How to Trade?
If you want to be part of the great adventure that is trading, it’s time to join the financial markets and start investing in the most profitable assets. Trading can provide you with a superior lifestyle, provided that you follow a few simple rules in keeping your trading capital safe.
Cryptocurrencies are by far the most exciting financial assets of 2017, providing traders with some of the best returns. Almost all investors are starting to show an interest towards this monetary revolution by actively buying and selling in the market to take advantage of their short-term price variations.
If you are new to trading cryptocurrencies, it’s normal to feel somewhat overwhelmed. It’s understandable if you feel confused by the new terms and concepts associated with trading Bitcoin, Ethereum, Litecoin and other altcoins – also known as “alternative digital currencies”. If this is a completely new market for you, here’s an introduction to get you familiar with the latest trading phenomenon…
Introduction to the Cryptocurrency Market
Cryptocurrencies are digital or virtual currencies that use cryptography to create money as well control and validate every transaction. Bitcoin was the first virtual currency to launch, but overtime we have seen the establishment of several more. The five most significant in terms of market capitalization are Bitcoin, Ethereum, Bitcoin Cash, Ripple, and Litecoin.
It all started in 2009 when a paper named Bitcoin: A Peer-to-Peer Electronic Cash System was published by an individual, or a group of people, called “Satoshi Nakamoto”. This anonymous creator introduced the new payment method known as Bitcoin.
This peer-to-peer online payment system allows users to send money (Bitcoin) from one person to another without the intervention of a third party such as a bank or any other financial institution. There is no government or central bank that governs this cryptocurrency, making it a completely decentralized system. Every transaction is executed pseudo-anonymously which is recorded and made visible to everyone in a general and public ledger. The technology that powers this system is called “Blockchain technology”. Its associated “distributed ledger technology”, doesn’t only apply to Bitcoin and other cryptocurrencies, its uses can also be widened to an enterprise level when creating contracts, sharing data and for other innovating services. A growing number of companies are already enjoying the limitless possibilities of Blockchain technology including Microsoft Azure.
Cryptocurrency Trading: What Can You Trade?
Start trading cryptocurrencies by purchasing and storing them in a wallet. The next step involves finding a cryptocurrency exchange to trade with. Note that cryptocurrency exchanges are not part of a regular stock exchange.
You can also use cryptocurrency brokers like CFD brokers, which enable you to easily trade digital currencies and other financial assets without owning them. You can usually profit from leverage and margin trading through these brokers, enabling you to increase your market exposure and invest more funds that what you currently hold in your trading account. Each market movement will then amplify your gains, as well as your losses.
Opening a position in the cryptocurrency market involves the same process as Forex. It involves buying/selling one currency while selling/buying another simultaneously. Cryptocurrency trading involves opening a position on a virtual currency to bet on its rise or fall against another cryptocurrency or fiat currency.
A currency pair includes a base currency and a quote currency. The base currency, also known as the transaction currency, is the first one displayed in a currency pair while the quote currency, or counter currency, is the second. With a currency pair like BTC/USD – Bitcoin (BTC) is the base currency while the American Dollar (USD) is the quote currency. If BTC/USD = 4,638, then it means that 1 Bitcoin is worth 4,638 USD.
You can trade cryptocurrencies against the most common and widely used traditional currencies such as the American Dollar (USD), the Euro (EUR), the Chinese Yuan (CNY), the Japanese Yen (YEN). There is also the option to exchange them against other cryptocurrencies. For example, you can trade Ethereum against Bitcoin (ETH/BTC), Ripple against Bitcoin (XRP/BTC) or Litecoin against Bitcoin (LTC/BTC). Your broker will determine which currency pairs are available to trade.
The Most Important Concepts to Know about the Cryptocurrency Market
• Cryptocurrency = A digital currency that is completely decentralized, meaning it doesn’t require a middleman or no third party to control it, which ultimately reduces fees. Transactions are fast, pseudo-anonymous, irreversible, secure and they do not require any permission to be executed.
• Blockchain = The base technology behind the foundation of cryptocurrencies. It includes a giant database which stores and shares information and records transactions in a general and public ledger.
• Mining = A process whereby miners confirm transactions and allocate them across the network and build and add blocks to the Blockchain. This is also how the currency is created, as each miner is rewarded with a token according to the cryptocurrency they are working on.
• Cryptography = Cryptocurrencies are built on cryptography – a method that encrypts a message to protect its content. The security of every transaction is not achieved through its users but through this mathematical process.
• Private Key = This represents a private and secret combination of numbers and letters that are used to spend and send digital coins. The private key acts as your digital signature.
• Public Key = This key is open to all. It represents your public address and is linked to your wallet that people can use to send you coins.
