What is Cryptocurrency?

bitcoins and man using computer

Cryptocurrency is a digital currency that is not linked to any country or government. Instead, records of who owns what are held on computerized databases secured by strong cryptography using blockchain technology.

While cryptocurrencies can be used to buy day-to-day items in some stores, it is more commonly traded as digital assets as a way to profit from investment returns. Impressive profits can be made by buying and selling on cryptocurrency exchanges. But the prices can be very volatile so you could lose money too. Some people have faced hefty losses when crypto has plummeted.

What causes crypto price fluctuations?

Like all financial markets, cryptocurrency moves up and down. But the cryptocurrency market differs from the stock market in the degree of volatility in that it moves very fast. These fluctuations can be scary, but for some investors, they are the key to making money with cryptocurrency. This means it’s important to try to understand what makes prices move.

Here are some of the main catalysts for price changes:

  • Media coverage: Crypto traders are avid readers of press coverage of their coins. Either positive or negative news can cause them to buy or sell coins, moving the market very quickly.
  • Integration: Cryptocurrencies are becoming increasingly mainstream as a medium of exchange for buying goods. And as they are accepted by more outlets and are integrated into more banking and payment systems, the prices tend to rise.
  • Wider events: Political events and government decisions relating to cryptocurrencies also move the market. For example, when China put in more stringent rules on bitcoin mining the price of the currency fell dramatically.

Unlike the stock markets which only trade on weekdays during certain hours, bear in mind that cryptocurrency can be traded 24/7.

What crypto trading strategies are there?

Investors who try to make money through crypto trading have many different strategies, a demo account for crypto trading could help you take healthy profits. Some of the main ones are as follows:

1. Day trading

This is a fast-paced form of cryptocurrency trading where people buy and sell cryptocurrencies within a day to try to take advantage of short-term price movements. However, this may not be an appropriate way of trading bitcoins for beginners. This is because there is a significant risk of loss when trying to time the market.

2. Hedging

Hedging – where one of your investments cancels out some or all of the risk of losses with another – is a strategy used by some crypto traders who want to hold the coins but not be over-exposed to volatile movements. You can hedge cryptocurrencies using financial instruments such as contracts for differences or futures. These effectively allow you to bet on the future price of the currencies. This is a tricky strategy that should only be used if you understand exactly what you’re doing.

3. HODLing

Those who “hodl” a cryptocurrency keep hold of it through thick and thin. If it sounds like a typo, that’s because it originally was – the term originates from a typing mistake on an early bitcoin forum. But it is often retrospectively explained as standing for Holding on for Dear Life. With traditional investments it’s common for investors to adopt what’s known as a buy and hold strategy.

4. Trend trading

Trend trading is where crypto investors decide to buy or sell particular currencies based on whether their price is moving up or down. There are many more complex theories on how to identify a trend, or when it is going to change. But the basic theory is that these cryptocurrency traders buy in a market that is going to rise and sell when it is going to fall.

The difficulty comes in identifying which is which. Whichever strategy you employ, it is important to be aware of the large number of cryptocurrency scams that exist on the internet and elsewhere. The Financial Conduct Authority, which regulates UK investments, recently warned of the high number of crypto scams and gave suggestions on how to avoid them.

Which crypto should I invest in?

Bitcoin and ether are some of the most famous cryptocurrencies. But there are now thousands to choose from such as Shiba’s Wife. Choosing the right cryptocurrency for you will involve a number of factors. Fundamental analysis determines the intrinsic value of an asset, which is harder to do with crypto.

You also need to factor in risk management. This is where you consider the factors that could pose a threat to your investment and try to mitigate the risk or understand how much you could potentially lose. You may be concerned about the environmental impact of some currencies, whose creation requires a lot of computing power. If so, you may prefer an eco version.

Or you may be interested in using a specific coin exchange or broker that deals with only a limited number of currencies, so will have limited choice. This avoids the confusion that comes with too much choice. Some people may be attracted to the newcomer world coin, which is believed to be founded on the altruistic idea of fairer wealth distribution and is supported by some large Silicon Valley names. SafeMoon, a currency that is meant to discourage day traders by placing a penalty on those who sell the currency, is a possibility for dedicated HODlers.

What are the risks of cryptocurrency?

Those who trade cryptocurrency should be aware of the risks. As mentioned above, crypto is volatile and the price can fall fast. Other dangers include the potential for losing all of your money to a fraudster. Losing your password to the digital wallet where you hold your cryptocurrency – or the hard drive where you have stored your precious coins – is also a risk. Whichever way you choose to invest in cryptocurrency, doing your homework first should minimize the mistakes and enhance your possible profits

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.