What are cryptocurrencies?
Cryptocurrency (electronic money, digital money) is a digital asset secured by cryptography and distributed across the network of computers (blockchain). This decentralized structure allows them to be exchanged without control of the central banks and governments. Cryptocurrencies can be bought, sought, and exchanged as the standard money via digital wallets.
Blockchain technology is the digital register of data that is generally available for all. This data is the transaction history for every item of the digital coin. The transaction history displays how the price for a certain coin was changing over time. Blockchain technology works as the recording of the transaction in “blocks”. Every new block is added to the beginning of the whole chain. Blockchain technology has special security features that standard computer files do not have. A blockchain file is always located on multiple software within the network. Everyone from the network can use it. And this is what makes digital money unique: it is both transparent and safe.
Blocks are linked together by cryptography — the science of using mathematics to encrypt and decrypt data. Any attempt to change the data breaks the cryptographic links between blocks, and can quickly be identified as fraudulent. This mechanism protects the data from hacking. Cryptography consists of two basic elements — hashing and digital signatures.
- Hashing. Hashing is an algorithm that computes a fixed-size bit string value from a file. This file includes the blocks of data. Hashing transforms this data into a far shorter fixed-length value or key which represents the original string. The hash value can be considered the summary of everything within that file. Hashing checks the integrity of data saves the structure of the blockchain and encrypts the user’s account details and transactions. It also generates cryptographic puzzles that ensure block mining is possible.
- Digital signatures. The digital signature is a mathematical technique used for validating authenticity as the analog of the standard signature. It can be used for messages, digital documents, or software. By contrast with the handwritten signature, the digital one is much harder to falsify. A digital signature is created to solve the problem of tampering and impersonation in digital communications.
The cryptocurrency appears as the result of the mining process. Mining is the creation of new structures to provide the work of cryptocurrency platforms. For the creation of the next structural unit, a reward is usually provided at the expense of new cryptocurrency units and/or commission fees. Usually, mining is presented as a series of calculations with an enumeration of parameters to find a hash with a given characteristic. Such computation is used by cryptocurrency algorithms to provide protection against re-spending of the same units and stimulate people to spend their computing power and keep networks running.
Types of cryptocurrency
When an individual thinks about cryptocurrency, the first thing that comes to their mind is bitcoin. However, it is necessary to admit that bitcoin is just a type of cryptocurrency. They often confuse these two terms because the word “cryptocurrency” itself has appeared after the creation of the Bitcoin payment system in 2009. The term "cryptocurrency" became widespread after the publication of the article "Crypto Currency" in Forbes magazine in 2011.
Then, in 2011 other cryptocurrencies began to appear. They were named “altcoins” (abbreviated from alternative coin). Currently, this is a commune name for all digital money developed after bitcoin. Their developers sought to overcome a number of problems inherent in Bitcoin or use blockchain technology in other areas. The cryptocurrencies created on the basis of another are called “forks”. Also, a fork is a process of splitting the blockchain with the creation of a new cryptocurrency. Unlike a fork of a program, a fork of a blockchain can be caused by technical factors, for example, bugs in a new version of a wallet program. There are two types of forks — hard forks and soft forks. Both forks create a split, but a hard fork creates two blockchains and a soft fork creates only one.
- A soft fork is a cryptocurrency protocol change that is backward compatible. This means that not updated nodes are still able to process transactions and add new blocks to the blockchain until the rules of the new protocol are violated.
- Hard Fork is a change in the cryptocurrency protocol that is incompatible with previous versions. The nodes that are not updated to the latest version will not be able to process transactions and add new blocks to the blockchain. Hard forks can be used to change or improve an existing protocol, or create a new independent protocol or blockchain.
Bitcoin (BTC). Bitcoins is the first cryptocurrency developed in 2009 by a person or a group of people under the pseudonym Satoshi Nakamoto. Bitcoin relies on two processes — mining and blockchain. When an individual buys bitcoin on an exchange, the price of one bitcoin is usually quoted against the US dollar (USD). In other words, he sells USD in order to buy bitcoin. The main reason for bitcoin’s popularity is the fully independent blockchain system. All transactions remain anonymous without third-party intervention. Another reason for bitcoin’s popularity is numerous sites for exchange. As bitcoin was the first cryptocurrency, it is accepted by the majority of traders and investors. The new cryptocurrencies are still struggling to get such credibility.
