You may have heard that PayPal now accepts Bitcoin as a legitimate currency, this is a huge breakthrough for crypto supporters! Will we start seeing more companies accepting cryptocurrencies over the next few years or are they dead in the water?
Cryptocurrency has an average daily trading volume nearing Forex making it a huge success since the first digital currency (Bitcoin) was launched in 2009. Many people believe cryptocurrency is the future, what do you think?
What is Cryptocurrency?
Cryptocurrencies are digital currencies which were created by private bodies. At the moment they are not legal tender so you cannot pay for things in the same way you can with the pound or the dollar, but the future is bright for cryptocurrency.
Blockchain is a type of technology that regulates cryptocurrencies. Cryptocurrency is created, distributed, traded and stored in this decentralised ledger system.
There are alot of types of cryptocurrency, the most popular being Bitcoin, but names such as Litecoin, Ethereum, Ripple and Stellar may also be familiar.
Bitcoin is the first and largest cryptocurrency by market cap. It was created in January 2009 after the housing market crash. You can’t physically hold a bitcoin as they are a digital currency, however you can see everyone’s ownership through access to a public ledger. Your personal balance of Bitcoin tokens are kept using keys, which is essentially an encrypted password. So although your personal Bitcoin balance is private, there is a public element to it! So you may be wondering who regulates the transaction of Bitcoin? Miners are people who process the transactions on the blockchain in return for rewards (new bitcoin releases) and transaction fees (paid in bitcoin). Miners act as the decentralised authority to make the Bitcoin network credible, similar to central banks for national currencies. However, Bitcoin are released according to an algorithm and the schedule is available beforehand, whereas national currency is released at a rate matching economic growth to stabilize markets. Bitcoin mining therefore is the release of bitcoins into circulation, some say all bitcoin will be released by 2150 so there is plenty of opportunity for growth.
How can cryptos make me money?
There are two ways you can make money. The first is by buying and therefore getting ownership of cryptocurrencies through a cryptocurrency exchange and is best for long-term investment. There is often a fee and commission so watch out for sites which are looking to rip you off!
The second way to make money off cryptocurrencies is by trading them as CFDs, where you are essentially betting on the direction of price change. This is better for short-term trading as price fluctuations can be rapid and there are holding fees for CFDs which you don’t get with cryptocurrency exchanges.
Is it worth it?
There are pros and cons for trading cryptocurrencies as with any asset, so heres the run down.
- Volatility: Cryptocurrencies are around 100x more volatile than forex currency. Cryptocurrency has no managing bodies to regulate their price, they are purely influenced by market forces. This means they fluctuate, A LOT. But this is actually good news as higher volatility means more opportunity to profit from changes in the market, but beware with high volatility comes high risk.
- Low leverage: Trading cryptocurrencies usually has low leverage of around 2:1 due to the high risk and volatility of the asset class. Therefore you are unlikely to make losses enough to make you broke!
- 24/7: Brokers typically open cryptocurrency markets on weekends meaning you can trade all week round.
- Cost: Cryptocurrencies have a fairly high commission compared to most asset classes, with Bitcoin charging around 0.4%. This doesn’t mean you can’t make a decent profit, it is just something to bear in mind for short-term traders.
- Sensitivity: Most cryptocurrencies are smaller than national currencies and are therefore more sensitive to issues such as integrity, adaptability and popularity.
Cryptocurrency is an amazing invention but it isn’t the easiest to trade. We’ve just covered the tip of the iceberg! We recommend you learn more before you start investing in crypto and practice before you invest with BullBear.