What are cryptocurrencies? How to trade it?

Asset classes

Cryptocurrencies
  • Cryptocurrencies are types of digital currencies and some unique codes create them.
  • They dont associate with traditional banking and government systems as they operate outside of them.
  • There are several techniques to start cryptocurrency trading. The first one is a long-term technique to buy and hold cryptocurrencies for gain over a longer period of time. The second is cryptocurrency trading on an exchange. The last is cryptocurrency trading with the help of a broker.

Cryptocurrencies have become the mainstream and the dawn of the new modern economy – a 21st-century phenomenon that is absolutely impossible for investors to ignore. 

Cryptocurrencies are the forms of digital money and that is why they are also known as digital currencies. This phenomenon in modern economies is mesmerizing the whole world. It has become increasingly difficult for people interested in the economy to ignore. And, the cryptocurrencies phenomenon has become the focal point for investors and traders all across the globe. 

People from around the world want to know more about cryptocurrencies. They want to know what are cryptocurrencies and how do cryptocurrencies work. They also want to know how to trade cryptocurrencies. Cryptocurrency aficionados and enthusiasts consider understanding cryptocurrencies as crucial as breathing. So, if people have questions about cryptocurrencies, we have answers. In today’s post, we are going to share with you all that you need to know about cryptocurrencies, how do they work, and how you can trade cryptocurrencies. 

What are cryptocurrencies? 

Cryptocurrencies are types of digital currencies and some unique codes create them. They dont associate with traditional banking and government systems as they operate outside of them. Cryptocurrencies are also known as virtual currencies because they only exist on the internet and you cannot touch them. They have become a medium of exchange at a level of person to person and also support direct payments between people. 

Although cryptocurrencies’ history dates back to the 1980s, they became a global phenomenon back in 2017. They never caught the attention of people despite existing for years but when Bitcoin price went sky-high in 2017 and crossed the twenty thousand dollars threshold, digital currencies began to overwhelm the world. Now, cryptocurrencies are the talk of the town and everyone is interested in digital currencies. 

What are cryptocurrency tokens?

Cryptocurrency tokens are in fact value units. They base on top of an existing blockchain. Crypto tokens are value units because they represent a digital asset or particular use. You can use tokens to make investments, purchase things, or they can also be of some store value. Although cryptocurrency tokens are compatible with the cryptocurrency of a particular network, they are a different class of asset. The major difference between cryptocurrency and cryptocurrency tokens is – cryptocurrency functions independently using its own platform, crypto tokens base on top of an existing blockchain. 

How cryptocurrencies are different from fiat currencies? 

Fiat currencies or paper currencies have legal status. The paper currency of a country is officially recognized currency and creditors must accept it as payment of debt. Moreover, official paper currencies are centralized and a central issuing bank guarantees them. On the other hand, cryptocurrencies don’t have a legal status and it isn’t obligatory to accept them as payment of debt. They are also decentralized, unregulated, and unguaranteed by a central bank. 

How you can use cryptocurrencies? 

Cryptocurrencies are so unique characteristically that they share characteristics of both, currencies and investments. A lot of debate is going on this subject whether cryptocurrencies are currencies or investments. Although cryptocurrencies are acceptable on many platforms to buy goods and services, they aren’t widely accepted. They aren’t widespread enough and the level of volatility makes it impossible for their widespread use as currencies.

You can also use cryptocurrencies as investments where you can buy and hold cryptocurrencies in order to make profits. However, cryptocurrencies as an investment is another complicated case as they don’t have any inherent physical value. Cryptocurrencies’ value can increase or decrease in a way that is impossible to predict. What is the reason? The reason is individual investors have no tools or measures to predict where supply and demand for cryptocurrencies end up. Therefore, cryptocurrencies are difficult and extremely risky to trade until clear regulations. Regulations will help us how to use cryptocurrencies and what is the future of cryptocurrencies. Although regulators have started their journey, we aren’t there yet.

Understanding important cryptocurrency terms

Before heading forward, it is important to understand some key cryptocurrency terms. Without understanding them, we cannot thoroughly understand the different aspects of cryptocurrencies. 

1. Blockchain

A blockchain is a key concept and term associated with cryptocurrencies. It is a kind of database that stores a record of digital currency transactions. A blockchain stores transactions in groups or blocks. It continuously creates new blocks as an extension of the existing groups or blocks. A blockchain forms blocks and then a chain of blocks, that is why it is known as a blockchain. The data regarding new crypto transactions keeps storing itself in those blocks and thus blocks continue to build upon themselves. 

