Crypto trading is an important trading avenue like stocks and forex, with the advantage that it is easier to make profits in the former. However, it is important to have a sound knowledge of the basics of crypto before getting started. This article lays down a simple overview of crypto and its related topics.
Cryptocurrency is a digital or virtual currency. It is the digital counterpart to real-world currencies such as dollars and pounds, which means it does not have a physical form. You cannot touch it or put it in your wallet.
Cryptocurrency was developed in the year 2008 by an individual or group under the assumed name of Sakatoshi Nakamoto, as a safer alternative to the currencies of the physical world. Bitcoin was the first cryptocurrency that they released.
Cryptocurrency is designed as an electronic system that works like digital cash. It is built on blockchain technology — all transactions are strongly encrypted and easily verifiable by means of a digital or computerized ledger. Cryptocurrency is named so because it is secured by cryptographic techniques such as symmetric and asymmetric passkeys and hashing.
Encryption of these transactions helps to make the crypto activity of all users secure, be it payments or the generation of new cryptocurrency coins.
Cryptocurrencies are used in the same way as normal currencies, like purchasing or selling commodities, and currency trading.
It is difficult to cheat this system, as every move is accounted for. Cryptocurrency is a decentralized system, with no governing body such as banks or other institutions. Its production is also not centralized; anyone can create crypto on platforms such as Bitcoin. Individuals can handle their crypto cash directly, without the intervention of regulatory authorities or institutions.
When Bitcoin came into being, it was the only one of its kind, hence cryptocurrency trading was not possible. As more and more people started buying into the concept, more such currencies were created. Today there are thousands of cryptocurrencies, and all of them apart from Bitcoin are called Altcoins.
One of the main functions of cryptocurrency is currency trading. Crypto trading is similar to forex trading.
You can trade one cryptocurrency only against another cryptocurrency. For example, you can trade Bitcoin against Litecoin, another popular cryptocurrency. Like the EUR/USD currency pairs of forex trading, crypto trading also is done through cryptocurrency pairs. Trading was made possible with the creation of many cryptocurrencies.
Crypto trading takes place through exchanges. These are basically the market places where traders get to meet and engage in crypto trading. Crypto trading is a big financial market today, worth more than 200 billion dollars.
Every day, fortunes are made or lost through crypto trading. Nowadays, all kinds of AI tools and software are available for traders to pick and choose from, to make decisions of higher accuracy.
In short term trading, currency that is bought can be held only for a short time, which may range from as little as a few minutes to a few months.
Traders buy a currency which they know will appreciate shortly. By selling again when the price spikes, quick profits are made.
In long term trading, the purchased currency is held on for a long period of time. Traders may buy with a view for selling at a suitable time in the future, one or more years away.
For example, Bitcoin has grown enormously in value since its inception. The early buyers of Bitcoins profited many times over a few years later.
The crypto market is the collective name for all exchange platforms that facilitate trading. Binance and Coinbase are the most popular ones.
Crypto exchanges are not to be confused with crypto wallets. There are two kinds of crypto wallets, hardware, and software. The hardware wallet is generally considered the safest kind.
A person can set up a crypto wallet on platforms like Coinbase. This wallet serves the same purpose as a real wallet, and the user can use it to store the digital currencies or assets he purchased using fiat money like USD.
By setting up an account, he can use the wallet to purchase popular cryptocurrencies like Bitcoin; he can send coins to other wallets or also receive coins.
If the user wants to trade Bitcoin for other cryptocurrency or altcoins, and the facility is not available on his wallet account, he can register with a crypto exchange platform. He can send coins from his wallet to this exchange account and with this money, he can start trading in currency exchange.
Crypto market prices are determined in the same way as the forex market. The supply and demand of the cryptocurrencies and their utility are the factors that come into play here.
Entry to crypto exchanges presents very few barriers. The centralized exchange is a traditional platform like a brokerage where there is a centralized authority, and buyers and sellers are brought together through an intermediary. A percentage of each trade is charged as the fee.
In the decentralized kind buyers and sellers meet directly without the help of a third party. It functions on a peer-to-peer basis.
Miners form part of the digital crypto network. In simple words, they collect and verify the data of transactions and process them into blocks. However, these functions require highly sophisticated computer systems. Cloud mining, CPU mining, GPU mining, and ASIC mining are the different types of mining.
Every single transaction is encrypted and added to a block. After several transactions have taken place, the block gets added to a chain, which serves as the public ledger.
The encryption is like solving highly complex puzzles that require powerful hardware. Miners verify these encryptions for a fee of a currency, such as Bitcoin. The more blocks he adds, the more he gets paid. And the more people want to mine, the more complex the puzzles become.
Crypto trading as a concept is easy to understand but in practice, one needs a deeper and more comprehensive understanding of the subject before participating in it. It is imperative to research the backgrounds of the different platforms and middlemen to ensure their indubitability. While there is always going to be a risk factor, there is no denying the high appeal of crypto trading.
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