Bitcoin Cash (BCH). Bitcoin Cash is a hard fork of bitcoin that was created in December 2017. These two cryptocurrencies differ from each other. In comparison with bitcoin, its hard fork bitcoin cash can have blocks of up to 8 megabytes in the blockchain. Don’t send bitcoin cash to bitcoin addresses and vice versa.
Ethereum (ETH). Ethereum is both a cryptocurrency and an open universal platform through which blockchain-based decentralized applications are created. The inner currency of this platform is called ether. Ether is convertible, and you can use it to pay for the transaction and computing services. The ethereum became popular thanks to the system of “smart contracts”. A smart contract is a special program that is written into the blockchain. That means a smart contract is a contract that is executed independently, without any intermediaries. For this, it is sufficient to fulfill the conditions indicated in the contract. The parties sign a smart contract using methods similar to signing the sending of funds in existing cryptocurrency networks. After signing, the contract is saved in the blockchain and comes into force. To ensure the automated execution of contract obligations, a special environment (the nodes of the ethereum blockchain) is required. This allows to fully automate the execution of contract clauses. This means that smart contracts can only exist within an environment that has unhindered access for executable code to smart contract objects. All terms of the contract should have a programmatic description and clear logic of execution. According to the specified conditions, the achievement or violation of the clauses, the contract makes independent decisions based on the programmed conditions. Thus, the main principle of a smart contract is complete automation and reliability of the execution of contractual relations.
Litecoin (LTC). Litecoin is a cryptocurrency based on the program code of the bitcoin platform. That’s why the miners often call it the “bitcoin of all altcoins” and “electronic silver”, as the bitcoin is called the “electronic gold”. Litecoin is a peer-to-peer (P2P) cryptocurrency and a public blockchain. It is an open-source project similar to bitcoin but using a different cryptographic algorithm. This gives litecoin the ability to process more transactions with shorter block generation periods and cheaper fees. Litecoin was created to solve several problems with bitcoin, in particular, to reduce the time required to validate a new block on its blockchain, as well as to maintain the reliability of storage. Litecoin uses a proof of work (PoW) mining model to prioritize fast transaction speed and efficiency. This means that even consumer hardware can mine litecoins as opposed to bitcoins. Litecoin is a blockchain where participating nodes process transactions while miners ensure that all transactions are secured and verified in the ledger. Anyone can use litecoin to make cross-border transactions, store, speculate on the fluctuating price, or make payments.
ZCash (ZEC). Zcash is a decentralized cryptocurrency focused on privacy. The main advantage of Zcash is its anonymity option, which provides a high level of privacy that is unattainable for pseudo-anonymous cryptocurrencies such as bitcoin or ethereum. Zcash is completely decentralized because it uses an open-source protocol. The main feature of the coin is the ability for users to choose which transactions they want to use — public or hidden. You can even make transfers between different types of addresses, but this has a negative effect on the confidentiality of transactions. This allows the users to have both privacy and other benefits of a decentralized digital currency.
EOS. EOS is a cryptocurrency and platform for the development of decentralized applications. EOS was created as a modernized ethereum, which means, a platform for smart contracts and decentralized applications. The main feature of EOS is the distributed consensus algorithm based on the delegated confirmation of the rate (DPoS protocol). There are no transaction fees on EOS. The resources of the user are used, in proportion to his rate. The price for EOS depends on demand. This mechanism ensures the equality of all EOS miners, regardless of the amount they invest.
XRP. XRP is the cryptocurrency of the Ripple network, which exists only in this system. Speaking of this cryptocurrency, it is necessary to make an important distinction between XRP, Ripple, and RippleNet. Ripple is a cryptocurrency platform that was developed by a similarly-named company for payment systems. It is focused on currency exchange operations without chargebacks. RippleNet is a Real-Time Gross Settlement System (RTGS) that aims to guarantee instant money transactions around the world. XRP is a digital currency powered by the RippleNet digital payment platform. XRP was created as the fast alternative to both other digital assets and cash payment platforms such as SWIFT. The main advantage of XRP is that the Ripple network can work directly with banks and corporations that control global financial flows. XRP coins can only be bought or distributed. You don't need to mine it. Within the Ripple network, you can use ordinary money (dollars, euros), other coins, and precious metals. The other advantages of XRP are the high speed of transactions (XRP transaction proceeds within 4 seconds on average), low transfer costs, and low volatility.
