Cryptocurrency trading is an effective way to earn extra cash in a minimal amount of time. This quick return on investment is made possible by the less regulated digital currency exchange currently running the market. Cryptocurrencies have been around for almost a decade now, in the last few years they have emerged as one of the most sophisticated means of trade ever used for global transactions.
The transactions are quick and do not cost much on either side of the trade. The reason for these minimal costs is the distribution architecture that divides different tasks amongst sub-users of the digital currency market. From the mining of coins to creating a general ledger, cryptocurrency transactions take place within seconds.
The first currency that was used to perform initial trades in the cryptocurrency market was the Bitcoin. The algorithms and architecture used by Bitcoin programmers were later on used by cryptocurrency designers all over the world. Today, more than 1500 types of digital coins are flowing on the internet. However, some are more valuable and popular than the others. This disparity between digital currencies has given rise to cryptocurrency trading.
Things to Know Before You Start Cryptocurrency Trading
There are many ways to perform cryptocurrency trading. However, before we understand how trading works, here are some useful tips for anyone who wants to enter this field:
- Cryptocurrency markets are much more volatile than the regular stock exchange markets. The prices fluctuate drastically every second, and people can win or lose a lot of money in a matter of seconds.
- There are statistical websites available on the internet that are dedicated to cryptocurrency trends. These websites can show useful data about each currency type including their current price, the number of coins available in the market, their market cap, and percentage change in prices in the last hour or week.
- Digital currencies can be bought using credit or debit cards or directly from your bank account.
- Since digital currency coins have no physical existence, the platforms for cryptocurrency trading are all digital, therefore, there is no physical presence required to trade your currencies on a digital currency exchange.
What Makes up a Cryptocurrency Platform
Cryptocurrency platforms run on some of the most complex pieces of code written in recent times. The digital currency framework allows users to transact with each other from anywhere in the world without using any merchant like a credit or debit card provider. Since the coins of these currencies are digital in nature, the transactions are fast and do not require much effort from either side. The two major components of a cryptocurrency network are the ‘miners’ and the ‘blockchain’.
Digital Coin Miners
Like gold miners, digital currency miners dig for bitcoins or any other currency coins using an encrypted code. These miners are just like any other computer users who are a part of the cryptocurrency network. They work on machines that use cutting-edge technology to perform thousands of calculations with a second. Whenever a currency is generated for a transaction, miners jump on the block of that currency to crack the code and verify if the currency came from an authentic source and holds the said value required for the transaction. The first miner to crack a currency code is given a few coins of the currency as a bonus. This is how miners make their income. The more currency blocks a miner is able to break, the higher their revenue.
With all these transactions taking over the internet, cryptocurrency obviously needs to have a general ledger to keep a record of all the buying and selling that takes place every second. To establish a general ledger that is virtually impossible to hack and is always available on the internet, programmers created the ‘blockchain’. As the name suggests, blockchain consists of small pieces of information that are linked together in the form of a virtual chain, which means they follow a certain sequence. To decrypt the blockchain, programmers use a distributed platform to hold each block of the chain at a separate location over the internet. The cryptocurrency blocks can be placed at a location around the world. However, each block contains a primary and a public key. The public key holds information of the next block which may reside virtually anywhere on the internet. Besides, blocks are encrypted with algorithms so that hackers cannot gain access to records that are held within the block.
What You Need To Start Trading on The Digital Currency Network
Like stock markets around the world that require investors to purchase stocks and hire custodians to manage their assets, digital currency trading requires users to have some tools before they can start trading on the exchange.
To trade on a digital currency network, you need to subscribe for a digital wallet and buy yourself a currency you want to trade with on the exchange.
Digital Currency Wallet
Cryptocurrency wallets hold your digital coins and when there is a trade, you can take your currency coins from the wallet and hand it over to the buyer. All these transactions take over the internet and require sophisticated codes to encrypt and decrypt information as it moves over the digital network from one part of the world to another. Since there are millions of transactions taking place a given point in time over the internet, programmers design digital wallets in such a way that they can hold maximum coins using minimal space over the internet.
The cryptocurrency architecture is such that all coins are held in a central repository. The owner of each coin is given a private key to the repository. Each private key has a reference to a public key in the repository. When a coin is exchanged with another user, the public key reference is changed to a new private key lying in a buyer’s wallet. In this way, millions of coins are exchanged over the internet within seconds.