2. Decentralized

Decentralized means there isn’t a central bank that backs cryptocurrencies and thus, they are decentralized. 

3. Distributed Ledger Technology (DLT)

Distributed Ledger Technology (DLT) means the data isn’t stored on a centralized location like regular databases. Conversely, DLT stores digital currency data on multiple locations simultaneously. Moreover, a transaction gets permanent as soon as it gets recorded. 

4. Exchange

Exchanges are marketplaces where you can easily buy and sell cryptocurrencies. 

5. Wallet

Wallet is a type of electronic wallet where you can store your cryptocurrencies. There are various exchanges that offer the facility of digital wallets.

6. Cryptocurrency mining

Crypto mining is a term that demonstrates a transnational process to record crypto transactions. It involves solving complicated functions using computers and cryptographic algorithms and store data on a blockchain. As cryptocurrencies involve no central authority, it is always difficult to verify transactions before recording them on a ledger. Cryptocurrencies use cryptographic algorithms to verify and record crypto transactions and that is known as cryptocurrency mining. Cryptocurrency miners use their skills and computer to do cryptographic work and add new transactions to the ledger. Miners get cryptocurrencies for themselves as a reward for their efforts.

7. Popular currencies

You should also know the names of popular currencies. Bitcoins is the first and the most popular cryptocurrency in the world. Altcoins include all other cryptocurrencies such as Ethereum, Bitcoin, Neo, Stellar, Dogecoin, etc. 

What are the main characteristics of cryptocurrencies? 

The following are some revolutionary characteristics of cryptocurrencies.

1. Pseudonymous

The world of cryptocurrencies connects neither accounts nor transactions to real-world persons. You receive your digital currency on an address consisting of 30 characters of randomly seeming chains. Your owned digital currencies are stored in digital wallets. Although crypto transaction flow analysis is possible, it is impossible to relate any real-world identity with an address. 

2. Exceptionally secure

A public key cryptographic system ensures exceptional security of cryptocurrencies. Strong cryptographic algorithms and addresses consisting of 30 characters make it impossible for crypto criminals to breach security protocols. 

3. Extremely fast and global network

Cryptocurrency network is extremely fast and global. Crypto transactions are confirmed and verified instantly. Moreover, they are also indifferent to a user’s physical presence as cryptocurrency transactions happen on a global network of computers. That means it doesn’t make a difference whether you are sending your digital currency to one of your neighbors or a person across the seven seas. 

4. Irreversible

Cryptocurrency transactions are irreversible as soon as they are confirmed. If you send your holding to the wrong address or a scammer, you cannot reverse a transaction.

5. No need to take permission

A software, that everyone can download and use, facilitates buying and selling of cryptocurrencies. There is no gatekeeper who can prevent you from making any transaction. So, you don’t need anybody’s permission. 

How to trade cryptocurrency?

After understanding the basics of cryptocurrency, it is time now to learn how to trade cryptocurrency. Learning how to trade cryptocurrency, however, isn’t as easy as it seems. The arena of trading and investing is full of uncertainties, surprises, and risks. When it comes to trading and investing in cryptocurrencies, the arena becomes more uncertain and risky. However, when you learn how to trade cryptocurrencies with intention and purpose, you start unraveling the mysteries. 

Crypto wallet and crypto exchanges 

Before starting cryptocurrency trading, you need to know about the crypto wallet and crypto exchanges. First of all, you need a crypto wallet to store and secure your holdings. If your intentions are only to buy and hold cryptocurrencies, you only need to set up a crypto wallet. Once you have a digital wallet, you can use your fiat currencies to buy a digital currency of your choice. 

However, it is important to note that wallets are not regulated and a certain degree of risk is associated with them. There is always a risk of cybercrime. Mt. Gox, the first cryptocurrency exchange, went bankrupt and its clients lost access to their accounts having cryptocurrencies worth millions of dollars. Soon investors begin to lose faith in unregulated markets. Therefore, private digital wallets are the best option. But, you should seek a platform that offers maximum security. 

On the other hand, if you intend to trade cryptocurrencies, you need to set up an account on a cryptocurrency exchange. Crypto exchange allows you to trade cryptocurrencies and profit from your trading. 

