How does cryptocurrency and its trading work?
Cryptocurrency trading is as easy as ABC. Cryptocurrency is digital money that does not require financial institutions or banks to authenticate transactions and may be used for both purchasing and investing. Transactions are then confirmed and stored on a blockchain, which is an immutable database for tracking and recording assets and exchanges.
If you want to learn more about cryptocurrencies, this article will explain how it works and what you should know before investing in these financial assets.
What is cryptocurrency?
Cryptocurrency, or crypto, is a form of electronic payment that reduces the need to carry real cash. It is only accessible in digital form, and while most people apply it to carry out transactions on the internet, you can also make physical purchases. Several companies sell cryptocurrency as opposed to traditional money, which is solely created by the government.
Cryptocurrencies are fungible, meaning the value remains the same when bought, sold, or traded.
What is cryptocurrency trading?
Cryptocurrency trading is the act of speculating on cryptocurrency price movements via a CFD trading account or buying and selling the underlying coins via an exchange.
CFDs trading are derivatives, which enable you to speculate on cryptocurrency price movements without taking ownership of the underlying coins. You can go long (‘buy’) if you think a cryptocurrency will rise in value, or short (‘sell’) if you think it will fall.
Both are leveraged products, meaning you only need to put up a small deposit—known as a margin—to gain full exposure to the underlying market. Your profit or loss is still calculated according to the full size of your position, so leverage will magnify both profits and losses.
How are cryptocurrencies created?
The word mining refers to the process of creating cryptocurrency. Crypto transactions must be validated, and mining does just that while also creating new bitcoin. Mining is the process of adding transactions to the blockchain using specialized hardware and software.
Not all cryptocurrency originates from mining. For example, cryptocurrency that cannot be spent is not mined. Instead, engineers generate the new currency via a hard fork. A hard fork generates a new chain on the blockchain. One fork follows the new path, while the other continues the old. Cryptocurrencies that cannot be mined are often utilized for investment rather than buying.
How does buying and selling cryptocurrency via exchange work?
When you buy cryptocurrencies via an exchange, you purchase the coins themselves. You’ll need to create an exchange account, put up the full value of the asset to open a position, and store the cryptocurrency tokens in your own wallet until you’re ready to sell.
Exchanges bring their own steep learning curve, as you’ll need to get to grips with the technology involved and learn how to make sense of the data. Many exchanges also have limits on how much you can deposit, while accounts can be very expensive to maintain.
What are the types of cryptocurrency?
Cryptocurrency is available as coins or tokens. The difference between them is that tokens are assets that exist on a blockchain, while coins can be virtual, digital, or tangible. Coins are more like traditional money; a digital coin has its own blockchain. Conversely, a token is created on an existing blockchain and can be used as currency or to represent asset ownership.
The first cryptocurrency introduced was Bitcoin, the most commonly traded one. Ethereum is the second most valuable cryptocurrency and can be used for complex transactions. Other more common cryptocurrencies, called altcoins, include Cardano, Solana, Dogecoin, and XRP.
How does the cryptocurrency market work?
Cryptocurrency markets are decentralized, which means they are not issued or backed by a central authority such as a government. Instead, they run across a network of computers. However, cryptocurrencies can be bought and sold via exchanges and stored in ‘wallets’.
Unlike traditional currencies, cryptocurrencies exist only as a shared digital record of ownership, stored on a blockchain. When a user wants to send cryptocurrency units to another user, they send it to that user’s digital wallet. The transaction isn’t considered final until it has been verified and added to the blockchain through a process called mining. This is also how new cryptocurrency tokens are usually created.
What moves the cryptocurrency market?
Cryptocurrency prices are shaped by supply and demand. Because they’re decentralized, they’re less affected by economic and political issues. However, some factors can still impact their prices:
- Coin circulation: How many coins are out there and how they’re added or removed.
- Market value: The total worth of all coins and how people think it’s changing.
- Media coverage: How cryptocurrencies are portrayed in the news.
- Ease of use: How easily cryptocurrencies can be used with existing payment systems.
- Major events: important happenings like new regulations, security issues, or economic changes.
What is the spread in cryptocurrency trading?
When buying or selling cryptocurrencies, you’ll see two prices. The difference between them is called the spread.
- Buy price: The price you pay to buy a cryptocurrency (slightly higher than the market price).
- Sell price: The price you get when selling a cryptocurrency (slightly lower than the market price).
Think of it like this:
- To buy, you pay a bit more (buy price).
- To sell, you get a bit less (sell price).
The spread is the difference between these two prices.
How do I get started with cryptocurrency?
To start with cryptocurrency, you’ll need to choose a broker or crypto exchange. An exchange is an online platform where you can trade cryptocurrencies. Brokers use interfaces that interact with exchanges.
An exchange allows you to trade without a third party. Should you decide to use an exchange, you’ll need to find buyers for your cryptocurrency. A broker can do that for you. Here are the steps to start trading cryptocurrencies.
1. Create and fund your account.
When you’ve selected a broker or exchange, the next step is to open an account. You’ll want to keep a form of identification nearby since some platforms require it. Once you verify your identity, you can fund your account. Depending on your funding method, you may need to wait a few days for it to clear into your crypto account.
2. Buy cryptocurrency.
You can make your first cryptocurrency purchase when your account is set up and verified. You’ll find many options. You can purchase as much or as little as you’d like. When you’ve selected the one you want to start with, you’ll need to enter the ticker symbol and the amount you wish to purchase. Some of the more traded cryptocurrencies and their symbols are:
- Bitcoin (BTC)
- Ethereum (ETH)
- Dogecoin (DOGE)
- Tether (USDT)
- USD Coin (USDC)
- Uniswap (UNI)
3. Select a storage method.
Most often, you’ll store cryptocurrency in a crypto wallet. When you purchase from a broker, you might not have an option regarding how you store your crypto. However, you can choose between a hot or cold wallet when purchasing through an exchange.
Ready to get started with cryptocurrency?
Cryptocurrency offers opportunities for investing, trading, and employment. Before getting started, you can learn more about crypto technology and how it works here.