The ChoosaBroker Trading Academy

2.7. Cryptocurrencies

One of the biggest tech and finance stories of 2017 has been the massive surge in investor interest in cryptocurrencies. This previously fringe asset group is quickly gaining mainstream acceptance among both small and big investors. Though widespread concerns still remain about the long-term sustainability of these assets, the lure of extraordinary returns is drawing hordes of speculators in to the crypto-marketplace. There are a number of leading brokers in Cryptocurrency. In this lesson, we will learn:

What are Cryptocurrencies?

Wrapping your head around the above definition may seem like a very daunting task. But let’s take one tiny step at a time and first understand what cryptography is. In simple words, cryptography is a method of securely storing and transmitting data so that only those for whom it is intended can process it. A currency with cryptographic encryption is just like a dollar bill with a password. Only those that have the password can access it.

Key Features of Cryptocurrency

  • Cryptography – Wrapping your head around the above definition may seem like a very daunting task. But let’s take one tiny step at a time and first understand what cryptography is. In simple words, cryptography is a method of securely storing and transmitting data so that only those for whom it is intended can process it. A currency with cryptographic encryption is just like a dollar bill with a password. Only those that have the password can access it.
Mining – Since there are no central banks or governments involved, this brings us to next important question of who “prints” these currencies. Cryptocurrencies enter in to circulation through a process known as “mining.” Mining is essentially done through computers by running specialized software, which tries to solve complex mathematical puzzles known as “hash.” People all across the world compete to be the first to solve the “hash.” The winners are in turn awarded with new cryptocurrency coins.
  • Blockchain – Just like in accounting, where there is a ledger to keep track of all transactions, a blockchain is a ledger that records all cryptocurrency transactions. Using cryptography to keep transactions secure, blockchain provides a decentralized digital database of transactions that everyone on a network can see. This network is in effect a chain of computers that records cryptocurrency transactions between two parties in a verifiable and permanent manner.
  • Wallet – Similar to a physical wallet where you store your cash, there is a digital wallet for you to store your cryptocurrencies. This wallet holds all the private and public “keys” or “addresses,” which you can use to send or receive the cryptocurrency units. Wallets can be stashed on an external or an internal storage device.

Evolution of Cryptocurrencies – 8 Milestone Events

Created in 2009, Bitcoin was the first cryptocurrency. Since then, numerous other digital currencies have evolved. Let us take a brief look at the history of cryptocurrencies.

2008 – The Elusive Mr. Nakamoto

  • Satoshi Nakamoto, whose real identity remains a mystery to this day, published a paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System,” which provided a conceptual and technical framework for a payment system that would enable individuals to receive and send payments without involving any financial intermediaries.

2009 – Bitcoin is Launched

  • Nakamoto released the Bitcoin software to the public, and a group his enthusiastic supporters began mining and exchanging the currency for the very first time.

2010 – Bitcoin Finally Gets a Valuation

  • Since Bitcoin had never been traded before, only mined, it was virtually impossible to assign a monetary value to the cryptocurrency. Then, on May 22, 2010, a programmer by the name of Laszlo Hanyecz swapped 10,000 units of the digital currency to buy two Papa John’s pizzas. If the pizza guy had held onto those Bitcoins, at today’s rate they would be worth over $100 million!

2011 – Rival Cryptocurrencies Surface

  • As Bitcoin grew in popularity and the idea of encrypted and decentralized currencies caught on, the first alternative cryptocurrencies, Namecoin and Litecoin, appeared.

2013 – Bitcoin Crash Lands

  • Shortly after the value of one Bitcoin surged 78-fold in 2013 to touch the $1,000-mark, prices quickly plummeted to less than half of that after the People’s Bank of China prohibited Chinese companies from accepting Bitcoins.

2014 – Fraud and Theft

  • In January 2014, the world’s biggest Bitcoin exchange, Mt. Gox, which accounted for roughly 70% of all global transactions in the currency at that point of time, went offline and announced that close to 850,000 Bitcoins belonging to customers were lost and likely stolen.

2016 – Ethereum and ICOs

  • One cryptocurrency that came close to upstaging Bitcoin’s popularity in 2016 was Ethereum. The Ethereum platform uses a cryptocurrency known as Ether to support blockchain-based smart apps and contracts. Ethereum’s growth coincided with the emergence of Initial Coin Offerings. These are crowdfunding platforms through which a new digital currency is sold to investors at a discount, or a “token,” as part of a process to raise money for a company.

