A cryptocurrency is simply a form of digital currency that exists purely as computer code. It is "crypto" because it utilises a secure encryption technology to ensure secure, transparent, and verifiable transactions that are conducted virtually. Cryptocurrencies are backed by a public ledger system known as the blockchain, which ensures that decentralised, peer-to-peer transactions are conducted without the need of a third party, such as a bank or government.
When Bitcoin was launched in late 2008 as the first cryptocurrency, it was intended to be the future of money. Several cryptocurrencies have since sprung up, and while most of them have attractive monetary qualities, investors have particularly been concerned with their characteristics as a digital store of value. This is why many investors nowadays seek avenues of trading cryptocurrencies.
What is Cryptocurrency Trading?
Cryptocurrencies carry inherent value, and this has made them legitimate financial assets that can be bought and sold for profit. Based on this, cryptocurrency trading is the buying and selling of various coins or tokens with the aim of generating a profit. Investors can trade various cryptocurrencies via a crypto exchange or a CFD brokerage firm, such as AvaTrade. When you trade via an exchange, you will need to create an exchange account as well as open a crypto wallet where you will be storing your coins.
With an exchange, you own actual coins in digital form and must store them securely. You will generate a profit when the value of the underlying coin you are holding increases and you sell the coins at a higher price than that which you had initially bought for. If you sell at a price lower than the buying price, you incur losses.
In contrast, with a CFD brokerage firm, you do not own the underlying coin or token – you simply speculate on its price changes. If you place a buy order, you generate profits if you exit the trade position at a higher price. You incur losses when trading crypto CFDs if your price prediction is wrong. CFDs offer a lucrative way of trading the volatile cryptocurrency market, and investors can also benefit from leveraged trading. At AvaTrade, we offer you the chance to trade a selection of leading cryptocurrencies. This means you can speculate on whether you believe the price will rise or fall. When you trade with us, you can take advantage of some of the industry’s leading crypto conditions, including low spreads.
What Cryptocurrency Miners do
Cryptocurrencies are handled like cash but are mined like gold. The work of a crypto-miner is simply to "mine" or "mint" new cryptocurrencies. They do this by confirming transactions on the blockchain or the public ledger. This means that mining is simply the process of verifying crypto transactions. People around the world transfer cryptocurrencies from wallet to wallet, with miners using computer-processing power to confirm and add the transactions on the public ledger.
Once a transaction has been completed and recorded on the blockchain, it cannot be reversed. For this work, miners receive new coins as their compensation- and this is how new cryptocurrencies are generated. Similar to physical gold, most cryptocurrencies, such as Bitcoin, have a supply limit. In the case of Bitcoin, the last coin will be mined in 2140.
By capping supply, demand will be the primary determinant of the price. Bitcoin was the first-ever cryptocurrency in the world, and it continues to be the most popular and influential cryptocurrency as of January 2021. Nevertheless, numerous blockchain projects have created many cryptocurrencies that have grown both in terms of adoption and circulation. Some of the notable cryptocurrencies that have emerged over the years include Ethereum, Ripple, Litecoin NEO, EOS, Stellar Lumens and a number of derived currencies, including Bitcoin Cash and Bitcoin Gold.
Blockchain – The Technology Behind Cryptocurrencies
Unlike traditional transactions, cryptocurrency transactions do not require a third party, such as banks or other financial institutions, to be facilitated. Every transaction is recorded on a public digital ledger known as the blockchain.
What is a Blockchain
Blockchain is an open digital distributed ledger that publicly holds records in a manner that is secure, transparent, and decentralised. It is essentially a public database that is not controlled by one single entity. A blockchain is made up of several ‘blocks’, which are lists of transaction records that are linked to each other and they are encrypted.
Each block contains:
- The details of the sender, receiver and amount of e-coins.
- A hash, which serves as a unique fingerprint.
- A hash of the previous block in the chain.
When a new block is created, it is sent to all the users in the network. Each user then verifies the block and it is added to the blockchain.
What is Tangle
Blockchain emerged as a revolutionary technology whose application went beyond cryptocurrencies. But as its adoption spread, its inherent limitations were exposed. It was a verification system that could not do without miners (and their fees), and it became heavier and slower as more ‘blocks’ and ‘chains’ were added. There was, therefore, the need for another verification technology that would solve these problems. Enter Tangle!
Like blockchain, Tangle is a data verification system. But while blockchain is a public ledger system that utilises ‘blocks’, Tangle applies the directed acyclic graph (DAG) protocol.
When you make a transaction on the Tangle platform, you have to verify the past two transactions, hence the graph is ‘directed’. It is ‘acyclic’ because past transactions cannot be used to verify present or future transactions. Because users themselves verify transactions, there’s no need for miners or the miners’ fee. Users get to enjoy fee-free transactions as well as faster transaction speeds, and they can make as many tiny transactions as required.
Another issue solved by Tangle is scalability. Unlike blockchain that gets heavier and bulkier when a new block is added, Tangle gets more computing power as new devices or users join the platform.
This is why Tangle is the best protocol for the Internet of Things, a reference to a universe of interconnected devices that communicate with each other independently so as to carry out their unique functions. IOTA (Internet of Things Application) was the first cryptocurrency to implement Tangle, and this has led to the coin being dubbed the ‘cryptocurrency of the future’.
What is a Cryptocurrency Wallet?
A wallet is a piece of software or hardware that gives you the ability to store and exchange your cryptocurrencies. Think of a crypto wallet as a ‘crypto bank account’ that helps you to keep your coins or tokens. In most cases, crypto wallets are coin specific: A Bitcoin wallet will only send and receive Bitcoins; an Ethereum wallet will only send and receive Ether coins.
Each cryptocurrency wallet is encrypted and unique to you. When you send funds, you broadcast an encrypted message to the recipient. Only the recipient’s cryptocurrency wallet can decrypt that message and thus receive the funds. Crypto wallets can either be hardware or software.
Software wallets operate online and include mobile applications and wallets provided by crypto exchanges. Hardware wallets are also known as cold storage and are offline. Hardware crypto wallets are considered to be more secure than their software alternatives because they cannot be hacked and are immune to viruses or malware. Furthermore, hardware wallets can also host multiple cryptocurrencies.
Why Trade Crypto CFDs With AvaTrade?
- Uncompromised Safety – Enjoy maximum safety and security by trading with a reliable and trustworthy broker regulated in various jurisdictions around the globe.
- Wealth of Trading Resources – AvaTrade has numerous handy resources that can help investors get the most out of their trading activities. For instance, you will get access to Trading Central, AvaSocial and Guardian Angel add-ons to maximise your trading potential. We also provide access to a free paper trading account you can practice on before investing real money and a trading positions calculator for you to evaluate your possible trade outcomes.
- Cutting-edge Trading Platforms – At AvaTrade, we understand the importance of having access to an intuitive trading platform and we provide our clients with access to top-notch platforms including the MT4 and MT5 trading platforms, AvaTradeGO app, browser-based WebTrader, and a selection of automated trading software.
- Numerous Cryptocurrencies – Choose from a wide selection of crypto coins and tokens to trade directly through our platforms. No wallet is required.
- No Hidden Fees – We offer zero commissions and no bank fees on transactions!
- Crypto Never Sleeps –Crypto markets never sleep, and neither does AvaTrade. We offer round-the-clock service and support in multiple languages.
- Generous Leverage – Get leverage of up to 2:1 (for EU residents) and 25:1 (for non-EU residents), and increase your trade value and exposure to the markets. Remember that leverage can also increase your risk.
- Limit Your Risk – Control your risks using stop loss and take profit orders available at AvaTrade. Other innovative orders such as buy/sell stop orders as well as buy/sell limit orders are also available to help you manage your risks when trading your preferred cryptocurrencies.
- Choice of Crypto Pairs – Trade crypto/crypto pairs as well as crypto/fiat pairs (USD, EUR, JPY, and more) and diversify your trading portfolio.
Here are Today’s Most Popular Cryptocurrencies:
Bitcoin, Bitcoin Cash and Bitcoin Gold
Bitcoin has not only opened the gate for other coins and tokens. It continues to lead the cryptocurrency world with pride and authority. The cryptocurrency started with its value being worth only a few cents to the dollar, but by 2017, it had announced its place in the investment world when BTC value almost touched the $20,000 mark. After a brief period of retracement, it roared again and printed an all-time high of circa $41,000 in early 2021.
Not even its founder, the mysterious Satoshi Nakamoto, could see this coming. One of the biggest qualities of Bitcoin is its scarcity, because it has a supply cap of 21 million, with the last coin to be mined in 2140.
Bitcoin Cash (BCH) was created by the Bitcoin hard fork on August 1, 2017, resulting in a new version of the blockchain with different rules. BCH has a similar supply cap to Bitcoin at 21 million, but it was created to solve the concerns of scalability, transaction speeds, and block size, manifested by the latter coin. The BCH network is faster and can handle large transactions, but there were concerns that the larger block size was susceptible to security compromises. In late 2018, BCH experienced its own fork, which resulted in the creation of Bitcoin SV, whose proponents stated that they wanted to stay true to the original vision of Satoshi Nakamoto.
Bitcoin Gold (BTG) is the second fork from Bitcoin (i.e., the second version to stem from Bitcoin’s source code). BTG was created to solve the danger of centralised mining pools. Mining Bitcoin was increasingly becoming controlled by large players who could afford specialised computing equipment. The idea of BTG was to change the algorithm of Bitcoin mining such that miners with dedicated ASIC-based computers would have no advantage over miners with normal GPU processors. It was a bid to democratise mining all over again. Beyond the mining protocol, BTG developers have also continued to focus on addressing issues relating to distribution, security, and transparency of the wider cryptocurrency world.
Altcoins refers to all other cryptocurrencies other than Bitcoin. They are basically ‘alternative coins’. Some coins mimic Bitcoin while others implement different use cases of the underlying blockchain technology, which refers to cryptocurrencies that were launched on the back of the success of Bitcoin as well as the underlying blockchain technology. There are hundreds of altcoins in the market, with most of them launched after an ICO (Initial Coin Offering), a form of crowdfunding, similar to an IPO in stocks.
Here are some of the most popular and promising altcoins:
Ethereum (ETH) is more than just a cryptocurrency, it is also a decentralised blockchain platform that supports the development of decentralised applications, tokens, and smart contracts. It is the internet of blockchain. No cryptocurrency holds more promise than Ethereum, and this has been reflected in its price.
Although a young cryptocurrency, Ethereum quickly rose to above $1300 during the crypto boom of late 2017. It would succumb to the subsequent multi-year bear run and printed a low of just above $100 during the March 2020 coronavirus pandemic. But it has since recovered nicely and managed to print an all-time high of above $1,400 in January 2021.
Unlike Bitcoin though, Ethereum does not have a capped supply, but the pace of production of new coins will gradually decrease over time. The Ethereum platform opens the door to the application of wide and varied use cases of the blockchain technology, and this serves as a major positive fundamental of its underlying cryptocurrency.
Litecoin (LTC) is one of the more veteran cryptocurrencies out there, and very much similar to Bitcoin in many of its characteristics. It was basically designed to be the ‘lighter’ version of Bitcoin to enable faster peer to peer transactions. There are key differences though, in terms of speed and quantity. It takes Litecoin 2.5 minutes to create a block compared to the 10 minutes required with Bitcoin. The supply cap of Litecoin is also 84 million compared to Bitcoin’s 21 million. Litecoin initially attracted numerous miners because of how fast blocks are completed, but critics insist that the coin has failed to live up to expectations despite being an early entrant in the cryptocurrency scene.
Ripple (XRP) can be described as the next generation of payment networks, it is also a technology that acts as a cryptocurrency (XRP). Originally set up to engage financial industry leaders, just one year after being founded, the digital currency’s creator Ripple Labs was named one of the 50 Smartest new Companies by MIT University.
Since then banking institutions like American Express, Santander and Money Gram starting adopting Ripple’s payment system. At the time of writing, the RippleNet advanced blockchain is currently being used by over 300 providers spanning 40 countries.
This is the e-coin that is considered Ethereum’s biggest competitor. The EOS blockchain gained its fame because of the way it effectively records and secures transactions. It is similar to the Ethereum blockchain but faster, more scalable, and allows users to build decentralised applications more efficiently. Market analysts are promoting the currency as ‘The Most Powerful Infrastructure for Decentralised Applications’ and expect the coin to be dumped and pumped, which could provide some interesting short-term opportunities.