Is it possible to make money on cryptocurrency?
Of course, it is possible to make money on cryptocurrency trading. The value of cryptocurrencies is much bigger than the value of standard currencies, and crypto trading is very lucrative. However, there is an opinion that cryptocurrencies are just a “soap bubble” and the money invested in them will be just wasted. Also, the legislation concerning cryptocurrencies differs in every country. There are countries where digital money is legal, and you can buy a service via them. In other countries, the legislation concerning cryptocurrency is much more complicated. Let’s look in detail at the pros and cons concerning crypto trading.
Pros of cryptocurrency trading
- High return. Cryptocurrencies have much more value than the standard currency like the dollar and euro. If the standard money can be printed as much as necessary, digital money can’t be issued this way. Its volume is limited. And already in the next century, "bitcoin mines" will be exhausted. This means that these coins will only rise in price. Also, digital coins are much more difficult to create. A large amount of electricity and powerful computers are required for a mining farm.
- Anonymity. The crypto market exists outside the governmental regulators. The participants of the market can effectuate the transaction at any amount and at any time. This freedom attracts investors and traders. For example, if the trading with binary options and forex can be restricted, the cryptocurrency is located in the “gray zone”. If there is no specific regulation concerning digital money, you can freely work with it.
- Cryptocurrency is the future. The government accepts cryptocurrencies step by step because the transaction in cryptocurrency is much faster. Moreover, some trading platforms offer crypto-fiat pairs. Fiat money is money that is not backed by gold and other precious metals. The nominal value of the fiat money is established and guaranteed by the state, regardless of the value of the material used to make it. Crypto-fiat pair is the pair that includes the cryptocurrency. The most famous crypto-fiat pair is BTC/USD.
Cons of the cryptocurrency trading
- High volatility. The crypto market is highly volatile. The price dynamics can vary up to several tens of percent. For classic financial instruments, such changes are unusual, while for the crypto market it is common. There are several factors explaining such high volatility.
- Lack of governmental regulations. The standard currency receives support from the state. The state is interested in stabilizing the national currency rate, while the cryptocurrency rate fluctuates depending on supply and demand. Cryptocurrencies are decentralized and not fully regulated by the financial authorities of states.
- No attachment to tangible value. The exchange rate can depend on the demand for resources or energy. Oil, gold, and gas have a value, and as long as it is stable, the rate will be relatively stable too. Cryptocurrencies don’t have such value because there is no accurate way to estimate them.
- Market hype. Cryptocurrencies became very popular in recent years, which has provoked an influx of novice investors and traders into the market. Newbies in this often make mistakes, buying and selling assets at the most inopportune moments, and thereby influence the rate fluctuations.
- Cryptocurrency may be hard to understand. The work with cryptocurrency requires an understanding of both the work of the market and technical knowledge. If you want to work with cryptocurrency, you should understand the key concepts of this sphere: mining, fork, hashing, blockchain. Moreover, you should understand how cryptocurrency appears and how it should be bought and sought. Not everyone has the time and possibility to study this sphere.
- Risk of fraud. The anonymity and lack of governmental control create a high risk of fraudulent activity. Regulatory bodies such as the CFTC, SEC and Financial Industry Regulatory Authority (FINRA) have all issued warnings for fraudulent schemes used against the crypto traders and owners of cryptocurrency. Generally, the crypto exchanges are safe but the intruders develop new ways to hack them.
What is crypto trading?
Crypto trading is the process of selling and buying digital money. Crypto trading works the same way as trading with another asset. For example, the trader suggests that the prices for bitcoin will be above $20 per share at 20:00 on a certain day or the price for ethereum will be below $43577 at 18:00 on Friday. He opens the option in the amount of $10, for example. Then the trader waits for expiration and sees if his guess was right. In the case of the winning trader receives $10. If the forecast was incorrect, he loses $10.
