In a nutshell, Cryptocurrency is a digital currency. Operating independent of a central bank, it needs complex encryption techniques to issue currencies and record transactions and balances for users. These records are made public through a digital ledger called Blockchain. Blockchains are hosted through numerous computers globally. To protect the integrity of the system and its users, every step is secured by Cryptography—a process which converts data into an unreadable format to unauthorized users.
Everything is decentralized as only the users and computer algorithms control and keep track of all Cryptocurrency activity.
How Cryptocurrencies Work
In Cryptocurrency, banks and governments play no role in issuing the currency and maintaining ledgers. These are done by algorithms.
Cryptocurrency is transferred from one peer to another through software called "Cryptocurrency Wallets".
Transactions are recorded in Blockchains through a process called, "mining". This phase requires solving mathematical problems that allows users to add a block of transaction to the ledger.
Newly-mined coins are rewarded to whoever solves the puzzle first. This process permits more people to mine. In turn, the network becomes more secured as numerous miners are required to approve transactions.
Depending on the speed Math problems are being solved, the network automatically upgrades the difficulty.
Before, computer processors are used to solve the puzzles. Miners later on discovered that the graphics cards for gaming are more conducive for the job. However, these required more electricity and generated greater heat.
Bitcoin mining products were later on produced. These contained reprogrammed chips that mine Bitcoins. While fast, these were still power-consuming.
Then came Application-Specific Integrated Circuit chips (ASIC). These chips are specifically designed and created solely for Bitcoin mining. It made mining faster and required less power.
As Bitcoin mining became more popular, more miners joined the network. This resulted into more complex Math problems. Some miners came together for "Pooled Mining" to make the job easier. Each is compensated for their individual efforts.
Trading and Investing Cryptos
Cryptocurrencies can also be traded.
Cryptocurrency Exchanges, also known as Digital Currency Exchanges (DCE), are businesses that allow for the trade of Cryptocurrencies for other types of assets. A Cryptocurrency Exchange can be a liquidity provider, which means it can sell to and buy from clients. It plays an essential role in forging profitable exchanges and creates venues for market liquidity.
There are numerous stories of individuals who invested in Cryptocurrencies and became rich overnight. However, as prevalent as these are, so are the cases of people suddenly losing all their life's savings.
Trading with Bitcoin has high risks, but with potentially high rewards. In fact, from December 2016 to December 2017, Bitcoin went up to $10,000 in profit from $750. By the end of 2017, the cryptocurrencies' total market cap reached an impressive $500 Billion.
How do you make an intelligent investment? Let’s count the ways:
1. Don't Invest Money You Can't Afford
Cryptocurencies are volatile. It is not a normal investment.
So calculate your risks. It would be best not to liquidate your crypto assets. Make sure that you only put out money you can afford.
2. Look to Other Coins
Yes, Bitcoin is the mother lode of all coins, but it is not the only coin.
Fact of the matter is, Bitcoin's share of the crypto-market fell from 90% to 50% in September 2018. The crypto-community speculated that this was due to questions on its long-term utility and its sudden lacklustre in performance. The lack of immediate cure led to the creation of “Bitcoin cash”.
Now let’s look at the performance of all coins in the crypto-market:
2.1. Bitcoin (BTC): Market cap: $197,415,184,605 Price: $11,096.43
2.2. Ethereum (ETH) Market cap: $31,673,021,950 Price: $296.80
2.3. XRP: Market cap: $17,502,286,429 Price: $0.411174
2.4. Litecoin (LTC) Market cap: $7,729,626,843 Price: $123.74
2.5. Bitcoin Cash (BCH): Market cap: $7,327,560,061 Price: $410.11
As of June 2019
3. Read Whitepapers
When we said you have to do research, we meant it.
You will have to read whitepapers about the coin you want to invest in. Look at the “utility” the coin offers. Utility is the digital token of Cryptocurrency. It is issued to fund development of the digital currency that will be used for purchasing.
The way Whitepapers are written are telling of the coin’s potential. An Initial Coin Offering (ICO), being the Cryptocurrency's IPO counterpart, generates Whitepapers for potential investors. If it doesn't have any, disregard it.
