The Only Cryptocurrency Explainer You Need

Ever since Bitcoin made a splash in 2009, cryptocurrencies have changed the world’s understanding of financial markets and the threshold for volatility. Perhaps the most volatile markets of all, crypto has given traders a spectacular show of rallies and crashes, and today has become an asset of choice by traders worldwide.

In this article, we look at how cryptocurrencies work, the diverse ways to invest in them, and what you should know about this highly volatile crypto market.

What are Cryptocurrencies, and How Do They Work?

Cryptocurrency is a digital or virtual form of currency that operates on decentralised networks based on blockchain technology and uses cryptography for security. The blockchain is a distributed ledger that records all transactions across a network of computers, ensuring transparency, security, and immutability.

Let’s break some of these terms down:

• Digital currency: Cryptocurrency is like digital cash. It's not physical; it's just numbers on a computer.
• Blockchain: A blockchain is a chain of information. When you send someone cryptocurrency, your transaction is added to a block. Once approved by the network, this block is added to a chain of other blocks, forming the "blockchain."
• Distributed ledger: This is another way of saying that the blockchain is a digital ledger that records all cryptocurrency transactions. It's not stored in one place but is distributed across a network of computers, making it extremely secure and resistant to tampering.
• Immutability: This is a fancy way of saying that once something is on the blockchain, it's there forever. Transactions on the blockchain are irreversible, providing a high level of security and trust. Once information is added to the blockchain, it's nearly impossible to change or delete.
• Cryptography: Cryptography makes use of encrypted keys, or coded information, digital signatures, hash functions (algorithms) and other tools to secure cryptocurrency transactions. Your private key allows you to access and manage your crypto. Your public key is like your address, where people send crypto to you.

Cryptocurrency Features at a Glance:

Transparency and identity protection: All transactions are recorded on a public digital ledger called the "blockchain," making for transparent transactions. However, remember that it can be difficult to ascertain the real identity of the parties involved in a transaction as they have the option to use pseudonyms or fake identities.

No central authority: Unlike regular money controlled by governments, cryptocurrencies are decentralized. No single person or institution controls them. They're maintained by a network of computers.

Value: Just like with regular money, the value of cryptocurrencies goes up and down. Factors like popularity, technology improvements, and what people are willing to pay for it affect its value.

Crypto trading: People buy and sell cryptocurrencies on various platforms across the world. They aim to profit from crypto price changes. It's like trading stocks but with digital money. Popular crypto exchanges include Coinbase, Binance, and Kraken.

Held in a wallet: Since crypto is a digital currency, it is held in hardware or software “wallets,” storing the public and private keys you need to manage your crypto balance.

Cryptocurrency vs. Real Currency: What’s the Difference?

Here's where it gets interesting. Cryptocurrencies are fundamentally different from traditional fiat currencies in several ways:

• Centralisation vs. decentralisation: Fiat currencies are issued and regulated by governments and central banks. Cryptocurrencies operate independently of any central authority. This decentralisation is a big deal because it means no one entity has control over your money.
• Physical vs. digital: Fiat currencies exist in physical forms like paper bills and coins (although central bank digital currencies are gaining popularity). Cryptocurrencies are entirely digital and exist only in electronic form.
• Global nature: Cryptocurrencies are borderless. You can send them to anyone, anywhere in the world, without the need for intermediaries like banks. This makes international transactions faster and cheaper.
• Supply: Many cryptocurrencies, like Bitcoin, have a capped supply. For example, there will only ever be a certain number of Bitcoins in existence – roughly 21 million (around 19 million of which have already been mined). The supply of fiat currencies, on the other hand, depends on the decisions made by central banks.
• Privacy: Cryptocurrency transactions are pseudonymous. They're recorded on the blockchain, but your identity isn't tied to your wallet address unless you choose to reveal it. With fiat currencies, your transactions are often linked to your identity through banks and financial institutions.
• Accessibility: Anyone with an internet connection can access and use cryptocurrencies, making them more inclusive than traditional banking systems that may not be available to everyone for several reasons.

How to Trade or Invest in Cryptocurrencies?

There are multiple routes to crypto trading or investing, each with its own level of complexity and risk. Here are some of the different strategies to trade or invest in crypto:

• Buy and Hold (Hodling): The simplest strategy involves purchasing cryptocurrencies and holding them in a wallet with the expectation that their value will increase over time. “Hodlers” aims to benefit from long-term price appreciation.
• Day trading: Day traders buy and sell cryptocurrencies within the same day to profit from short-term price fluctuations.
• Swing trading: Swing traders hold positions for several days to weeks to capture price swings within a trend.
• Futures trading: Futures contracts allow traders to speculate on the future price of cryptocurrencies without owning the underlying assets.
• Options trading: Crypto options provide traders with the right (but not the obligation) to buy or sell cryptocurrencies at a predetermined price on or before a specified expiration date.
• Algorithmic trading: Algorithmic or automated trading relies on pre-programmed trading strategies executed by computer algorithms. These algorithms can analyse crypto market data and execute trades at high speeds.
• P2P trading: P2P platforms connect buyers and sellers directly, allowing them to trade cryptocurrencies without the need for an intermediary exchange. Users can negotiate prices and payment methods.
• Yield farming: Yield farming involves providing liquidity to decentralized finance (DeFi) protocols in exchange for rewards. For example, staking is a common type of yield farming, where users lock up their coins in a blockchain network to support its operations and earn additional tokens or a share of transaction fees in return.
• ICO: This method involves investing in newly launched cryptocurrencies or tokens during their Initial Coin Offering, or ICO.
• Crypto CFDs: Contracts for Difference (CFDs) allow traders to speculate on the price movements of cryptocurrencies without owning the underlying assets. It offers leverage and the ability to profit from both rising and falling crypto markets.

What are Crypto CFDs?

Cryptocurrency CFD trading is a derivative trading method where traders speculate on the price movements of cryptocurrencies without owning the underlying assets.

Advantages of crypto CFD trading

• Trade crypto prices: CFD trading allows traders to participate in the crypto market without having to own any actual crypto.
• Leverage: CFDs allow traders to control a larger position size with a small amount of capital, meaning that they don’t need a substantial deposit to trade a larger exposure.
• Short selling: CFDs enable traders to profit not only from rising but also from falling crypto prices by taking short positions.
• Market access: Traders can access various cryptocurrencies without the need for multiple wallets or exchanges.

Risk considerations

• Leverage risk: While leverage can amplify gains, it can also lead to significant losses to your capital. Traders should use leverage with adequate risk management measures.
• Market risk: Cryptocurrency markets are highly volatile, and crypto prices can change rapidly, making risk management crucial, especially for traders with less experience.
• Broker selection: Choosing a reliable broker is essential to ensure a fair and secure trading environment.

Look for established brokers with a good reputation, strong security measures, and trader-friendly features when trading crypto, and remember that disciplined risk management and a strategic approach are essential to succeed in trading.