How to trade cryptocurrencies?
In this article, we will go over what cryptocurrencies are, how they work and how you can profit by trading with them.
What are cryptocurrencies?A cryptocurrency is a digital currency that is based on blockchain technology and secured by cryptography. Blockchain is essentially a decentralized, distributed ledger that records information about digital assets & transactions and stores them into digital blocks. A full copy of that ledger is present on all the devices connected to the network so there’s no single point of failure that could lead to the collapse, a problem common in centralized systems.
These features are the biggest advantage of cryptocurrencies because they make them very difficult to counterfeit or double-spend. It also makes them resistant to any government manipulation or intervention, which is one of the main reasons for their popularity due to a growing distrust in the current financial system.
How are new coins created?One way to produce or “mine” those digital blocks and achieve consensus about which transactions are real and which aren’t is by using electricity and computer processing power. This consensus algorithm is called “proof of work” and miners get newly produced coins as a reward for mining.
However, proof of work has been heavily criticized for its energy consumption and inability to punish miners who try to push fraudulent blocks to the network.
This situation has led to the development of the so-called “proof of stake” consensus algorithm. Instead of making an investment in expensive hardware and electricity, proof of stake participants make an investment in the token itself. They set aside a certain amount as collateral and based on the amount of collateral they dedicate, the network randomly selects someone to build the next block.
If the block builder creates a fair, valid block, then they will receive a reward of newly minted tokens. If the block builder is dishonest, however, they will lose their collateral, restricting their ability to participate in future rounds of proof of stake.
Both methods for creating new coins are widely used and even though many crypto projects are switching to proof of stake, proof of work is still used by many projects such as bitcoin. While these are primary consensus algorithms, new ones are being proposed and tested all the time so in the future we will probably see new solutions to the existing problems.
But these aren’t the only methods of getting cryptocurrencies or making money in this market.
CFD trading with cryptocurrenciesBesides mining, another way of getting cryptocurrencies is to buy them through a cryptocurrency exchange or a peer-to-peer network.
While traders can definitely make a profit by buying cryptos when the price goes down and holding them until it eventually goes up, it can take a lot of time until that happens. Their trading options are also very limited because they can’t short or trade with leverage when it comes to regular crypto trading. Not to mention potential security issues surrounding crypto exchanges and wallets where you can lose everything overnight if they get hacked.
That’s where CFD trading with cryptocurrencies comes in. It allows traders to make money by predicting whether the price of a cryptocurrency would go up or down and allows them to use leverage to increase their gains significantly. Security issues are also mitigated because the money is secure with the brokerage house and no crypto is held in an exchange or a wallet so there’s no chance of it being hacked.
ConclusionCryptocurrencies are an exciting new investment vehicle whose volatility can be a great opportunity to make a profit. However, this volatility also means that the risks are higher, so you need to be careful what you invest in and combine both fundamental and technical analysis in order to predict market movements correctly.
There are many ways to invest in this market but one of the most versatile ones is CFD cryptocurrency trading because it allows you to profit regardless whether the market is going up or down.
Sources Consulted1. Febrero P. What is cryptocurrency CFD trading? - Coin Rivet. 20 Mar 2019 [cited 16 Jun 2021]. Available: https://coinrivet.com/guides/what-is-cryptocurrency-trading/what-is-cryptocurrency-cfd-trading/
2. McNamara R. How to Trade Cryptocurrency. 18 Feb 2021 [cited 16 Jun 2021]. Available: https://www.benzinga.com/money/how-to-trade-cryptocurrency/
3. Ashford K. What Is Cryptocurrency? Forbes Magazine. 2020 [cited 16 Jun 2021]. Available: https://www.forbes.com/advisor/investing/what-is-cryptocurrency/
4. Frankenfield J. Cryptocurrency. 25 May 2021 [cited 16 Jun 2021]. Available: https://www.investopedia.com/terms/c/cryptocurrency.asp
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