What are Cryptocurrencies and why were created
Instead of getting too technical, here’s the easiest way to think about cryptocurrencies.
Cryptocurrencies are basically the money on software platforms.
It’s important to keep in mind that the companies that are behind these cryptocurrencies are not only creating a new form of currency but a new software platform.
Examining how these platforms work (the so-called “fundamentals”) will help you understand cryptocurrencies.
On each of the platforms like Windows or Dropbox, a type of money is used, in exchange for using the platform. Each of these systems also has a database connected to it. Cryptocurrencies essentially replace the US Dollars (or your local fiat currency) that you use to purchase these software services. The “database” that cryptocurrencies give you access to is based on blockchain technology.
But wait, what are the software services that you are getting? Isn’t a cryptocurrency like Bitcoin just a currency, like US Dollars?
The goal of cryptocurrencies is usually to improve on some type of existing software system or network. Cryptocurrencies like Bitcoin want to make financial transactions more open and accessible to everyone around the world. Other cryptocurrencies like Ether, Litecoin, and Ripple solve other problems.
As you’ll learn more about the cryptocurrency market and you’ll actually start trading Bitcoin and other digital currencies, you’ll find that there are tremendous opportunities. With some cryptocurrencies, it’s potentially like being able to get pre-IPO shares of Apple or Google.
Cryptocurrency market – higher volatility and less liquidity
The cryptocurrency market may be more volatile than one might think. There are numerous instances when the price of Bitcoin, relative to the U.S. dollar has turned erratic for a number of reasons.
Volatility is not something new to the investing world and any type of market has undergone extreme volatility. One of the fundamental reasons why shares, commodities or currencies turns volatile is because when some news or information is released which is not discounted by the markets already.
The volatility that follows later, which can result in either a sharp appreciation or depreciation of the security’s price in question is simply a result of price adjusting to the new piece of information. In the Bitcoin world, volatility is for the same reasons, but also additional factors such as regulatory warnings from agencies, a hack into an exchange, and so on.
The limited liquidity and availability of Bitcoins mean that just a few transactions can quickly and significantly impact the price of Bitcoin. Proponents of Bitcoin claim that volatility will settle as the technology matures and Bitcoin becomes more widely accepted. If one looks close enough, you can see that the volatility in Bitcoin has been steadily falling over the past couple of years, while liquidity is increasing fast.
The most popular form of cryptocurrency trading
Only those with specialized, high-powered machinery are able to profitably extract bitcoins nowadays. While mining is still technically possible for anyone, those with underpowered setups will find more money is spent on electricity that is generated through mining. In other words, mining won’t be profitable on a small scale unless you have access to free or really cheap electricity.
Instead of time-consuming, high costs mining unsuited for most people, there is an alternative way that doesn’t require dedicated hardware or virtual wallet, nor investing in bitcoin hyips or bitcoin cloud mining.
The most popular form of cryptocurrency trading – CFD trading – enables you to speculate on the rising or falling prices of the fast-moving global cryptocurrency market (or instruments) such as Bitcoin, Bitcoin Cash, Ethereum, Litecoin, or Ripple.
Contracts for difference (CFDs) let you go long or short on cryptocurrencies, without needing large amounts of money to get started.
Cryptocurrency trading with CFDs have 2 major advantages:
- The potential for better risk/adjusted returns
CFDs are a leveraged product, which means that you only need to deposit a small percentage of the full value of the trade-in order to open a position. This is called ‘trading on margin’ (or margin requirement). The availability of leverage in cryptocurrency trading magnifies gains and losses, creates the unmatched proﬁt potential for those with limited trading capital IF they learn how to control the downside risk. For example, with 5:1 leverage in cryptocurrency trading, a 20% price fluctuation means 100% proﬁt. It also means a 100% loss.
- As easy to profit in bear markets as in bull markets
In Cryptocurrency CFD trading it’s as easy to proﬁt from falling prices as from rising ones. You can also use CFD trades either to speculate on movements in financial markets or to hedge existing positions or your existing crypto portfolio.
Example: selling short CFDs on Bitcoin with the scope of offsetting exposure to price fluctuations in the opposite direction with a previous Bitcoin purchase or holding. The hedging method can also be used when a Cryptocurrency has reached your profit target and you want to lock in gains without actually selling them.
How do you value a cryptocurrency?
Very simple is just about how much SUPPLY there is and the nature of the DEMAND. To measure supply and demand for a given instrument one needs to look at the charts. That’s because a chart is a shortcut of looking at all the available news and data since the price chart factors in all the fundamentals and quickly shows you who’s winning the battle between the buyers and the sellers.
This is especially important in Cryptocurrencies because there is so much news and technologies from so many different sources and it’s impossible to keep track of all of it.
