Cryptocurrencies are considered by many economists to be the most significant financial development of the 21st centuries. Not a day goes by without headlines about Bitcoin and other digital currencies being mentioned on major news media outlets. In 2018, CNBC and the Wall Street Journal are hardly the only news platforms following the cryptocurrency world; the BBC, New York Times and even the Daily Mail are also engaged in this reporting.
Even with all the aforementioned attention that cryptocurrencies are getting these days, quite a few people are not clear on how they work; what they do know, based on news reports, is that trading these digital currencies can be a lucrative activity. When considering that the total market capitalization of cryptocurrencies was valued at more than $200 billion in late 2017, it is easy to see why so many people wish to get into cryptocurrency trading.
Introduction to Cryptocurrencies
When talking about Bitcoin, Ethereum and other major cryptocurrencies, it is important to remember that they serve three purposes:
* Monetary transactions
* Store of value
* Distributed ledger
Cryptocurrencies are financial instruments that can be used to settle transactions. Similar to fiat currencies such as the United States dollar, the pound sterling and the euro, cryptocurrencies can be used to make purchases, make payments and transfer funds; as long as two parties agree to accept settlement by means of cryptocurrency, the transaction will be forever recorded in a distributed ledger that is powered by the blockchain, an open source software platform that also serves as a network.
One of the most notable characteristics of cryptocurrencies is that they are decentralized, which means that they are not tied to a standard or to values imposed by central banks. This explains why Bitcoin, for example, has reached such high currency exchange values when compared to the dollar; individuals who buy and sell this cryptocurrency are the ones assigning value to it, and this is a perfect explanation of Bitcoin as a store of value. Just like the value of gold is determined by market traders, Bitcoin holders determine how much it is worth in dollars.
Cryptocurrency Trading Platforms
Those who are familiar with the foreign exchange (forex) markets will easily understand cryptocurrency trading. Whereas forex trading platforms are mostly managed by online retail brokerages, cryptocurrency trading takes place on exchange platforms. Similar to forex currency pairs such as EUR/USD, which puts the value of the euro against the dollar, cryptocurrency exchanges offer traders the opportunity to take market positions on pairs such as BTC/USD, which puts the value of Bitcoin against the dollar.
Getting started with cryptocurrency trading requires setting up a digital currency wallet plus an account at an established exchange. Most newcomers should be able to get both a cryptocurrency wallet plus a trading account for free at reputable exchange; the next step would be to acquire cryptocurrencies to deposit into the wallet, and this can be accomplished in different ways. Some people post an item for sale in an online marketplace and ask for payment to be made in cryptocurrency while others will try their hand at mining, but these are cumbersome methods; it is better to simply acquire cryptocurrency from the exchanges, this involves depositing regular currency such as dollars and requesting an exchange transaction.
Choosing the Cryptocurrency to Trade
Bitcoin is hardly the only cryptocurrency that can be traded for profit; in fact, most beginners will be better off getting started with alternative cryptocurrencies, also known as alt-coins; the main advantage of these currencies over Bitcoin is that they are not as volatile, and many of them seem to be more promising because their blockchain development is superior.
A good rule of thumb for novice traders is to select a cryptocurrency launched by the exchange itself. The advantage in this regard is that the underlying server platform that supports the exchange is also being used to support the blockchain of its cryptocurrency, which makes it more robust. Whereas Bitcoin transactions are taking some time to clear due to the high trading volume and complexity of the network, this is not the case with alt-coins launched by cryptocurrency exchanges.