Often crypto traders apply the trading robots that work instead of them. This type of work is named crypto auto-trading, the process where the robot opens the options based on the predetermined algorithm. In the past years, many traders utilized robots but currently, this number is decreasing. The weak point of auto-trading is the predeterminacy of the robot’s algorithm. As opposed, the human can make the unusual decision and create the non-standard strategies.
When to trade cryptocurrency?
In contrast with forex or stocks, cryptocurrencies are available for trading every day including weekends and holidays. It is possible because the crypto markets exist independently of the state. For example, if the trader wants to trade the standard asset he needs to wait for the major exchanges to open and the trading session starts. If he wants to trade cryptocurrency, he doesn't have to wait for anything. All that he needs is to monitor the news concerning digital money to follow the level of volatility.
How to trade cryptocurrency with forex?
Crypto trading is possible on the forex and CFD platforms. However, there are significant variations that are used in crypto trading on forex and CFD platforms. You should take these things into account in comparison with trading on a crypto exchange. It is necessary to note that what is traded on most forex/CFD platforms are cryptocurrency contracts for difference (CFDs). In other words, the trader is entering into a contract with the CFD provider on an underlying asset. These derivatives are based on the price movements of their underlying assets, but they don’t involve an exchange or ownership of the cryptocurrency itself.
This means that there are no actual cryptocurrencies that are being exchanged, nor wallets to worry about. This also reduces the hacking risks. CFD traders can focus on how to take advantage of market movements. There are some main differences between trading cryptocurrencies on a forex/CFD platform and on an exchange.
- No cryptocurrencies are exchanged in any of the trading transactions.
- There is no requirement to own a cryptocurrency wallet.
- You trade cryptocurrencies under the terms and conditions agreed with the forex/CFD provider.
- Crypto CFD trading is leveraged.
- You get to trade crypto-fiat pairings such as the BTC/USD or LTC/USD, as opposed to a majority of crypto exchanges where you can only trade crypto-to-crypto pairs.
- You can only make deposits and withdrawals using fiat currencies.
Platforms for cryptocurrency trading
The trading platform is the computer software supplied by brokers which gives the opportunity to sell and buy various assets as well as to have a trading account. Brokers play the role of intermediary between sellers and buyers. He gets a small part of the trader’s winnings as the commission for services.
A reliable platform offers the customers an excellent service, many assets to work with various withdrawal methods. Usually, the brokers provide you with the opportunity to trade on the demo account and create the trading strategy.
How to choose a trading platform?
The quality of the broker’s platform is an important aspect of successful trading. Sometimes brokers apply fraudulent techniques. They block the successful account without warning and the trader can’t withdraw the money. To avoid this the trade should carefully check the broker’s platform before he starts to trade.
Pay attention to the comments from other users. You may look for it on the forums, on social media, and on blogs.
Make sure that you understand why the platform functions. The trustworthy broker clearly indicates the details of how the platform works: ways to withdraw the money, how to create a personal account, how to work with trading indicators. Contact the broker’s support service if something bothers you.
Verify the conditions of withdrawal of the money. Ensure that the broker offers the services that work in your country.
Check the work of the technical support. Better avoid the platform where the support service doesn’t keep in touch with you and doesn't answer your questions.
Keep in mind that the good broker never promises effortless money because trading is not simple as it may seem. It requires effort and time. Be sure that it is probably a publicity stunt if a certain broker promises you a fortune without effort.
Is crypto trading safe?
Yes, crypto trading is safe to do it right and act logically. If you trade based on the working strategy and utilize professional tools, he will see a positive result. The main thing is to be patient and persistent. Of course, there is a risk of financial losses but it is you who can avoid them. If you first learn to trade on the demo account, you can reduce the level of financial risk.
The whole process of trading is quite simple. The trader opens the trading platform, chooses the assets, selects the indicator, and opens the option. Then he chooses the strongest trading signals and waits for the option’s expiration.
Recommendations for the safe crypto trading
- Pick the most profitable and stable cryptocurrencies. If you’re not sure that a certain asset is beneficial, don’t trade it.
- Choose a reliable broker with positive comments and fast technical support.