2017 – Bitcoin Scales $10,000

  • A gradual increase in the number of places where Bitcoin could be spent boosted its popularity among users. As more and more users opted for the cryptocurrency, money started flowing into the Bitcoin ecosystem, triggering an exponential ascent in its value from less than $1,000 at the start of 2017 to hit $10,000 on November 28, 2017.

BITCOIN, ETHEREUM, LITCOIN – Asset Classes of the Future

At the time of writing this lesson, there were close to 900 different types of cryptocurrencies in circulation. With such a dizzying number of assets available, investors often struggle to figure out which are best ones to invest in; also see the best crypto brokers. Provided below is a short introduction to the three most popular cryptocurrencies – the ones that generate the highest average daily trading volumes.

  • Bitcoin (BTC): The original digital currency to emerge in the wake of the 2008 global financial crisis, Bitcoin soared to spectacular popularity in 2017, with its current market capitalisation estimated to be in the region of $190 billion. There are approximately 16.80 million Bitcoin tokens in circulation, out of a pre-fixed maximum supply limit of 21 million tokens.
Ethereum (ETH): The second most popular member of the crypto family, Ethereum is often tipped as Bitcoin’s main rival. Unlike Bitcoin, Ethereum evolved as sort of super network of “world computers” that facilitates the creation and deployment of applications called “smart contracts”, which run in the Ethereum blockchain. The Ethereum platform has a native currency, “ether.” There are around 95 million ether currently in circulation, with an estimated market cap of just over $110 billion.
  • Litecoin (LTC): Often touted as Bitcoin’s little brother, Litecoin is a peer-to-peer cryptocurrency that supports much faster transactions, and has a more memory intensive mining process. Litecoin was created in 2011 by Charlie Lee, a MIT graduate and former Google engineer. It has a maximum supply limit of 84 million coins, of which close to 53 million are currently in circulation.

How to Invest in Cryptocurrencies?

Before you kick-start your investing journey with cryptocurrencies, it is important that you have an understanding of the different routes available. Whether you are a long-term believer in the value of cryptocurrencies or want to profit from the wild intraday price swings, explained below are the two most popular ways to buy and sell cryptocurrencies:

Buy and Hold

To buy cryptocurrencies for the long-term, you first need to open and fund an account with an online exchange through which you can directly purchase the assets. Exchanges are spread across the globe, and the one you choose should depend on where you live. It is always better to select an exchange that is located in the same jurisdiction as you, so that in case there is some dispute or default, you have the chance to legally claim your money back. If there are no exchanges nearby, opt for one that is located in a stable country like the U.S. or Canada, with a good legal framework. Also, since there are no financial intermediaries like banks involved, safely holding on to the cryptocurrencies becomes your responsibility. Private digital wallets, which come laden with high levels of security, are the recommended storehouse.

Trade Through a Broker

For those wanting to profit from the short-term fluctuations in the price of cryptocurrencies, without having to deal with the hassle of a digital wallet, trading through a regulated broker is the most popular choice. Trading cryptos with a broker is similar to trading foreign exchange. The cryptocurrencies are generally quoted against the U.S. Dollar or the Euro, with BTC/USD generating the maximum intraday volumes. If your analysis suggests that Bitcoin is likely to increase in value, you “go long” on the pair and ideally sell at a higher price. Conversely, if Bitcoin is projected to decrease in value, you can “short” BTC/USD and hopefully cover at a lower price. Another perceived advantage of trading through a broker is the leverage on offer, which can potentially boost your winnings regardless of how big or small your starting capital is.

Advantages and Disadvantages of Cryptocurrencies

The primary advantages of digital currency stem from their technological superiority and comparative ease of use.

  • Making payments using cryptocurrencies is quick and easy.
  • Cryptocurrencies are relatively inexpensive in contrast to traditional means of transferring funds.
  • All your cryptocurrency transactions are secured using advanced cryptographic encryptions.
  • Since there are no third parties involved, you are the master of your money. You don’t even need to share your identity or the details of transactions with any government agencies.
  • Like any other currency, there are disadvantages associated with digital currencies:

  • Cryptocurrencies are not widely accepted.
  • There is a risk of the wallet being lost.
  • When goods are purchased using cryptocurrencies, and the seller doesn’t deliver the promised goods, there is nothing that a buyer can be done to reverse the transaction.
  • The valuations of cryptos fluctuate constantly, causing a lot of confusion among outlets that accept it.

Final Thoughts

It is important that an investor remains cautious when approaching a new and volatile asset class like cryptocurrencies. Sticking to the top three coins, Bitcoin, Ethereum and Litecoin, would be the prudent thing to do. Keep a strict risk management strategy in place, and start-off with capital that you can afford to lose.

Want to start trading? Have a look at top cryptocurrency brokers!