What is a cryptocurrency?
Cryptocurrency is the latest trend in the trading world and arguably the most popular one. But how did it come to exist? And why? As you very well know, there are hundreds, thousands of currencies humans used to trade and barter with. In the modern developed world, these currencies all come down to money kept in banks and various institutions having a say in how you manage your own funds. And here cryptocurrency comes into the picture: unregulated, no intermediaries, digital and virtual, this type of tech-based currency makes sure every trade/transaction is on a peer-to-peer basis, with no one to oversee and charge you extra fees. But the term, “cryptocurrency”, is not as simple as it seems. You might even say it's a classic chicken and egg situation: the first peer-to-peer based system, Bitcoin (BTC) was developed long before the term saw the light of day (in particular, two years later).
Despite what we said previously, there is some physical cryptocurrency, but it has no real value or advantages over virtual cryptocurrency. People mostly buy it as something to remember a trade by, or as a souvenir, like Litecoin, Ethereum, Cardano and the like. Yet some physical bitcoins did contain BTC, or they simply were storages you can put your BTC in. However as similar as they might seem to a real coin, there are major differences between the two. Think of a gift card, or a bank card. They hold no real value; it's the money deposited that counts. There were even wallets and golden-plated bars designed to store bitcoins. Some of them even came with bitcoins, which was very neat.
As we've mentioned, cryptocurrency has no real monetary value. So what's the deal? It's not regulated, you can't really put it into your wallet and use it to buy stuff in a shop. What's the point? In order to work, cryptocurrency requires every participant to agree that it has value; crypto transactions will be negated if participants do not consider trust to be crucial in all financial relationships and transactions. Cryptocurrency also offers its resources for people to make new products with it. Ever heard of smart contracts?
Basically, it all comes down to a distributed, decentralised ledger maintaining a secure online record of all transactions made with cryptocurrency. It stores all information on everything that goes down with crypto. Transactions form blocks that when grouped together are called a blockchain. The most valuable thing about cryptocurrency is an electronic key which you can use to access a digital wallet storing your cryptocurrency. A key is also what makes the existence of physical bitcoin even remotely possible as it also contains a digital key.
There are tons of cryptocurrencies, over seven thousand, all over the world, for example, IoT Chain (ITC), Litecoin (LTC). But the ones that stick out most are a bitcoin and ethereum (Ethereum, ETH).
Types of cryptocurrencies
Technically, there is more than one way to get cryptocurrency. First, you can mine it, the term which you've undoubtedly heard before; this means you have to solve a complex mathematical problem to add a new block and therefore get cryptocurrency, if you're lucky. There's also such thing as a mining fee, something that is given to a miner or (most likely) a computer to verify a transaction added to the blockchain. Second, you can forge (mint) cryptocurrency; basically, you create new blocks by using the Proof-of-Stake algorithm and in exchange, you get a reward. It can be new cryptocurrency or a portion of the fees. Third, there's ICO: an initial coin offering is roughly equivalent to an initial public offering (IPO). The procedure is virtually the same: a company seeks to raise capital and launches an ICO. An ICO usually involves bulk listing. This also means that it has a limited volume and can only be purchased from those who whitelisted for the ICO, though sometimes, an admin will issue some extra cryptocurrency, but this never happens at once; you've got to bide your time and wait.
Investors can buy into an ICO like they would with an ordinary security, only with an ICO, you get a cryptocurrency token. It might represent a stake in the issuing company, therefore granting you access to the company's possible revenue down the road and dividends; it also functions like a unit of currency you can benefit from since it lets you enjoy the service the token confers.
Over three thousand cryptocurrency exchanges ensure that the cryptocurrency market is as busy as a bee. Some cryptocurrency exchanges issue their own blockchain-based tokens. For example, Binance, the largest cryptocurrency exchange, issues Binance Coins that are used to facilitate crypto trading and to pay for services and fees. Binance does not feature every cryptocurrency there is, for example, IoT Chain (ITC), but it’s the largest crypto exchange to date.
What makes the cryptocurrency market different from other financial markets? It is open 24/7, with no weekends or public holidays affecting the trading. The price of cryptocurrencies varies across crypto exchanges.
There are two kinds of cryptocurrency markets: organised and unorganised, where you can exchange digital currencies online for regular fiat currencies or other cryptocurrencies.
