensation.