Cryptocurrencies are the future of investing and trading. Whether you’re a new investor or a seasoned professional, it can be hard to understand the benefits and risks of trading in this modern way. Many have heard of the success of Bitcoin, and the millionaires it made; these were just normal people like you and me with a little bit of investment know-how! In this post, we will provide a rundown covering all the important things you need to know about cryptocurrency: how to trade it and why it is so important to your financial portfolio. We will also cover the main cryptocurrencies that you need to understand to get you on the right track!
WHAT IS CRYPTOCURRENCY AND WHY DOES IT MATTER?
Cryptocurrency is a new trading medium based on the internet. It uses complex systems of computer code that are hard to break and duplicate. Just like traditional currency, crypto can be used to trade for other currencies, goods, and services. It is growing in importance, particularly in global trade, as it is not centred in government regulation like more common currencies; this allows it to be sent and received with minimal processing fees, which can save money in larger international transactions. Furthermore, it is developed using blockchain. This means that, in theory, cryptocurrency is completely decentralized, and all transactions are transparent and immutable.
WHERE DID CRYPTOCURRENCY START?
In the early 1980s, David Chaum, a cryptographer in America, created an algorithm that allowed secure information exchanges between two online parties, in which the information sent was unalterable. This created the basis on which cryptocurrency is built. In an attempt to commercialize this “blinded” transaction, he founded DigiCash in the Netherlands. This ultimately failed as it was too centralized, and faced opposition from the Netherlands’ central bank for dealing directly with individuals. Ultimately, the company failed in the late 1990s.
When Wei Dai published a paper around this time on the architecture of ‘b-money’, it included the basic components of today’s cryptocurrency. These were decentralization, and complex anonymity systems. A little after this, one of Chaum’s associates, Nick Szabo, developed Bit Gold. This was a cryptocurrency that adhered to all of the modern definitions of this alternative currency. It used the blockchain system that is responsible for most modern cryptocurrencies. Unfortunately, it never gained popular support and faded into obscurity.
In 2008, the pseudonymous group (or individual) Satoshi Nakamoto released a paper that outlined Bitcoin as the first public method of exchange. Bitcoin became known for using blockchain for anonymous and decentralized trading. It also outlined the finite supply issue. When released in 2009, it became an instant hit for traders and miners. Because of its succeses, throughout the early 2010s, many similar currencies began to pop up on the trading market.
THE PROS AND CONS OF CRYPTOCURRENCY TRADING
One of the obvious pros of trading in cryptocurrency is its massive potential for returns. According to ‘The Block’s 2020 Research Outlook report’, the total income generated by bitcoin miners in 2019 was $5 billion. Obviously, each miner did not bring home this amount, however, it is clear that there is still money in the business. Furthermore, cryptocurrencies are adaptable, easy to trade internationally, and with a great degree of individual ownership. On the other hand, cryptocurrency is fairly volatile, as it does not have the same level of inherent value as more formal currency.
Using cryptocurrency can also raise issues in scalability; mining for new cryptocurrencies continues to require higher and higher quantities of technological investment. There have been some scams surrounding cryptocurrency; to avoid losing your investment in this way, make sure to trade on reputable platforms that allow you to protect your money. It is also vastly unregulated, which may be seen as a positive or negative trait, depending on the specific scenario.
This means that cryptocurrency trading is a good candidate for a portion of your higher-risk investment. This is because although it may have a high return, it is also somewhat volatile.
HOW TO TRADE CRYPTOCURRENCY
From an investment point of view, trading in cryptocurrency is similar to Forex trading. This involves buying the currency using fiat currency (such as US Dollars). Then, take advantage of fluctuations in the value of the trading currency to sell to other investors for a profit. You can trade through specialized websites such as eToro. If you wish to transfer peer to peer, this can be done on a personal level.
For more direct investment, some people choose to invest in funds that purchase or mine cryptocurrencies. This gives them more ownership over the currency itself.
WHERE DO I KEEP MY CRYPTOCURRENCY?
If you choose to directly own cryptocurrency, it will be stored in an online “wallet”. This can be either on a cloud-based storage system, an internal drive, or an external storage device. This has unique information identifying you as the temporary owner of the currency. If this wallet is used through a cryptocurrency exchange, it can be vulnerable to hacking. Instead, many may choose to keep it within your personal storage system. Regardless of where you choose to store your cryptocurrency, it is important to have them backed up in at least one place. Earlier, we noted that because cryptocurrency is formed of complex computer code, it cannot be duplicated; the backup is not a copy of the currency itself. This back up is just a record of their existence and your temporary ownership of that particular coin.
I have used MetaMask and MyEtherWallet and found the process quite arduous for a beginner. Instead, you can also have third parties store the coin for you such an example that I use is eToro and although the fees are higher I find that for the simple ease of use and significantly easier process eToro is the winner for me but you must balance this with the increased fees and decide what more of a priority for you!
WHAT ARE THE MAIN CURRENCIES I SHOULD KNOW ABOUT?
Bitcoin is arguably the most well-known form of cryptocurrency. Because it is so common, it is considered less volatile than other cryptocurrencies. It is nearing its finite limit too; 17 million of the 21 million available Bitcoins have been mined already. It was developed in 2008, and released in 2009, and rose to prominence quickly. Some of the first investors in Bitcoin received a profit in the realm of 3000%; clearly, it can be a lucrative investment.
Despite its successes, Bitcoin also experienced a massive crash in 2017. In December, a ‘whale’ (a single Bitcoin holder) likely manipulated the market in order to engineer a massive rise in the value of Bitcoin. This was further fuelled by the media craze, and Bitcoin hit its all-time high price of $19,783.06. Amidst rumors that trading Bitcoin was to be banned in South Korea, and the dying down of the media craze, the price of Bitcoin tanked to below $11000, a fall of 45% in just five days. It then fell by another 12% in January 2018.
As the most major and well-known cryptocurrency, it is fairly easy to trade and invest through sites like eToro and Coinbase. Bitcoin is beginning to reach the limit of its finite amount available for mining. Therefore, it is not financially viable for most traders to mine it as a side hustle as they once could. Now, mining requires complex computer systems that are expensive. This means that only those with established mining farms or lots of money to develop such a farm may find it viable. Instead, Bitcoin is something to buy and invest in.
XRP, which is also commonly known as ‘Ripple’, is another giant in the cryptocurrency market. It is both a platform and a currency; the Ripple network provides a system that finds the cheapest and shortest combination to achieve the desired transaction. The platform allows users to make payments in any fiat currency, and in many cryptocurrencies, including Bitcoin. It works with many massive banks and organizations like Santander to trade globally.
XRP, therefore, is the token used to represent this transfer of value across the Ripple network. Its main purpose is to mediate the exchange of other currencies, whether these other currencies are cryptocurrencies or more traditional currencies. For example, in trading English Pounds to US Dollars, the XRP can act as pounds when trading with pounds, and as dollars when trading with dollars. This minimizes the commission, which is why the transaction cost is just $0.00001. Unlike other cryptocurrencies, Ripple does not have a blockchain. Instead, it has the Ripple Protocol Consensus Algorithm (RPCA) to verify transactions and maintain security.
I have a small position in XRP which I add to each month as you can see I have made a loss so far but I think Long term XRP is a fantastic buy for those willing to HODL!
Ethereum, like Bitcoin, is a blockchain-based trading currency. Like Ripple, it consists of a trading platform and a paired currency, called Ether. It is completely decentralized, evading ownership and control. This makes it more secure to use. In a traditional company, information and goods can be accessed and stolen by the company itself, or by workers. By being decentralized, Ethereum is also immune to a central point of failure, and can never go offline; this means apps and programs running through Ethereum are far more predictable and reliable.
Although Ethereum is based on the same blockchain technology as Bitcoin, it has far expanded the capabilities of the software. It has moved from currency and money transfer to an entire system with internet browsing and applications. These applications can be created by users as new concepts or as reworks of existing ideas.
In order to maintain its decentralization, Ethereum is run by ‘nodes’. These are volunteers who run the entire Ethereum blockchain from their desktops, enforcing the consensus rules of the system. They receive rewards, and help to keep the platform running; the RPCA system requires all ‘nodes’ to be in agreement. Therefore, it is only with the full cooperation of all nodes in maintaining the rules that any transactions can take place.
Dash is an alternative form of cryptocurrency. It was developed and released in 2014 with an emphasis on privacy and anonymous transactions. It includes a system that scrambles transactions so that privacy is possible whilst still working from the blockchain style of coding. Furthermore, Dash uses a system of ‘masternodes’ to simplify the transaction process and prevent clogging and backlogs of payments. This means that Dash is far more scalable than bitcoin, and may become a bigger phenomenon in everyday usage.
This development is a result of a change of purpose for Dash. Initially, it framed itself as a privacy-based currency. It has since adapting to more everyday use, Dash saw its worth increase by 8000%. It is also the 12th most-used cryptocurrency and doesn’t show any sign of slowing down.
Unlike Bitcoin and other cryptocurrencies, Dash is also capable of a degree of self-funding; that is to say, it is not so reliant on academic and business investors. It splits block rewards between three groups; Masternodes, Miners, and Treasury. Both Masternodes and Miners receive a 45% share in order to incentivize mining and usage. The final 10% is allocated back into the Dash Treasury in order to finance future developments and projects. In order to keep the currency decentralized, this is voted on by Masternodes.
As the third-largest cryptocurrency currently in use, Litecoin is one of the major competitors to Bitcoin and was developed in 2011. It functions as an online payment system similar to Paypal or online banking. Obviously, it instead trades in Litecoin, as opposed to traditional currencies. In a similar style to Bitcoin, the 84 million units must be ‘mined’ and added to the blockchain ledger. A finite supply prevents hyperinflation. It also has an extremely cheap transaction cost, which makes global transactions quick and easy.w
Unlike Bitcoin, however, it is more likely for it to be mined by a more ordinary computer, although the greater a machine’s capacity, the higher value output it can mine.
Despite the general population not yet using cryptocurrency to pay for everyday transactions, Litecoin has still experienced a rise in the value of around 8200% at its peak; clearly, investors see potential once these decentralized currencies reach a more common circulation. With Litecoin being almost identical to Bitcoin, as well as being quicker and cheaper to run, mine and use, it seems that if any cryptocurrency would become pervasive, Litecoin will be high on the list.
There is a significant difference between Miota tokens and other cryptocurrencies; they are not mined, and all of the tokens (just over 2 billion) are already in circulation. Instead of being focussed on the mining process and blockchain, the aim of Miota is to encourage machine to machine communication, in order to support the foundation of smart technology, such as solar panels that are connected to the electrical grid in a way that allows all energy to be tracked and analyzing. This focus on big data is designed to allow the democratization of data, and make it easy to access, which is obviously easier as the platform is adopted by more and more companies.
The network itself is a microtransaction network, built for efficiency and scalability to cover the entire internet if there is the demand. Instead of using blockchain, Miota uses Directed Acyclic Graphs to validate transactions based on previous transactions within the chain; this is much faster, and still secure, which means that it can support far higher usage than Bitcoin or Litecoin.
EOS calls itself the most powerful infrastructure for decentralized applications, supporting commercial-scale dApps. Like many other cryptocurrencies, it is a decentralized system based in blockchain, supporting the required core functionality for applications, secure access, and communication between the system and the internet. The app development system works in a similar way to Apple’s App Store or Google’s Play Store.
EOS.IO is the name of the system; it works in a similar way to a computer operating system, and manages and controls the EOS blockchain network, and is capable of both vertical and horizontal scaling. The EOS token is the cryptocurrency itself, much like the XRP on the Ripple network, or Ether on the Ethereum network. In order to develop an application on the EOS system, one must simply hold the EOS tokens, instead of spending them, to be eligible to use the resources on the network. Holding a token also allows a user to allocate or rent their bandwidth to other participants that need it.
EOS attempts to solve the speed and scalability issues associated with other cryptocurrencies by using parallel execution and asynchronous communication across the network, to offer flexibility and usability.
Founded in 2014, NEO is another blockchain-based platform supporting its own cryptocurrency, with a focus on smart contracts. NEO aims to automate the process of managing digital assets, using a smart contract system, in order to build a trade network free of the normal associated costs of traditional intermediaries. Smart Contracts are not governed by any centralized legal system, and instead by programming code that allows for traceability, transparency, and irreversibility, creating an open and trusted system.
By creating a unique digital avatar, users are able to buy and sell physical assets as well as currency on the NEO network. Registered assets have a protected digital identity with verifiable key information in order to maintain security and protection for all users and entities involved.
The main distinction between NEO and other blockchain cryptocurrencies is the focus on complying with regulations. The digital avatar and registry system mean that all users can be verified and can only complete transactions if both parties have the correct verified identity; this means that not only is it regulatory-compliant, but adds an extra layer of security. Even the nodes that work on the NEO network must have a verified identity before the can contribute to transaction verification, accounting, and bookkeeping.
ADA is the native cryptocurrency token for the computing platform Cardano. Cardano is a multi-layered blockchain-based system for usage in financial transactions (like other, similar networks) and distributed computing, a well as running smart contracts and decentralized applications (dApps). Cardano is the main competitor to Ethereum but is a slightly more ambitious project trying to combine all of the capabilities of what cryptocurrency can currently do in order to create the most useful, up-to-date platform. The network is distributed across a multitude of different computers around the world, and consists of different layers for different applications of the software, be that financial transactions, computing, or app development. This allows for faster running.
Having only been developed in 2017, Cardano and ADA is still under development and being built out. Despite its relative recency in the crypto market, it quickly became one of the top cryptocurrencies when ranked by market cap, and is already being put under consideration for being added to Coinbase (another popular trading platform).
BNB is another relatively new cryptocurrency, having been developed in 2017 to be used on the Binance system. This currency is used as a utility token that allows users to receive discounts when they pay for their trading fees, as well as for more commercial use through the Binance platform, such as paying for travel expenses and virtual gifts. For people who use Binance as their main trading platform, investing in some unites of BNB (which have been priced as low as $0.11) can save serious money on the 1% trading fee.
Clearly, there is a wealth of cryptocurrencies to choose from when it comes to investing. Cryptocurrency is yet to hit the mainstream in full force, but as more and more platforms with greater capabilities begin to trade, it seems likely that at least one will revolutionize the internet, trading, and finance as we know it today. Whilst prices can be volatile, every investment portfolio needs some higher risk, higher return options to balance the low-risk investments, and to provide the real earning potential. By using a platform such as eToro, you can copy seasoned investors whilst you find your own feet in the investing world, and learn from their knowledge and understanding of the markets at the same time. On eToro, cryptocurrencies are just one part of the myriad of investment options you give yourself.
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My name is Joseph Moricca, I run Velox Investments and I am an Investor on eToro and have been for a number of years.
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Disclaimer: eToro is a multi-asset platform which offers both investing in stocks and cryptoassets, as well as trading CFD assets.
Please note that CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.
Cryptoassets are volatile instruments which can fluctuate widely in a very short timeframe and therefore are not appropriate for all investors. Other than via CFDs, trading cryptoassets is unregulated and therefore is not supervised by any EU regulatory framework.
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