Before you start trading on a digital currency exchange, you need to buy cryptocurrency coins for yourself. You can do so by paying through a credit or debit card or by using your bank account details over the internet. Bitcoin was the first currency used over the cryptocurrency network and since then has been extremely popular on the digital currency exchange. As people started using bitcoin more and more over the internet, coin generators and miners started to have arguments about how so many transactions would take place over the internet. When miners start having arguments with organizers of the currency, it is called a ‘fork’. As a result of this fork, Bitcoin launched another currency called the Bitcoin cash. Although it was launched much later than Bitcoin, the currency has high value in the cryptocurrency market.
Besides Bitcoin, the currencies that have been popular in the market include Ethereum, Litecoin, and some other big names. All these currencies were generated by some of the brightest minds in the tech industry. The value of a currency depends upon how well it is received by the users. What this essentially means is that the currency needs to be reliable and fast to transact with. As the demand for a currency grows, people buy it more and use it to make transactions over the internet. To meet the demand, currency generators may float more coins of the same currency in the market. If the organizers are able to maintain their performance in terms of currency mining and fast-paced transactions, the currency may reach its cap. This means that the highest bidder will hold the coins of that currency.
Platforms to Use for Cryptocurrency Trading
There are many platforms that people have used over the years to trade their cryptocurrency coins. Some of the most popular ones include:
‘Traditional’ Cryptocurrency Exchange
These digital currency exchanges operate like a regular stock market. Just like New York Stock Exchange would have its brokers, asset vaults and stock price, cryptocurrency also offers users digital wallets, broker services, and trading trends. To establish your account in a traditional currency exchange, you need to create an online account and provide confidential details to your provider. Since the information that you use on these exchanges is quite valuable, you need to do proper research before you start trading on an online platform. Some of the popular cryptocurrency exchanges available in the market include Coin base, Bitbuy, Coin square, and many others.
If a user of cryptocurrency does not want to make an account in a cryptocurrency exchange, they can always approach a brokerage company. What these brokers essentially do is buy currencies in bulk and then sell it off to consumers at a premium. Although this mode of cryptocurrency trading may be more expensive, it relieves buyers from all the worries of having a wallet and coordinating with a broker. Some may suggest that new entrants in the cryptocurrency trading world should start their trades through a brokerage house.
Over the Counter or Direct Trading
This form of trading takes place in regions where cryptocurrency exchanges and brokerage houses are not available. In such types of trades, sellers put up a price of a coin over the counter. The buyer either buys the coins or quotes their own buying price. Once both parties agree on a certain price, the trade takes place. This is the least expensive form of cryptocurrency trading available in the market. However, it is the least secure as well. Why? because you do not have an intermediary that can verify or authenticate the other side. To mitigate this risk, both parties need to conduct thorough research about who they are dealing with so that the transaction is smooth.
Alternative Investments in Cryptocurrency Trading
For people who want to know about alternatives in cryptocurrency trading, we have some useful information about those methods as well. These are essentially alternative methods that are popularly used to trade cryptocurrencies in the market, these investment methods are:
Digital Currency Trusts
Digital Currency Trusts trade on the regular stock market. What these trusts do is seek investment from a pool of investors and gather a large digital currency coin base in their portfolio. Since these trusts are listed on the stock market, people can buy their shares and take leverage from the bull and bear cryptocurrency market trends.
One popular trust that everyone likes to trade on is the GBTC or the global Bitcoin Trust. Everyone knows that Bitcoin is the most popular digital currency in the market today. GBTC contains a large number of Bitcoins that can be traded on the stock exchange. All the users need to do is buy this stock and they can get access to bitcoins from around the world. The only negative side of such trades is that there is no diversification in the portfolio. If the currency that has been held by the trust goes down, so does your investment.
These are the purest forms of alternative investment vehicles available in the cryptocurrency market. The digital currency fund managers perform complex calculations to figure out a perfect mix of cryptocurrencies to add into their portfolio. Once the fund has been designed, the managers ask investors to invest in their funds. As the funds increase in value, so does the investor’s money. As the fund managers do all the work from selecting the digital currency and creating a portfolio mix they charge a higher fee to the investors. Some fund managers may put a minimum investment requirement for investors to gain access to their portfolio.
Although cryptocurrencies are relatively new financial instruments when compared to stocks and bonds, they can offer high returns than traditional securities. Digital currency is the future of financial markets all over the world. People who want to be part of digital currency disruption should definitely invest in digital currencies and gain high returns on their investment.