Why are Cryptos Ideal for Trading?
Cryptocurrencies have emerged as a lucrative opportunity for an investment portfolio. Their prices are less influenced by underlying economic performances or political stability, and more by demand and supply. The year 2017 was when the power of cryptocurrencies was felt by the mainstream investing public when the price of Bitcoin surpassed that of one ounce of gold. This invited institutional money into the crypto world, whereas various governments started considering various forms of digital money.
Blockchain adoption also accelerated, and the financial markets saw the introduction of cryptocurrency derivatives. During the 2020 global lockdown due to COVID-19, the general public saw first-hand the limitations of existing fiat as governments literally printed money to spur economic growth as tough lockdown and curfew measures were instituted.
As stores of digital value, cryptocurrencies have continued to outperform all other financial assets, and interest in them can only increase. Cryptocurrencies are here to stay, and they represent a new form of high-volatility investment that is available for trading 24/7, even over the weekend.
Understanding Key Factors Influencing Cryptocurrency Prices
Here are some of the key factors that impact crypto price:
Supply and Demand
As with every financial asset in any market, the prices of cryptocurrencies are heavily influenced by the forces of supply and demand. For instance, Bitcoin has a supply cap of 21 million, and this can sometimes increase demand as reflected in its high prices. Compare this to a coin such as Ripple that started with a supply of 100 billion, and whose price continues to suffer in the market.
Supply can also be influenced by how mining or generation of the underlying cryptocurrency takes place. If new coins are easily generated, supply is boosted, and demand is limited. The reverse is also true.
Regulation covers political and legal issues surrounding cryptocurrencies in various jurisdictions. In most cases, positive regulation on cryptocurrencies or the underlying blockchain technology usually provides tailwinds for crypto prices, whereas negative regulation or even outright bans trigger lower prices for cryptocurrencies.
Every cryptocurrency has a use case. For instance, Bitcoin aims to be peer-to-peer digital money, whereas Ripple seeks to enhance cheap, borderless cash transfers. If a cryptocurrency manages to achieve widespread adoption for its use case, its value will increase, and vice versa.
This particularly applies to altcoins. Getting listed on any of the major crypto exchanges is a massive vote of confidence for any underlying cryptocurrency project. A listing is a positive fundamental that can inspire higher prices, but delisting as well can trigger significant price losses.
News and Media
Media coverage of any underlying cryptocurrency greatly impacts its pricing. Positive media coverage can attract investors to a crypto project and consequently inspire higher prices of the underlying coin, whereas negative media coverage can easily inspire fear among investors and trigger lower prices.
Please note: The cryptocurrency market’s high volatility may offer endless trading opportunities, but also high risk of loss. Due to price fluctuation, certain crypto pairs may be suspended and/or removed from our trading platforms periodically. Please see our crypto trading conditions page for available crypto currencies. When trading with AvaTrade you are trading on the price changes of the digital coin, and not physically purchasing it.
Are cryptocurrencies more volatile than forex?
The volatility of currency markets is much higher than that of stocks, commodities, indices, ETFs, and bonds. When comparing volatility between cryptocurrencies and forex, it’s important to understand the precise definition of volatility. It refers to the change in the price of an asset. While forex prices certainly fluctuate about the mean, it is nowhere near the level of volatility seen in the crypto market. The historical charts represent the extreme fluctuations in crypto prices. In October 2016, 2017, 2018, 2019, 2020, the price of Bitcoin was $693, $6130, $6276, $9226, and $13,573 respectively. In May 2021, Bitcoin was $58,000!
Is retail ownership of cryptocurrencies greater than institutional ownership?
In the world of trading and investing, institutional ownership comprises the lion’s share of activity. While much has been made of Elon Musk’s interest in Dogecoin and Bitcoin, institutional investors comprise a minor percentage of crypto ownership. Most of it is held by smaller retail traders. Consider that bitinfocharts.com data found that 133,304 accounts hold 85% of all Bitcoin wealth (10 BTC – 100 BTC per account). While nobody can predict crypto price movements with any degree of certainty, there is a limited supply of 21M BTC in the market. Already, 18.6 million are in circulation, with just 900 BTC mined daily.