And there are some amazing benefits of learning how to read the charts to really help boost your profits and decrease market risk via the use of Technical Analysis and its concepts.
Technical Analysis is the study of the behavior of the market and market participants. We try and identify the direction of the primary trend and invest accordingly. As Technicians, we can apply our price-focused approach to any market, whether it’s stocks, commodities, ETFs, or even Bitcoin. If it is liquid and driven by the supply and demand dynamics in that particular market, then applying our methods of price analysis makes perfect sense and it works very well.
Traders and investors really enjoy it, whether they are actively trading it or just interested in the product.
Cryptocurrency needn’t be any riskier than other markets
The cryptocurrency market has a gotten a reputation for being excessively risky due to a combination of:
- High failure rates due to beginner traders who failed to do their homework and understand the risks associated with the high volatility and leverage commonly used in most cryptocurrency trading.
- Brokers who failed to provide sufﬁcient training to deal with the risks of using leverage in volatile markets.
- Crypto exchanges failed to meet their financial obligations due to poor regulations and client protection.
However, you can reduce and manage the risks. There are:
- Highly regulated brokers, like Admiral Markets, offer the highest level of security protection and allow you to adjust your exposure down to what you can handle, and provide guidance on the appropriate level.
- Alternative ways to benefit from cryptocurrency, which are no riskier than stock trading.
- A variety of techniques to reduce risk in trading, as well as new instruments for simpler, safer cryptocurrency trading: social trading or automated trading.
Making money trading cryptocurrency can be easier than in stocks and other more traditional asset markets, particularly in bear markets. Until recently, there was no single source to invest in the crypto market via professional money managers or trading robots. No longer. This is the only crypto trading account to gather these tools into one collection.
Cryptocurrency Trading Steps
Take a look at the 5 steps to trading cryptocurrency.
Step 1: Make a cryptocurrency brokerage account.
Unless you already own cryptocurrency, you’ll need to make an account with a crypto brokerage. Binance, Coinbase, and eToro are among the best crypto brokerages on the market. All 3 of these options offer a simple user interface and a variety of altcoins to choose from.
To make an account, you’ll need to provide your crypto brokerage with personal identification information, similarly to opening a forex account or a stock account with a stock broker. Some common information you need to provide when setting up your account includes your Social Security number, address, date of birth, and email address.
Step 2: Fund your account.
Once you’ve signed up with a crypto brokerage, you’ll need to connect your bank account. Most crypto brokerages offer bank funding through debit cards and wire transfers. Wire transfer is typically your cheapest option to fund your account –– it’s free on most crypto exchanges.
Step 3: Pick cryptocurrencies to invest in.
Most active cryptocurrency traders allocate most of their capital to Bitcoin and Ethereum. These cryptos move more predictably than smaller altcoins, so trading with technical indicators can be easier.
Many crypto traders allocate a portion of their capital to smaller altcoins. Although small mid-market cap cryptos are riskier than large-market cap cryptos, they offer higher upside potential. Many small altcoins have risen over 1,000% in a matter of months, making them attractive investments for risk-tolerant investors.
Read our guides to decide what cryptos to trade and how.
Step 4: Choose a strategy.
There are a plethora of trading indicators to choose from, and most traders take multiple factors into consideration when buying and selling cryptocurrency. If you’re new to investing, you may want to consider purchasing a trading course.
If you’re an experienced trader, you may already have a strategy you use to trade forex. Forex trading strategies are also commonly used for cryptocurrencies.
Step 5: Store your cryptocurrency.
If you’re actively trading your cryptocurrency, you’ll have to store your funds on the exchange to have access to them. If you’re buying your cryptocurrency to hold for the mid to long term, then you should get a cryptocurrency wallet.
Cryptocurrency wallets come as software wallets or hardware wallets. Both are secure, but hardware wallets offer the best security, as they store your crypto on a physical device, offline. Ledger is a great hardware wallet brand many investors trust to store their crypto assets on. If you’re looking for a software wallet, there are several options on iOS, Google Chrome, and Android that is free to use.
The Most Popular Cryptocurrencies
#1. The King of Cryptos: Bitcoin
Bitcoin has turned into the go to cryptocurrency for traders. But for investors, who can hold through the volatility, they see advantages to bitcoin as well. Once 21 million bitcoins have been mined, no new coins will be created ever.
Looking at it from a supply/demand stand point, long-term investors stand to gain. Plus, Bitcoin is the base currency that you need to purchase if you want to end up getting some of the other currencies on this list. You can’t simply buy many of these others with USD – you need BTC.
Bitcoin is one of the easiest cryptocurrencies to invest in.
#2. The king of DeFi: Ethereum
Ethereum was initially seen as the cryptocurrency that could shove bitcoin off of its thrown as the dominant currency. It didn’t work out that way but Ethereum holds a solid #2 by market cap.
