With the rise of Bitcoin, and other Cryptocurrencies, the majority of the finance community wait with baited breath to see where the latest round of price spikes will take these new “assets”.
If you are interested in taking positions with any of the cryptocurrencies, this tutorial should give you an overview of what to expect from them, as well as the landscape moving forward.
Please be advised that this should NOT be construed as professional or legal advice. We are not trained financial advisers and everything we write about here is for education and entertainment purposes only.
“Trading” unregulated assets such as “cryptocurrency” is not only risky, but also highly volatile… with many scams in the marketplace. If you are committed to being involved with the market, please ensure you use a trusted exchange (Coinbase is the most popular in 2017)…
What Is Cryptocurrency?
A “Cryptocurrency” is meant to be a digitally encrypted currency which is not regulated by banks or a central regulatory body (government). Whilst an interesting idea on paper, the real interest in this type of product has come from the army of traders who’ve made “historic gains” buying & selling it in open markets. Forbes has more no the matter.
The most popular cryptocurrency today is one called Bitcoin – originally designed in 2009, it paved the way for the myriad (of around 25) different coins we see today.
The important thing to note about cryptocurrency is that it’s built on top of a technology called “blockchain”. This has been designed as a decentralized database which works by treating data as “blocks” which can be “chained” together to keep them updated.
The most vital element of “blockchain” is that instead of having data stored centrally (IE on a single machine/server), it’s stored on 100’s or even 1000’s of what are known as “nodes”.
These nodes continually update themselves by hooking into the wider “blockchain” network and pulling the latest version of the chain that has been approved. This does several things — 1) removes the need for a central processing facility (for ANY sort of data) 2) allows network-powered (decentralized) applications to grow (more explained in a second)… Learn more on FXEmpire by teleporting to their website.
“Crypto” currencies are built on top of this network infrastructure, utilizing its decentralized nature to store “public ledgers” of financial transactions that took place between two or more parties. The way the “crypto” side of the system works is to encrypt the data in a particular way (hence the name — cryptographic).
The most important thing to note about “crypto” currencies is they are NOT currencies at all. They are simply files which have been encrypted using a particular algorithm (each algorithm is named after the “coin” — “Bitcoin”, “Ethereum” etc). Click here to learn more about Bitcoin for Beginners.
What gives these files “value” is the apparent scarcity afforded by the different types of algorithm. For example, Bitcoin’s algorithm only allows for 21 million “coins” (files) to be created with it.
Before we proceed, it’s actually incorrect to call these a “currency” as they have NO intrinsic value. Whilst people will hark on about how governments just print money etc, the reality is that fiat currency is backed by the stability & influence of an economy. Bitcoin et al are not.
As such, you need to appreciate that “crypto” currencies are really the equivalent of 21st century “cheques”. Their main value lies in the facilitation of transactions between two or more people who were previously unable to deal with each other before.
With this in mind, things become clearer.
The “coins” (encrypted files) store a public ledger of transactions undertaken by different people. The value of these transactions determine the value of the ‘currency’. However, the point is that because this ledger is completely decentralized (IE no single person/entity has control over it), the “value” of its service will not diminish with that of governments. An interesting article was posted here recently concerning the state of cryptocurrency.
Because of this, the core understanding as to why cryptocurrencies are important is because if you are able to utilize them in a wider marketplace or ideal, you should be able to manage money irrespective of borders and government regulation. For example, if you wanted to buy a product from someone in China, the cryptocurrency infrastructure *could* help you do it.
In order for this to work, there really needs to be a secondary layer added to the top of these “coins”. A marketplace of sorts (much akin to Amazon or Alibaba), whereby people are able to purchase products & services which otherwise would have been unobtainable.
The Majority Of Money Is Made From Selling “Coins” To Others
The big problem with “crypto” today is that the ONLY money being made from the “coins” is from their trade between financial speculators. The consumer demand for them is negligible, and as a result all of the “stories” of people becoming “bitcoin millionaires” are almost entirely fabricated.
If you wanted to look it up, it’s something called the “greater fool” theory. The idea is that the higher returns from the purchase/sale of coins is from the “new money” that’s come into the secondary market as a result of inexperienced traders purchasing the “coins” for a MUCH higher price than they are actually worth.
Obviously, this isn’t something widely stated in the world… it’s a part of something called “herd mentality” where most people just follow what others are doing. They don’t really look at the core fundamentals and are easily swayed to be part of hype that has relatively little foundation.
The most vital aspect to consider right now is that the MAJORITY of people making money in this marketplace are not just the ones who are selling coins at inflated prices, but the various exchanges who receive a percentage as commission on any transactions made. These commissions have made the various exchange owners very wealthy indeed.
With that said, if you’re still interested in making a return from this asset class, the way to do it is through trading them. This is done through exchanges which have been set up as a way to buy & sell a number of “digital assets” to other people.
The leader of this new generation of trading exchange is one called Coinbase. Whilst there are others, namely “Gemini” by the Winkelvoss twins, and Kraken, it’s Coinbase which has received the largest amount of investor money & user attention. But find out what the skeptics are saying.
If you wanted to start buying/selling cryptocurrencies, you basically need to sign up for one of these services and then go through the process of either uploading Bitcoin to a wallet you already have (if you’ve been mining them etc), or buying coins from other users.
Whilst the trading of these “assets” is entirely legal, what’s HIGHLY questionable is how much they’re actually worth. The majority of the news you read about Bitcoin etc is ONLY slanted towards people creaming money off the “top” of the market (they likely bought at $500/”coin”) and will sell at $7000+. Whilst they make a decent profit, the majority of retail traders will lose.