How does cryptocurrency trading work?

If you haven’t heard of cryptocurrencies, then you’ve probably been hiding from civilisation for the past 10 years or so. Back in 2008, a person (or a group of people) by the name of Satoshi Nakamoto published a paper called “Bitcoin: A Peer-to-Peer Electronic Cash System”. This paper marked the birth of the world’s first cryptocurrency, the bitcoin, as well as blockchains, the distributed ledger technology it’s based on which can be applied in a number of different contexts.

Cryptocurrencies are virtual currencies but they’re quite different to the fiat currencies we know, e.g. USD, GBP or JPY, which is why central banks prefer to call them cryptoassets. They’re neither issued nor regulated by a government authority and, although you may be able to pay for goods or services with cryptocurrencies, no one is obliged to accept them as legal tender.

Let’s use bitcoins as an example to understand how cryptocurrencies work: The ownership of each bitcoin and any transactions made with it are recorded in a ledger, which is secured via cryptography and distributed in a number of computers. Miners verify the transactions and receive payment in the form of new bitcoins. The system is peer-to-peer, completely decentralised and anonymous.

Are cryptocurrencies a good investment?

The value of bitcoins has shot up and there are now many more cryptocurrencies to choose from, e.g. Ethereum, Ripple and Litecoin. People tend to rush in wherever there’s hype around quick massive profit and it’s true that whoever invested in bitcoin early on must be absolutely chuffed now. Then there are the idealists, the ones who invest in cryptocurrencies because they appreciate how this technology can revolutionise finance, provide complete privacy in transactions and liberate people from the watchful eye of banks.

But this is where the risk lies. Cryptocurrencies are unregulated and this makes them very suitable for money laundering as well as speculation. Their value depends mostly on supply and demand, although many argue that it also reflects the energy used to mine them, and it fluctuates wildly. Unlike fiat currencies which are linked to national economies, no one can and no one will jump in to save investors if things go horribly wrong. From Warren Buffett calling bitcoins “a delusion” to the Bank of Spain which warned investors they may risk everything, traders can’t say they haven’t been warned.

But as long as demand continues to grow, the price will continue to climb and people will be making a profit. So, if you’re confident you can make the most of it and you steer away from gambling your home, you can buy and sell cryptocurrency directly via a cryptocurrency exchange. It’s worth noting that you’ll need an e-wallet to store your digital money. The other option is to select a regulated online broker, who may not offer the option of trading cryptocurrencies directly but will allow you to trade on price fluctuations via CFDs.

Bitesize basics
  • Cryptocurrencies, also known as cryptoassets, are virtual forms of currency, which aren’t related to physical assets or regulated by any government authority.
  • They’re controlled by a peer-to-peer network called blockchain, which secures complete anonymity and privacy.
  • Because they’re unregulated, their price fluctuates wildly. At the moment, some cryptocurrencies, e.g. bitcoin, experience a surge in value.

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