- Compare the data from the trading signals with information of the indicators. If you suppose the emerging reversal or appearance of a trend, you should check your idea by three indicators. If they confirm the suggestion, you can open the option.
- Test every strategy with different crypto assets and in different conditions.
- Use the strategy that gives the profit with various assets.
- Manage your negative emotions and stay focused. Don’t let the negative feelings hinder you.
How do I manage risk during crypto trading?
If you want to reduce the financial risk, follow the rules of risk diversification and risk management. Risk diversification is the dividing of the capital among the different assets and brokers to take down the total trading risks. Risk management is the decision-making process aimed at reducing the probability of an unfavorable outcome and minimizing losses.
Recommendations for risk management
- Don’t concentrate all your resources on one asset especially when it comes to digital money. Cryptocurrencies are very volatile and their profitability may vary. That’s why it is better to open several options for different assets. You may open one trade for the pair BTC/USD, another for the ETH/USD, and the third for the LTC/USD. The funds should be divided according to the lucrativeness and the signal’s expiration. For example, $10 for the first pair, $9 for the second, and $13 for the third.
- Never risk all your money. Save funds for possible difficult situations. Sometimes the market may be very unpredictable and turbulent, and if you have some funds on your deposit, you’ll have the opportunity to compensate for the financial losses.
- Don’t risk by the amount more than 5% of your current deposit for one trade. If the risks are held within 5%, the total losses will be pretty much the same.
- Open the trades on several timespans but within the amount of the assured provisions. It is necessary to open trades on several timespans but within the amount of the assured provision. Losses for the unprofitable trades should be compensated by the winning ones. Try to separate money between options thoughtfully.
- Don’t forget about the stop-losses. Often traders forget that is time to leave the market. Stop-losses act like a cold shower in such a situation.
Apply these two formulas that will help you to compute the level of risk during the trading.
Formula for calculating risk for all trading capital
Risk = Expected losses in the trade/Capital * 100
Formula for calculating risk in one trade
Risk in one trade = Purchase cost - Stop
Instruments for crypto trading
Trading tools are technical equipment that trader uses during the trading process. Keep in mind that there is no universal solution for using trading tools. But if a trader has many tools, then he will be able to identify the profitable signals and assets very quickly. The main trading instruments are the economic calendar, online charts, and indicators.
Types of market analysis
There are two principal types of market assessment: technical analysis and fundamental analysis. The fundamental analysis shows the interrelation between economic events and trading. Such a type of assessment is based on the evaluation of financial news and economic indicators. Technical analysis is the visual assessment of the trading charts and figures using different instruments.
Instruments for fundamental analysis
Economic calendar. The economic calendar displays the main financial information (information from the major companies, decisions of the central banks) that may impact the state of the market. Such a tool helps traders to understand the financial situation clearly.
Market trends. Market trends show the emerging change of trends in different timespans. The trader compares the information from this indicator with data from other instruments and decides when it is better to open the option.
Instruments for technical analysis
Online-chart. This is a visual presentation of the market movement in real-time. The main role of the trader is to evaluate the chart and to identify the trend, breakdowns, and the point of reversal. The online chart can be presented in the form of bars of candles.
Technical indicators. A technical indicator is a tool that calculates certain parameters according to the predetermined formula. Indicators look like lines and histograms that trade should plot on the chart.
Types of indicators
Trend indicators. These indicators are used to recognize the upcoming trend or trend reversal and to determine its direction and power.
Examples of indicators
Moving Average (MA). Moving Average helps to figure out the strength of a trend. The average price value is determined by this indicator as a sum of all values of the calculated trading period, divided by the number of days.
Average Directional Movement Index (ADX). This indicator shows the presence of pronounced trend strength. The higher the value of the indicator, the more likely it is that the existing trend will continue. Thus, the lower the indicator, the more likely the trend will change.
Oscillators. These indicators are created to find out the channel’s borders and the areas of the oversold and overbought.
Examples of indicators
Relative Strength Index (RSI). This indicator shows the strength of the trend and the possibility of reversal.
Stochastic. This indicator determines the possibility of a reversal at certain levels. Use Stochastic together with the trending indicators.
The main function of the indicators is to be an assistant tool during the technical analysis.