4. Watch Out for Scams
Good coins get their reputation through the transparency of its technical vision, its enthusiastic development team, and solid community. Bad coins, on the other hand, do not focus on how the coin’s technicalities are navigated through. They focus more on getting rich in lightning speed.
Look closely at the development team, their advisers, their respective backgrounds (i.e. involvement with other companies, ICOs, endorsements), and achievements.
Be wary if it resembles a Pyramid Scheme. The ICO that declares “speedy and guaranteed returns” is probably a scam. Simply put, Crypto-investors know that investment in the Crypto-business has no assurance of returns.
It would also be good to look at their GitHub Repository. If it’s inactive, which means it only has few "commits", it’s a red flag.
Cryptocurrency exchanges are vital to the growth of digital currency and its community. These are bridges between the Fiat and the Crypto domain.
There are two (2) kinds:
A. Fiat to Crypto
These aid the investors to buy Cryptocurrencies in exchange for Fiat money. One such platform is Coinbase wherein one can buy BTC, BCH, LTC, and ETH to exchange for Fiat currency.
B. Crypto to Crypto
Here, various Cryptocurrencies are exchanged. While valuable, they are centralized, exposing them to risks.
Buying Cryptos is simple:
Open an account at the exchange.
Verify your identity. (This takes precedence in light of avoiding Money Laundering.)
Fund your account with the paper currency that you use. (Note: Some exchanges don't require you to fund your account as you need to trade directly with other users. One such platform is Bitcoin.de)
What Exchange Should You Use?
What exchange to use depends largely on where you live. If it is within your jurisdiction, it would be easier for you to get your money back legally if you get in trouble.
Major exchanges permit coin investors to acquire large sums in a short period of time. This allows greater liquidity. But if you are patient and only desire small amounts of coins, small exchanges would be an easy choice.
So when is a good time to buy crypto? Well, there isn't a fixed schedule. However, a wise investor would not buy at the height of the bubble, nor would he or she grind the gears when it’s falling.
Check when the exchange is stable; this means that it is not moving in any discretionary direction. Taking the time to observe is the best way to go.
Here are some things to take note of:
A 10% up in Crypto is not necessarily a bubble. It may just be daily volatility.
A 100% increase might be just the start of a bubble.
A 1,000% might just as well be a bubble, but there’s no guarantee that it follows through.
Where to Store Your Cryptocurrency
1. Use Wallets
Don’t keep your Cryptocurrency in the exchange. Crypto-markets are filled with stories of hacks and bankruptcies. It is recommendable to use wallets from known sources.
Wallets from unknown sources may be malware in disguise. A regulated exchange has a greater chance of having proper safety mechanisms.
There are three types of wallets: hardware, software, and paper.
Among these, hardware wallets are the most secure. These are physical wallets that keep the user's private keys. However, one runs the risk of losing it and that kind of loss does not allow for any sort of recovery.
In this case, a cold wallet may be a good option.
Cold wallets are offline hardware devices such as flash disks or hard drives. These avoid storage on an online exchange which can be easily hacked.
These flash disks have buttons that ask for users to confirm or cancel transactions by touching the device. This blocks hackers from recording keystrokes.
2. Distribute Your Cryptocurrency
Keeping your Cryptocurrency in various places minimizes the impact of lost exchanges.
While more time-consuming, the payoff is worth it.
3. Keep Your Private Keys Safe
It would be wise to avoid reusing passwords from your social media accounts. Use a “multisignature” or numerous keys to authorize Bitcoin transactions. This helps combat fraud.
Also, create a backup of your private keys.
You can store your keys locally in a hardware wallet and in the cloud. If one of the tools expires, you won't be losing all your money.
4. Password is King
A strong password is one that can't be easily cracked.
Come up with passcodes with alphanumeric combinations with both lowercase and uppercase letters and symbols. Common passwords are often listed by Cybercriminals. Thus, it is safer to create longer and more complicated passwords.
Also important is memorizing your seed phrase. You may store this in a secure safe or safety deposit box.
5. Trust Only Secure Networks
Public Wi-Fi networks are not safe.
Using your own network helps you bar eavesdroppers and reduces the risk of redirecting your funds to the wrong place.
Watch out for Malware infections as these will compromise your Cryptocurrencies. Using all-purpose PCs, smartphones, or tablets is not recommended.
