- What is cryptocurrency trading?
- Why is cryptocurrency trading so popular?
- Key factors about cryptocurrencies
- Why were cryptocurrencies created?
- Benefits of cryptocurrencies
- What affects the price of cryptocurrencies?
- Cryptocurrency volatility
- FAQs about crypto CFDs
What is cryptocurrency trading?
Cryptocurrencies, first introduced in 2009, have fundamentally reshaped our understanding of money. According to CoinMarketCap, as of July 2023 there are 22,904 cryptocurrencies in existence, including well-known ones such as Bitcoin, Ethereum, Litecoin, and Ripple. But what exactly are they, and how do they function? Let's delve deeper to find out.
A cryptocurrency is a form of digital currency, much like traditional money, that can be used to purchase goods and services. For instance, Bitcoin can be used to make purchases from renowned companies like Microsoft, Starbucks, and Wikipedia.
Cryptocurrencies utilize an online ledger fortified with robust cryptography, making them one of the safest payment methods for online transactions. Today, they are considered some of the most significant emerging currencies globally, primarily due to the impact Bitcoin has had since its inception. Let's explore further what cryptocurrencies are and how you can start trading them with FOREX.com.
Why is cryptocurrency trading so popular?
Crypto trading has become popular because of the massive press coverage Bitcoin and Ethereum have generated. In addition, cryptos are not subject to the same dynamics as conventional currencies.
Cryptos have no central bank regulating how much of a currency is in circulation. They are not tied to a particular interest rate, and it is not possible for a central bank to ‘print’ more coins. The traditional forces that influence other currencies, like economic factors like inflation data, generally don’t affect cryptos.
Like other currencies, the value of cryptos is measured by what they are worth against different currencies. This means you can go long or short on a particular cryptocurrency against the US dollar, British pound, or Euro.
Key factors about cryptocurrencies
They are decentralized
Cryptos are not regulated by any government or central bank and are therefore free from direct interference. Instead, they operate using a worldwide network of encrypted peer-to-peer transactions, usually based on blockchain technology (cryptocurrencies take their name from their encrypted nature).
They are virtually immune to fraud
The transparent and distributed structure of blockchain technology makes it very difficult to manipulate.
A blockchain is essentially a public digital ledger that records transactions. Transactions are made up of blocks and after a certain number of transactions, a new block is permanently added to the chain.
Since the ledger is open to everyone on the network and no entity is in control, any hacking attempt is almost impossible.
There is a limited offer
In the case of Bitcoin, it was created so that only 21 million Bitcoins existed. The reasoning behind this was to limit the supply so that Bitcoins would eventually rise in value.
As of July 2023, there are more than 19.45 million in circulation (Source: CoinMarketCap). The remaining 2.5 million have not yet been mined.
You can learn more about the daily happenings in the cryptocurrency world in our news and analysis section.
You can mine them
Bitcoin mining is what powers its blockchain ledger. Powerful computers solve a computational puzzle that verifies transactions and adds them to the blockchain. When this happens, a new Bitcoin is dug up.
As a reward, miners are rewarded with a new Bitcoin and transaction fees.
This "gold rush" in Bitcoin mining has led to the creation of vast energy-consuming Bitcoin farms and has caused computer graphics cards (used to solve computational puzzles) to double in price in 2018.
And although almost 90% of Bitcoins have been issued, it is estimated that the final Bitcoin will be mined in the year 2140. This is because the computational puzzle to release them is becoming increasingly difficult.
You can store them in a wallet
Cryptocurrencies such as Bitcoin are stored in virtual wallets, or e-Wallets. Transactions occur using public and private keys.
- The private key allows you to send currency from that wallet
- The public key is used to share with others so they can send you cryptocurrency
They can be extremely volatile
Cryptocurrencies are prone to massive ups and downs in value.
In the second quarter of 2021, Bitcoin and Ethereum suffered an extensive decline, which led the cryptocurrency market to fall together. After having achieved a record price of more than $ 60,000, Bitcoin fell below $ 25,000 in just five months.
By July, 2023, the price of Bitcoin was around $ 30,000, according to TradingView.
Some see them as "digital gold"
Cryptocurrencies are sometimes seen as a method of storing value with foreign workers choosing to use cryptocurrency to send money to their home country.
Why were cryptocurrencies created?
In 2008, Satoshi Nakamoto published the white paper called Bitcoin: A Peer-to-Peer Electronic Cash System. He set the plan for cryptocurrency based on revolutionary blockchain technology. To this day, Satoshi Nakamoto remains a mysterious figure who never revealed his true identity, or identities.
One of the main goals of cryptocurrencies was to eliminate transaction fees. Global payments companies such as MasterCard or Visa were perceived as unnecessary intermediaries that took their share every time a financial transaction was made.
Cryptocurrencies were also partly a reaction to the 2008 financial crisis. Mismanagement by banks and government responses controlling money had plunged many into poverty.