Main cryptocurrency trading and investing techniques

Your cryptocurrency trading policy depends on – whether you want to capitalize on the long-term increase in values of cryptocurrencies or you want to take advantage of daily price fluctuations. There are three main cryptocurrency trading and investing techniques.

1. Long-term technique – buy and hold

As we already know that cryptocurrencies were introduced back in the 1980s. However, they had to wait for almost thirty years to gain worldwide popularity. When Bitcoin started in 2009, many market wizards and shrewd investors saw potential. They invested in Bitcoin with the aim of making millions in the next few years. AND guess what, they were right. After 8 years, Bitcoin values increased to a level beyond expectations and imagination. An investment of $100 in 2010 proved so rewarding that it turned to millions. So, the central idea of the discussion is – there is potential in long-term investment. Moreover, cryptocurrency markets are still not fully mature and have a lot of potentials. Therefore, buying and holding cryptocurrencies can prove one of the best investment decisions.

2. Cryptocurrency trading on an exchange

Cryptocurrency trading on an exchange is another viable option for traders. Crypto trading on an exchange revolves around price speculation – the right prediction brings profit and vice versa. However, the number of cryptocurrency exchanges has significantly increased recently. No regulatory authorities regulate those exchanges in the way other financial institutions can be. Therefore, it is absolutely imperative to do your homework with due diligence and seek an exchange that offers the ultimate security. 

Besides the assessment of security concerns, traders should also carefully evaluate the levels of leverage. Traders who are seeking to initiate larger positions than the available capital, they should assess margin trading option. Although most of the exchanges offer leverage or margin trading, the leverage varies significantly. Moreover, leverage isn’t a good choice for novices as they don’t have the experience and skillset to do what experienced traders do.

Another key factor to consider is the payment method. When choosing an exchange for trading, thoroughly conduct a payment method analysis. Although most of the exchanges support card payments, the fees are so high. Therefore, most of the traders prefer comparatively slower but cost-effective payment methods.

3. Acquire services of a regulated broker

The third option available to cryptocurrency traders is to acquire the services of a regulated broker. A broker removes the worries associated with a digital wallet. A broker manages your trading and helps you capitalize on price fluctuations. Moreover, most brokers offer the highest protection of your funds. 

Brokers also offer leverage or margin trading with a variety of cryptocurrencies. It helps you increase your gains as you can use more capital than you originally have. However, leverage also brings high risks and therefore, requires precautions to keep risk at a minimum level. 

Some tips to follow when trading cryptocurrencies

  • Cryptocurrency trading is also a risky game. Even though the famous investing and trading maxim say, “high risk, high rewards,” you should try to keep your risks at a minimum level. You should not invest more than you cannot afford to lose. 
  • Secondly, follow the general rule of buying low and selling high. You should be ready to seize the opportunity of buying a cryptocurrency at the lowest price and sell at a high price.
  • Thirdly, you should make the best use of both analysis techniques, fundamental and technical. Fundamental analysis of the market will help you remain aware of the schemes of thought leaders who manipulate markets for their own advantages. Technical analysis, on the other hand, will help you analyze the price patterns and assist you in price speculation. 

Main takeaways regarding cryptocurrency trading

In order to sum up our discussion regarding learning how to trade cryptocurrency, it is important to summarize our discussion with main takeaways. 

  • Don’t haste when you decide to start trading cryptocurrencies. Haste makes waste and you will end up as a loser who has nothing left. Acquire preliminary and necessary knowledge. Gain experience and develop a skill set to be a better comrade in the arena of cryptocurrency trading. 
  • Set up a digital wallet if you want to buy and hold cryptocurrencies. The digital wallet should be safe and secure to hold your digital assets. If you want to trade cryptocurrencies, you should set up your account on a well-reputed exchange that offers maximum security.
  • Securing your digital wallet is absolutely crucial in cryptocurrency trading and investing. If you lose access or your wallet gets hacked, you lose all your holdings. 
  • There are three main techniques to start cryptocurrency trading. The first one is a long-term technique to buy and hold cryptocurrencies for gain over a longer period of time. The second is cryptocurrency trading on an exchange. The last is cryptocurrency trading with the help of a broker.
  • Leverage or margin trading is enticing as you have the opportunity to make huge profits. But, it also brings huge risks. Therefore, margin trading is for experienced traders and it isn’t at all for novices.
  • Keep your risks at a minimum level, always try to buy low and sell high, and make the best use of fundamental and technical analysis. 

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