What is Cryptocurrency?
Cryptocurrency took the world by storm just a few years ago, but what is it? Many of us have heard the term before and are familiar with some cryptocurrencies, such as Bitcoin.
Cryptocurrency is a virtual currency that’s controlled and secured by cryptography instead of policies at a bank. It’s secure and decentralised, usually based on blockchain technology. Many find it appealing because it’s unlikely that someone can counterfeit it, and it can’t be manipulated by government or corporate interference.
Launched in 2009, Bitcoin remains the most popular cryptocurrency, but there are hundreds of others. Ethereum is another one that almost surpassed Bitcoin’s market value. The various other cryptos are referred to as ‘altcoins’. You may have heard of a few, such as Litecoin, Ripple, Monero, and Zcash.
At the beginning of 2020, it was estimated that there were over 5,300 cryptocurrencies with an estimated market value of $201 billion altogether.
What is the Cryptocurrency Market?
The cryptocurrency market is dominated by Bitcoin, which is worth $160.4 billion, and Ethereum, worth $19.4 billion. As it isn’t backed or controlled by a central authority like a bank or government, the market isn’t plagued by the same economic or political factors as fiat currencies. Cryptocurrencies are therefore immune to traditional inflation rates, too.
Most cryptocurrencies gain value because they’re limited, like gold or other commodities. However, other factors such as the movement of current coins, media portrayal and major events all contribute. Integration, combined value, and even how users perceive the cryptocurrency plays a role, too.
Cryptocurrencies are still relatively new to the world, and there’s a lot of scepticism surrounding them with many still believing it’s a fad. However, we think that’s it’s here to stay. It’s among the next big changes that the world will see, much like the internet was a couple of decades ago.
The market value fluctuates according to supply and demand. As more and more people show interest in it, it’ll gain value. However, when mass media reports a scandal or an article that shines a negative light on cryptocurrency, people become sceptical once again.
For example, security threats are common. In 2016, assailants almost succeeded in a $55 million heist on Ethereum when they hacked the decentralised application (DAPP) built on the Ethereum currency. Fortunately, virtually all of the funds were returned.
Cryptocurrencies also gain more momentum, the more they’re included in the ecommerce infrastructure. As it develops in everyday society, it’ll become more normalised among civilians.
How Does the Cryptocurrency Market Work?
People can buy or mine cryptocurrencies. If you liken it to a mineral resource like gold, it works similarly. Miners mine the gold, but people can also buy and sell (trade) the existing commodity.
Those that would like to invest in cryptocurrencies can do so mining or through trading. Users can buy and sell their crypto coins on exchanges, and keep what they have in a virtual wallet (some use a piece of hardware that holds their wallet for added security).
Since cryptocurrencies are digital, the blockchains on which they’re built only allow the transaction to become final when both parties verify the transfer.
The blockchains are a record of the ownership of the units. With every change, a new block is formed and added to the chain.
If you want to start trading with cryptocurrencies, you can do so via a CFD account, where you speculate whether your selection will rise or fall in market value.
When you open a CFD account, you’ll be operating a leveraged product. Instead of taking ownership, you can speculate on the price movements of a cryptocurrency for a fraction of the trade value. However, while your profits will be significantly more lucrative, your losses will be equally as massive.
During speculation, you can either go long and buy when you think a cryptocurrency will increase in value, or go short and sell when you think it’ll fall.
When you’re working with a leveraged product, you’ll pay a margin (small deposit on the trade value). However, the profit or loss when you close the position is based on the full amount.
The Bottom Line
Cryptocurrencies are becoming more popular, and although decentralised, there are various factors that influence their movement. However, thorough research is required to accurately predict how the value of a crypto fluctuates.
This is crucial for speculating and even when you’re looking to buy or sell on an exchange. The crypto market is an exciting place. With more digital currencies emerging regularly, it’s bound to become the new norm in the coming years.