The emerging cryptocurrency market has generated increasing interest over the last few years, among investors of all varieties and backgrounds. Unlike traditional currencies, cryptocurrency trading is based on speculation of price fluctuations, instead of actually owning and selling an asset. The value of an investment is determined by the asset’s movement between trade entry and exit. Cryptocurrencies are unique in ways that distinguish them from other traditional commodities and trading markets. They’re virtual or digital commodities, which makes them intangible, and they’re unregulated and decentralized, so they’re not managed, monitored or governed by a central authority, such as a government or internationally recognized bank. This makes them intrinsically lucrative but also volatile.
These sorts of technologically advanced financial investment opportunities certainly carry their own appeal and the potential for unlimited profitability. But in the finance world, high returns are often proportionate to high risks. To minimize the risks and increase your chances of success, it’s essential to develop an adequate understanding of the theories and mechanisms behind these digital transactions. This will help you to improve your crypto trading strategy based on knowledge, instead of just hopes and prayers.
In the world of cryptocurrency, there are some industry-specific terms that you should become well familiarized with to understand how these markets operate. Here are some of the fundamentals:
Blockchain
Blockchain is the digital database underlying cryptocurrencies. It’s a digital ledger of recorded data, whereby all records are encrypted individually. Transactions are recorded in blocks, and blocks are added to the chain as transactions take place. This process is known as cryptocurrency mining.
Blockchain technology and its decentralized networks are built and sustained by mass collaboration on a global scale. They’re based on peer-to-peer exchanges and layers of trust, removing the need for a centralized authority to monitor transactions. This makes blockchain a trading anomaly that fascinates many investors and economists.
Types Of Cryptocurrencies
There are more than 1,600 cryptocurrencies currently being traded publicly, with a combined market value of more than $289 billion. The value of Bitcoins alone was estimated at $210 billion. And while there is a limit on the number of Bitcoins available for purchase, the appreciation of their value is seemingly limitless. This naturally heightens demand and speculative interest on trade and investment value, as it would with any tradable commodity.
Tokens
There are value tokens, security tokens and utility tokens. Value tokens like Bitcoins are created in an Initial Coin Offering (ICO) and represent value, but aren’t actually of monetary value. The same is essentially true for paper currency. Tokens are assigned their value by data encryptions used in transactions.
Although its name is misleading, Bitcoin does in fact belong in the token category, and is the most popular and widely traded cryptocurrency on the market. It was also the first crypto asset ever created. In general, people are more familiar with this digital currency than with any of the others, so the demand for Bitcoin is quite high. There are a number of ways to earn or win Bitcoin, such as by leveraging investment trading strategies or exchanging digital services for cryptocurrency.
Altcoins
An abbreviation for Alternative Cryptocurrency Coins, these are any coins besides Bitcoins. Although they’re all created on the same theory and foundation as Bitcoin, they’re all unique in the purposes and applications they serve, and are supported by different systems and protocols. The most well-known altcoins on the market are the following:
- Peercoin
- Litecoin
- Namecoin
- Ethereum
- Ripple
- Omni
- Bitcoin Cash
- Libra
- Monero (XMR)
- Binance Coin (BNB)
- NEO
- Cardano
- IOTA
Two Ways Of Investing In Cryptocurrencies
Once you feel confident about your decision to invest in a cryptocurrency of your choosing, there are a couple ways to approach your investment strategy: you can trade cryptocurrency or purchase it, and either method comes with its own advantages and disadvantages.
Trading With CFDs
A CFD or Contract for Differences is a contractual agreement to exchange the difference in price of a currency, from the time the transaction opens to when it closes. This is based on price speculation rather than actual ownership of the currency. In this case, a Bitcoin price analysis would greatly benefit your trade strategy. You’ll have to decide whether your strategy and position will be short or long. A solid risk management strategy should be built into any longer-term trade approach, so that there are limiting constraints to all losses.
Day trading is an example of how you can profit from a short-term strategy. Bitcoin is traded 24/7 and is the most liquid of all cryptocurrencies, which means it can undergo quicker transactions and monetary conversions within a day—and with marginal impact on the market price. There are also many more trading opportunities in a 24-hour window, in larger loads with much less overhead. With day trading, consider optimizing your strategy in the following ways:
- Diversify your trade currencies
- Track and monitor trading times and trends
- Stay vigilant and current on cryptocurrency news
- Minimize trading costs by using a low-rate exchange
- Utilize technical analysis tools and metrics
Purchasing Cryptocurrency Through An Exchange:
In this case, you’re taking ownership of the digital currency, and ideally the asset you purchase will appreciate in value. You’ll need a digital wallet to store your currency and an account through which to exchange it. Digital wallets need to be secure and protected from external cyber threats such as hackers.
Ways To Buy Or Invest In Cryptocurrency
If you’re wondering how to acquire cryptocurrency in the first place, there are a few options, such as exchange platforms and trade brokers. Bitcoin, for example, can be purchased from exchanges that’ll charge a percentage of the purchasing price. Each one charges different trade fees based on a tiered structure or schedule. The most well-known and widely used cryptocurrency exchanges are:
- Coinbase
- Binance
- Gemini
- Coinmama
If you choose to go down a more traditional route with a stockbroker, here a few mainstream cryptocurrency trade brokers:
- Robinhood
- TradeStation
- eToro
There are other ways to purchase or invest in Bitcoin or Altcoins, such as Bitcoin ATMs, peer-to-peer transactions, and digital currency asset managers.
Conclusion
Before you embark on your cryptocurrency adventure, you should first take steps to educate yourself on the risks involved before jumping into high-level trading. Explore your options for trading or exchanging currencies, and the necessary steps for storage and investment management. Even if you’ve got significant experience in financial trading and investment strategies, cryptocurrency operates very differently from any other market in terms of volatility, liquidity and predictability of trends. So, it’s important to first get familiarized with this unique market. Understanding the nature of cryptocurrency will help to optimize your experience, and help set you up for potential success.