6. Keep Your Investments Secret
Your investments and accounts should be made private. Cybercriminals are always on the lookout for the next victim. When you own a Cryptocurrency, you instantly become a target for them.
Talking about your investments online is an absolute no-no.
7. Make Small Trades
Doing huge trades at once is not smart. Hedge your online financial activities by doing smaller trades. This will benefit you two-fold:
7.1. You will not be a target for Cybercriminals.
7.2. This will test your exchange before you go all the way.
Bitcoin Trading operates on buying low and selling high.
Bitcoin Traders buy and sell Bitcoin for the short-term when they assume that profit could be made.
Advantages of Bitcoin Trading
1. It's volatile. If you can weather the behaviour of the market, you can easily make profit.
2. It's open 24/7
3. It’s unregulated. You can start trading without going through long identity verification processes
Different Trading Bitcoin Methods
1. Day Trading
Here, a trader vigilantly conducts multiple trades throughout the day in front of the computer screen. Attempts at profit are made from short-term price movements. The trader then wraps up the day by closing all his or her trades.
Through this, the trader tries to make substantial profits from small price changes. The trader focuses on short-term trading, functioning on the philosophy that making small profits repeatedly guards against risks and benefits traders. Scalpers derive dozens, even hundreds of trades within a day's work.
3. Swing Trading
This type of trading takes advantage of the swing of the coin's price cycles. Traders zero-in on the start of a price movement and enter the trade. They hold until the movement dies-out and collect the profit.
Traders of the sort can open a trading position and prolong it for weeks or even months until they see their desired results.
Fundamental Analysis vs. Technical Analysis
While predicting what happens to Bitcoin price is impossible, some traders were are able to determine patterns, methods, and rules that permit insight and foresight, thus allowing them to make profit.
Here are two methods of analysis:
1. Fundamental Analysis
Fundamental Analysis looks at the big picture.
The method takes a hard look at the relevant outside forces such as news about the currency, technical developments, and regulations around the world that impact Bitcoin technology. These, analysts concur, determine what will happen to Bitcoin price.
2. Technical analysis
Technical analysis takes market statistics into account. It considers price movements and trading volumes. Apparent patterns and trends in price are identified to help deduce what happens to the Bitcoin price.
How to Start Trading
To trade, you’ll need to do the following first:
1. Create an account on a Bitcoin exchange
2. Verify your identity
3. Fund your account
4. Open your first position on the exchange (i.e. buy or sell)
Bitcoin Trading Course
Video # 1: Beginner's Guide on Bitcoin Trading
This episode of 99Bitcoins' “Whiteboard Tuesday” walks wannabee Bitcoin Traders to the specifics on how to begin trading with Bitcoin. It has 4 segments:
1. What is Bitcoin Trading?
2. Trading Terms Explained
3. Reading Price Graphs
4. Common Mistakes (on Bitcoin Trading)
The language used is simple; it does not serve to overwhelm beginners. Important terms are emphasized and risks are declared, giving beginners an idea of what they are getting into. If you want to learn Bitcoin Trading, this is the video for you.
Video # 2: Basic Understanding of Fibonacci Retracement and How to Plot Against Bitcoin
Crypto Jim Australia's video is the user's personal take on the Fibonacci Retracement tool: a software that helps measure a stock loss or profit point and plots resistance and support levels. Simply put the tool measures the rise and fall of stocks versus a trend.
Walking the viewers through the TradingView website, one will find the functionalities of the site easy to navigate. He sampled Bitcoin as a point for navigation.
The language used was layman enough that viewers would be able to easily learn what can otherwise be thought of as a complicated tool.
Video # 3 Cryptocurrency Trading: Complete Guide to Trading Altcoins
This video from Udemy promises an in-depth yet practical look into Crypto trading practices.
Operating on the learning-by-doing philosophy, the tutorial is a step-by-step trading course on Altcoins. It includes the following areas:
1. Introduction to Cryptocurrencies
2. Securing Your Cryptocurrencies
3. Basics of Trading Cryptocurrencies
4. Explanation of Other Strategies
5. Deep Dive on Initial Coin Offerings
The lecturer's light-hearted approach makes it easy for the common user to get into the topic. It stays away from jargon, but when need be these are defined effectively.