Ethereum did provide a few enhancements over bitcoin. Namely smart contracts and 5X higher transactions per second (TPS) than bitcoin.
If you’re curious about Ethereum, check out our guide on How To Invest In Ethereum.
#3. Ripple: new payment ecosystem
Ripple is more than just an exchange of value. It helps make cross border financial transactions more efficient. By working with financial institutions, Ripple lowers currency exchange rates and provides for real-time exchange rates.
Before Ripple, banks often had to use intermediaries for cross border transactions. These were expensive and could takes days to complete. Ripple has greatly improved efficiencies in how cross border transactions operate.
For an investor, this shows that Ripple is providing real value in the world beyond the basic store or exchange of value premise.
#4. Litecoin: fast and affordable
Litecoin has similarities in its infrastructure to bitcoin. Litecoin’s transaction fees are far less, at around $0.35 per transaction. Just like Ethereum, Litecoin also has higher TPS than bitcoin.
Litecoin has an $81 million cap on coins that can be mined. This means Litecoin could potentially see steady increases in price, depending on future demand. Litecoin is currently ranked at #5 by marketcap so it isn’t a slouch by any means.
Check out our guide on How To Invest In Litecoin.
#5. Bitcoin Cash (BCH): the little brother
Bitcoin Cash will forever hold a special place in the history of cryptocurrency. It is one of the earliest hard forks from Bitcoin. And thus far, it’s the most successful one.
Because cryptos are decentralized by nature, when there is debate about possible issues to one’s underlying code, no changes can be made without a consensus. If miners and developers can’t come to an agreement, the digital currency can be split – or forked.
In this case, there was a heated debate about Bitcoin’s scalability. Bitcoin remained the same. And Bitcoin Cash was created with updates to its code. This code change increased the size of blocks from one megabyte to eight. This allowed for much faster transaction times.
Although it still has some catching up to do with some of its competitors, Bitcoin Cash’s scalability could allow it to accrue value even faster than much of the competition.
Like many other financial markets, the cryptocurrency market has evolved its own jargon. Some of the key terms used by market operators are defined below.
- Block: A collection of transactions permanently recorded on a digital ledger that occur regularly in every time period on a blockchain.
- Blockchain: A constantly growing list of blocks in a peer-to-peer network that records transactions.
- Cryptocurrency exchanges: Also called digital currency exchanges, these generally consist of online businesses that allow customers to exchange cryptocurrencies for fiat currencies or other cryptocurrencies.
- Cryptocurrency wallet: A secure digital account used to send, receive and store digital currencies. Crypto wallets can either be cold wallets that are used for storing cryptos in an offline environment or hosted wallets that are hosted by 3rd parties. Hosted wallets store your private keys and provide security for your digital currency balances.
- Distributed ledger: A network of decentralised nodes or computers that connect to a network where transaction data is stored. Distributed ledgers do not have to involve cryptocurrencies and can be either private or permissioned.
- Fork: Also known as a “chain split,” a fork is a split that creates an alternate version of a blockchain that then leaves 2 blockchains running simultaneously. For example, Bitcoin and Bitcoin Cash came about due to a fork in the original Bitcoin blockchain. Another type of fork is known as a “project” or “software fork.” This occurs when cryptocurrency developers take the source code of an existing altcoin project and create a new project. For example, Litecoin is a project fork of Bitcoin.
- ICO: An initial coin offering (ICO) occurs when a new digital currency or token is sold, typically at a discount, to its first set of investors. An ICO lets issuing cryptocurrency companies raise funds from the public to support their coin’s development and maintenance.
- Mining: A computationally-intensive process performed within a cryptocurrency network where blocks are added to the blockchain by verifying transactions on its distributed ledger. Miners are rewarded with digital coins as compensation for their successful computational efforts.
Best Cryptocurrency Brokers
Many people believe that cryptocurrencies are the future of finance. When you’re ready to leap into crypto, choosing a broker to trade or invest in cryptocurrencies is one of the most important steps to your success in the crypto market.
Get started now with Investing Magnates’s picks for the best cryptocurrency brokers and choose the right one for you.
Since different brokers have different strengths, you need to figure out what kind of broker best suits your cryptocurrency interests. Some brokers provide a social trading platform where you copy other cryptocurrency traders’ trades in your own account. Others can offer the ability to make transactions in a broader selection of altcoins.
Choosing the best crypto broker depends largely on addressing your needs as an investor or trader. The following list crypto brokers been selected for different reasons to meet the needs of differing cryptocurrency trading and investing styles.
- Best for Social Trading: eToro
- Best for Ease-of-Use: Gemini
- Best for New Investors: Coinbase
- Best for High Volume Forex Traders: CryptoRocket
- Best for DeFi Exchange: Crypto.com
- Best for Crypto Futures: Kraken