• Wallet = This is where you can store, send and receive your coins. There are different types such as paper, hardware, web, software and mobile wallets.
• Altcoins = Alternative digital currencies to Bitcoin which usually have lower market capitalization.
• Fiat currencies = Traditional currencies such as the EUR, the USD or the YEN as opposed to virtual currencies such as Bitcoin, Litecoin, Ripple and Ethereum.
• Leverage and Margin Trading = Involves borrowing funds from your broker, helping you increase your market exposure. Only a small fraction of the position is given to your broker as collateral.
• Margin Call = Occurs when your trading positions are against your direction and the value of the assets are below a certain level, thus requiring you to either deposit more money into your account or your assets.
• Spread = The difference between the buying and selling price.
• Slippage = The difference between the price you ideally wanted to buy or sell at and the actual price at which the trade is executed.
• Market Order = This order type will execute your position as quickly as possible with the current rate available in the market.
• Limit Order = This type of order gives you better control over the price at which you want to sell or buy an asset.
What is Bitcoin?
Bitcoin is a digital payment system. The Bitcoin cryptocurrency is the most popular virtual currency in the world and the largest in terms of market capitalization and volume. An increasing amount of companies, shops and stores are accepting Bitcoin as a method of payment around the world, proving that it is more than just an asset to trade.
Bitcoin was created in 2009 by a so-called software developer or group of people named “Satoshi Nakamoto”. Its price skyrocketed in 2017 from about $1.000 to more than $5,000.
Bitcoins are based on Blockchain technology, which is used for storing and transmitting information. This technology is transparent, secure and is not controlled by any central organization.
How does Blockchain technology work?
Let’s say “A” wants to send 10 Bitcoins to “B”. A block is created alongside other transactions. This is then validated by nodes in the network (also called miners) with a cryptography technique using both private and public keys. Each block of transactions is confirmed by miners while storing records of them in a general ledger. After validation, the block is added to the chain (hence the name of the Blockchain technology) and all users are given access to the transactions. “B” will then receive the 10 Bitcoins from “A”.
What is Ethereum?
Vitalik Buterin, the man behind the creation of Ethereum, proposed his cryptocurrency in 2013. At only 19-years-old, Buterin had dreams of building a programmable blockchain that would soon become the future of information technology. In 2015, the Ethereum platform was launched but it was only March 2017 when the price action of this cryptocurrency began rising and increasing exponentially by more than 3,700%.
While Bitcoin is strictly a virtual currency, Ethereum takes Blockchain technology to another level. It enables users to create and run any applications thanks to a turing-complete programming language called Solidity. Ether is the associated cryptocurrency and is described as “the crypto-fuel for the Ethereum network”.
What are smart contracts?
The Ethereum protocol allows users to generate “smart contracts”, mainly structured as “if-then” statements, which can widen the use of Blockchain technology in the business world. A smart contract is a code that’s uploaded to the Blockchain in a way that disallows downtime or fraud. This type of transaction cannot be changed once registered in the Blockchain, unless it is stated otherwise at the beginning.
A smart contract is smart because it is automatically executed once certain conditions are met. For example: Let’s say “A” wants to rent a car from agency B using the Ethereum protocol. They can use a smart contract stipulating that if and when “A” sends the requested funds, the car rental agency will send them a digital key to use the vehicle.
Everything is recorded within the Blockchain, enabling all participants to see if and when “A” sends the funds, for the digital key to be sent. The Ethereum Blockchain can therefore be used to program any contract, from the simplest to the most complex, such as royalty contracts or shareholders alliance.
What is Litecoin?
Silver is often considered the “little brother of gold”. Similarly, people often refer to Litecoin as “the silver to Bitcoin’s gold”. This is because it was created from the same open source code. Charles Lee introduced Litecoin in October 2011, predicating that it will take up the micro transaction space, while Bitcoin focuses more on expensive purchases. Litecoin is now one of the most popular cryptocurrencies with a market capitalization of about $4 billion. This digital asset has had a 1,400% increase so far this year. It reached the $87-mark for the first time ever in August 2017 after starting the year at about $4.
There are a few significant differences between Bitcoin and Litecoin. Litecoin offers low fees and fast transaction validation, which is particularly advantageous for small businesses. Litecoin also has a larger cap than Bitcoin at 84 million coins vs. 21 million. The block time, which is the time it takes for miners to confirm a block on the blockchain, is also shorter with Litecoin, at 2.5 minutes compared to the 10 minutes with Bitcoin. For merchants, Litecoin is a more attractive coin compared to Bitcoin, as there is less of a waiting time when ensuring payments from clients.