Bitcoin creator Satoshi Nakamoto commented:
"The root of the problem with conventional currency is all the trust that is required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of violations of that trust. Banks should be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction of the reserve."
In 2009, Bitcoin was launched as the first established cryptocurrency. Previous attempts to create a cryptocurrency like B-Money and Bit Gold failed to take off.
And on May 22, 2010, the first recorded Bitcoin transaction took place when Laszlo Hanyecz paid 10,000 BTC for two pizzas. This event has become known as Bitcoin Pizza Day.
Benefits of cryptocurrencies
- Cost: there are no middlemen or bank fees.
- Freedom: your money is not controlled by the government or an institution. This is especially pertinent if you live in a country suffering from political instability or hyperinflation.
- Privacy: cryptocurrencies are discreet. This secrecy has sometimes been associated with criminal activity, but it's worth noting that Bitcoin transactions are not anonymous.
- Access: cryptocurrencies provide a banking alternative to anyone who has a mobile phone.
Want to know more? Check out our article on why to trade cryptocurrencies.
What affects the price of cryptocurrencies?
A variety of factors can affect the price of a cryptocurrency. They are often sensitive to news stories - for example, the prospect of further regulation or news that attacks the credibility of a currency. In addition, they are more heavily influenced by market sentiment than other asset classes.
Cryptocurrency volatility
Traders can use CFDs to trade cryptocurrency markets without having to buy ‘coins’ or ‘tokens’, which can be a lengthy process. Buying physical cryptocurrencies requires the submission of applications to specialist crypto platforms, which can take days or weeks to execute a trade. A crypto CFD works in the same way as a CFD for other asset classes, such as FX and stocks - you trade the value of the crypto of your choice against a fiat currency like the US dollar.
Cryptocurrencies can see very sudden swings in price, for example, from news regarding possible further regulation of this market. That is why it important that you protect your profits and manage risk smartly with stop losses and take profit orders.
Another aspect of cryptocurrency trading to be aware of is ‘forking’. A ‘hard fork’ is when the software supporting a cryptocurrency needs to be updated, or when the community disagrees on its future direction. Traders are protected from most of the risks involved when a cryptocurrency forks though it can still lead to sudden and unexpected price movements.
As with any CFD trade, it is important to manage your margin and the amount of leverage you are using as it is possible to lose more money that you have allocated to the trade at first.
FAQs about crypto CFDs
What are cryptocurrencies and what are they for?
A cryptocurrency is a digital currency. Like any currency, they can be used to buy and sell goods. Some of the most famous cryptos include Bitcoin, Ethereum, Litecoin, and Ripple.
A cryptocurrency is a digital asset that employs cryptographic encryption to guarantee its ownership, and thus ensure the integrity of transactions. These coins do not exist in physical form: they are stored in a virtual wallet, or e-wallet.
How are cryptocurrencies traded?
Cryptocurrencies are digital currencies that are traded through platforms, virtual wallets or in operations between users. Its price entails a high speculative component that can even mean the total loss of the money paid to buy the cryptocurrencies.
With FOREX.com you can trade CFDs to trade the cryptocurrency markets without the need to buy "coins" or "tokens", which can be a lengthy process. A CFD on cryptocurrencies works similarly to CFDs based on other currency pairs. This means that you would exchange the value of the Crypto of your choice with a conventional currency such as the US dollar.
What are the most profitable cryptocurrencies?
The cryptocurrency market is extremely volatile, and speculative. This new class of currency is characterized by its independence from a central bank that regulates the amount of currency in circulation, without the possibility of "printing" more cryptos. This results in them not being tied to a particular interest rate.
When operating in the cryptocurrency market, it is essential to carry out an intense analysis of those currencies that interest you. With your FOREX.com account you will be able to trade four of the most important cryptos in the market, which have proven to have continuous growth since their birth:
- Bitcoin
- Ethereum
- Ripple
- Lithium
Is it safe to invest in cryptocurrencies?
Being a new market, trading cryptocurrencies represents traders with massive levels of opportunity and risk. This new currency works using a technology called blockchain; which is a decentralized technology distributed on many computers that manages and records transactions. Part of the appeal of this technology is its security.
The supply of cryptocurrencies is controlled and most have a maximum total supply; Once it is reached, no new coins will be produced. This is a factor that increases its volatility.
When trading crypto CFDs on FOREX.com, you can use our trading tools such as stop and limits. In this way, it may defend itself against some of the adverse market movements.
What is Bitcoin?
Bitcoin is a decentralized cryptocurrency, or a user-to-user digital payment system that is used as an investment and transaction method for other currencies, services, or products. Today it is the star in the world of cryptocurrencies, and the flagship currency of the world of cryptocurrencies.
Initially launched in 2009 by an anonymous internet user or a group known only as "Satoshi Nakamoto," the virtual currency has grown rapidly since its inception.