But that's not all: over 15,000 shops accept BTC and ETH (ethereum) as payment for goods and services, so feel free to take advantage of it and buy stuff with cryptocurrency you mined/bought. PayPal accepts BTC and ETH for online trading at an internal rate.
If you want to trade cryptocurrency, you don't have to start with an organised cryptocurrency market. There are, of course, other options to consider. For example: 2021 saw the registration of some exchange-traded funds involving bitcoin investing. It was straight-up part of their operational strategy. What is curious about them, is that they are subject to securities legislation regulation and as such typically pose fewer legal risks, so this is quite a valid option to consider.
When it comes to mining cryptocurrencies, like ethereum, today you will find yourself struggling to mine a single block alone, let alone to actually mine cryptocurrency. You'll have better luck joining a mining pool. Rankings are updated regularly, so you can easily choose the right fit for you: make sure to consider the ranking since it can actually accelerate the generation process and therefore you and your pool will get a reward faster. Time is literally money here.
Cryptocurrency markets sprung up only a short while ago. This explains why the price directly depends on supply and demand, with virtually no price support, and the support that's in place is very weak. You know how it is: it's the same story with regular currencies. Prices plummeting and soaring up in one trading day is a perfectly normal situation. All in a day's work, or so they say. Sometimes, even celebrities can affect cryptocurrency exchange rates, and in a major way, at that. And they don't have to go out of their way for that to happen, too—a comment or two will suffice. Case in point: Elon Musk. Surely, you know who we're talking about: a famous businessman, he kept the Dogecoin exchange rate at bay, making it reach up considerably by just a few off-hand comments on Twitter. That's all it took for the currency to boost, even though it'd first started as a joke. Musk also had his hand in the bitcoin exchange rate; however, he didn't have to do much: he just mentioned Tesla would accept bitcoin as payment for their cars. But the hype was short-lived: the company decided to forego that statement and stopped accepting bitcoins.
But still, it follows that more companies accepting cryptocurrency means a higher ranking and price. Everything is connected.
News about regulation of the cryptocurrency market by government agencies has a huge impact on pricing. You can also say that coin movements between cryptocurrency exchanges and large crypto wallets affect the price, too, though it's not a direct impact, of course. Poor liquidity on the market also has a say in cryptocurrency price. So, as you can see, there is a world of potential price-reducing or increasing factors when it comes to cryptocurrencies.
Feel free to use chart patterns to track price movements of large-cap cryptocurrencies; these patterns are a boon to investors and traders who'd like to have a go at investing in cryptocurrency. Yes, that's exactly what it means: you can apply all the knowledge you gained on technical analysis rules and patterns and make the most use of them with cryptocurrency price chart.
If you're a novice, there's also a CFD option, which means a contract for difference. Some bonus points: you don't have to buy and keep cryptocurrency, nor can you exchange it for fiat money if you already have a fiat currency account opened with a broker. So remember that.
As we've already mentioned, investing and trade are not regulated, so no holidays or days off are in place. It's round the clock, 24/7, non-stop trading for those who dare to dream big.
You can use leverage and open short positions, and you don't even have to buy the asset first. That's a major pro, don't you think?
You can even open a special account and trade other financial instruments using cryptocurrency. You just have to find the right broker offering services like that.
Admittedly, despite all the advantages, cryptocurrencies are the riskiest financial instrument when it comes to trading. Here, you've got to be extra careful: the bitcoin or ethereum price can plummet or skyrocket by 25–30%, even though it's the most liquid cryptocurrency. Imagine what can happen to other cryptos, like IoT Chain (ITC)! Lesser-known altcoins can experience much greater volatility.
Since the market is unregulated, there is a great chance of encountering fraud and scams, as it provides criminals with new and fresh opportunities for theft. Cryptocurrency-related crimes are on the rise as they're getting more digitally advanced and irreversible. So our advice is, focus on high-cap cryptocurrency, cryptocurrency exchanges or broker rankings; this will help you avoid infrastructure risks.
Start small; do not go all in and risk losing your livelihood. Maybe open a separate account while you're at it to be sure you've done everything to be safe.
Leverage is a great way to make a quick buck if the price changes in the direction you want it to, but risks are higher, and so are the losses. So think twice before venturing into crypto; it is an enticing, but risky market.