The proper utilizing of analytical tools is essential for the trading strategy. A strategy is a range of steps that lead to beneficial trading. The main goal of traders is to create one or several winning trading strategies.
The main trading instrument is the signal. The signal is the electronic caution that emerges when the price for assets changes. It appears when something changed on the market. The signal shows the main details of the asset: currency pair, the direction of signal, power, time of expiration. The capability to evaluate and choose accurate signals is important for traders. However, please remember, that signal is the guess and not the strict recommendation.
Bot for cryptocurrency trading
Nowadays the programmers offer bots for crypto trading. The pros for utilizing the bot are not hard to understand. The bot behaves according to the precalculated algorithm and can work for many hours. A bot is quicker than a trader and it can’t be influenced by greed or fear. Sometimes the auto-trading can be very profitable, especially in small timespans.
On the other hand, auto-trading has its disadvantages. The main problem is that you don’t know who created the algorithm. The programmers often offer only typical solutions and don’t provide variants for non-standard situations. You can’t verify the quality of the trading algorithm and you can’t modify it. And remember that bots can’t replace humans. Even when you use the robot, you can’t rely on it in all aspects
Signals display the indications as per the precalculated algorithm and this calculation may not comply with the current state of the market. There is always a certain level of unpredictability, especially when the market is turbulent. A trading bot just automatically follows the indications on the signal and submits the algorithm. But following the algorithm doesn’t mean to act right. The signal is just an alert and it’s a trade that decides when it is better to open the trade.
Recommendations for the beginners
Novice traders should apply several important recommendations to make the trading process more convenient. Trading may seem quite complicated but this is not so. It’s just a skill driving a car or playing a musical instrument. Of course, it is perfect when the person has some kind of talent for trading but the discipline and the right approach are much more important.
- Verify all new strategies on the demo account.
- Control your negative emotions and stay calm.
- Be disciplined and trade regularly.
- Compare the data from the trading indicators with signals.
- Learn more about trading and constantly improve your skills.
- Analyze your mistakes and learn from them.
Are cryptocurrencies illegal?
The legality of cryptocurrencies differs in various countries. The independence of the crypto market seems intimidating to governments. A basic principle of digital currency is decentralization, it is not issued by any central bank, and that’s why it can’t be regulated by it. Coins are created as a result of complex mathematical calculations in accordance with a predetermined algorithm, and it is impossible to influence this process by the decision of the government.
On the one hand, there are several positive aspects — speed, freedom, and anonymity. Individuals can quickly transfer funds between countries without restrictions. At the same time, both the sender and the recipient of funds remain anonymous.
However, there are also negative aspects. Criminals often take advantage of untraceable digital currencies and use coins in their illegal schemes. The anonymity of transactions makes it difficult for law enforcement agencies to track the movement of money in such schemes. Also, investors aren’t legally protected, and often become victims of fraudulent activity.
However, digital money slowly becomes a normal part of daily life and economics. The governments of all countries and their financial structures are trying to establish at least partial control over the crypto market. Digital currencies are legalized in some forms in the USA, Japan, Canada, Sweden.
The majority of countries follow the experiment with the legalization of cryptocurrency in other states. In such countries, operations with cryptocurrencies are not prohibited, but also they don’t have legal status. This happens in Spain, Switzerland, Turkey, Singapore.
By contrast, there are countries where cryptocurrencies are totally banned. In some countries, digital money is prohibited because the government sees them as a threat to the national currency (Indonesia, Bolivia, Ecuador). In other countries, coins are banned for religious reasons (Algeria, Bangladesh, Morocco).
Some countries have partial bans on certain cryptocurrency transactions. For example, China. Banks in China are prohibited to carry out transactions with digital money. China banned crypto exchanges and initial coin offerings (ICOs) but didn't restrict individuals from holding digital money.
How to trade if cryptocurrency is prohibited in my country?
If cryptocurrency is banned in your country, you can choose another asset to trade. There are numerous types of assets: forex, stocks, binary options, indices, commodities, futures, CFDs. Check the legislation in your country concerning trading and choose the certified broker. The broker also can offer you ways to trade legally. Select the well-known international brokers that work in many countries and have proved their reliability. If you want to know whether a certain broker works in your country, ask this question to the technical support.