Many of the top brokerage firm sites are now offering cryptocurrency trading alongside forex trading and other standard trading options. Bitcoin is, by far, the most popular of all the cryptocurrencies on the market (of which, there are hundreds), so many traders are beginning to wonder about Bitcoin and other cryptocurrencies. So, what are cryptocurrencies? What is Bitcoin? And can Bitcoin, along with other coins, be traded just like forex currency pairs? This article will guide you through the, at times confusing, though undoubtedly lucrative world of Bitcoin and cryptocurrency trading.
What are cryptocurrencies?
Cryptocurrencies are, in layman’s terms, digital money or currency which can be used, often anonymously, to buy goods and services online. They are stored either on Bitcoin/cryptocurrency exchange websites or in digital wallets and can be withdrawn, deposited and transferred, as required, using cryptocurrency addresses. Whether funds are being stored in a wallet (hardware-based, software-based, or paper-based) or on an exchange, all digital locations that house cryptocurrencies have a unique address. It is these which allow for the sending and receiving of funds.
Cryptocurrencies are traded ‘on the blockchain’. Think of blockchains as digital, autonomous, and incorruptible ledgers which facilitate and record all transactions. Most cryptocurrencies can be mined; mining involves solving complex mathematical equations using computers. Miners who successfully solve these problems are rewarded with coins and it is this mining process which keeps the system up and running, i.e., processes transactions and maintains the blockchain (or digital ledger).
Please bear in mind that this is merely a brief summary of what cryptocurrencies are and, as such, we’d recommend carrying out additional research if you wish to gain a well-rounded understanding of how the various cryptocurrencies function. However, admittedly, trading cryptocurrencies via brokerage sites requires only a surface understanding of what they are/how they work.
What is Bitcoin?
• Bitcoin was invented in 2009 by an individual or group of individuals, likely from Japan, who used the alias ‘Satoshi Nakamoto’; the identity of Bitcoin’s creator or creators remains shrouded in mystery to this day
• Bitcoin has been the world’s best performing currency every year since 2010, excluding 2014
• Bitcoin made headlines again in March of 2017 when the price of a single Bitcoin surpassed that of an ounce of gold for the first-time, causing the financial world to take note
• At time of press Bitcoin has a 56.5% share of a cryptocurrency market worth $170 billion USD
• As of 9pm, ET on October 28, 2017, one Bitcoin is valued at $5734.16, per CoinMarketCap
Bitcoin is a decentralized, digital currency which, like most other cryptocurrencies, is mined. Bitcoin miners are rewarded with bitcoins (or, more likely, fractions of bitcoins) which is of course what compels people to build and maintain spectacular structures such as this:
As you may have guessed, the more computers somebody has running these algorithms simultaneously, the more chance they have of earning that precious Bitcoin – it’s a bit like buying multiple tickets for the lottery to increase one’s chances of winning.
Bitcoin – Limiting the Supply
The number of Bitcoins generated per block discovered started at 50 back in 2009 when the system was first invented but has halved every 210,000 blocks (roughly every four years) since then.
The system was designed this way to guard against super inflation which would occur if too many coins appeared too quickly as more began mining.
The creators modelled these virtual coins on finite natural resources such as oil, gold and diamonds – their value being largely attributed to their growing scarcity.
The only notable difference between Bitcoin and these finite, physical resources is that Bitcoins have no practical use – they can’t be burned for fuel or sold as jewellery, and yet they retain their value so long as people continue to ascribe a value to them… bit of a headscratcher that, admittedly.
Can Bitcoin be traded like forex?
Short answer: yes. As mentioned, many brokerage firms, including eToro, AvaTrade, and IQ Option, now offer positions on cryptocurrencies so, as far as the trader is concerned, it’s just like trading forex. However, we would suggest familiarising yourself with whichever cryptocoin it is you’d like to hedge because, despite some universal similarities, they are all different and should be treated as such.
Bitcoin, along with other popular cryptocurrencies such as Ethereum, Litecoin, Bitcoin Cash, Ripple, and Dash, have made incredible gains in 2017 and, as such, more and more investors are beginning to involve themselves with cryptocurrencies. Bitcoin was trading at roughly one thousand US dollars at the start of the year and now it’s at nearly six so no wonder there’s so much hype.
Some argue that we’re witnessing a bubble which is waiting to burst but, quite frankly, it hasn’t shown any signs of letting up in the last year so we’ll see about that. Yes, they’ve been corrections – some, rather drastic, it must be said – but still, if you look at the overall trajectory, it’s like nothing you’ll find in forex. The cryptocurrency market is the most lucrative financial market in the world right now, bar none.
To summarize, yes, Bitcoin and some of the other cryptocurrencies can now be traded on brokerage sites in a similar fashion to forex and yes, the spreads offered cab be very lucrative for traders.
However, we would strongly recommend educating yourself on cryptocurrencies before investing heavily or, worse, leveraging. Brokerage firms will offer very attractive looking spreads on cryptos but you must remember, with the wide margin positions, it is actually possible to lose more than you have on your account which can spell financial doom if the market doesn’t go your way, so to speak.
So, our advice is to be smart; do your research, trade small at first, and remember, the volatility of the market can work for you, but it can also work against you. Just because Bitcoin, or any other coin for that matter, has had a fantastically successful year, does NOT mean that trend will continue.
Best of luck and happy trading!