Wondering what the fuss about Cryptocurrency is? Whether you are an amateur trader who knows nothing about trading cryptocurrency or someone looking to earn some passive income, read on to understand what cryptocurrency is and how you can invest by yourself.
What is a Cryptocurrency?
Cryptocurrency simply refers to digital money. It is an online form of currency where there are no tangible notes or bills. It can be formally defined as a digital asset designed to work as a medium of exchange. In such a case, the records of individual coin ownership is stored in a ledger in the form of a computerized database to ensure security of transaction records and to control the creation of additional coins.. It can be exchanged like physical cash without the need for any mediators. It is created using algorithms based on cryptographic functions. Some examples of popular cryptocurrencies are Bitcoin, Ethereum, Ripple, etc. While these are the most commonly traded forms, new and more advanced forms of currency continue to be introduced with time. Bitcoin is the first and certainly the most commonly used form of cryptocurrency. The other forms are generally referred to as Altcoins (alternatives of Bitcoin).
This form of money is bought in larger amounts by investors who anticipate a rise in its value with time. They use it as a form of investment the same way you would use other securities. Also remember that the pricing mechanism for cryptocurrency is inconsistent, the value of money in cryptocurrency form fluctuates with time, which can then provide returns as profit or loss for investors.
It is quite simple to make fast and easy payments using cryptocurrency, you can store your digitized money in digital wallets on your phone, your computer, or any storage hardware. It is also a great way to dodge large transaction fees generally associated with transactions involving tangible money.
How to Trade using Cryptocurrency?
Trades performed using cryptocurrency do not involve a sophisticated trading mechanism. They are performed with the consent of the buyers and sellers and there is no broker or middleman involved to initiate such trades.
To invest in cryptocurrencies, you need access to a digital wallet where you can store your investments. For example, Coinbase is the most popular wallet in the USA. You also need documents needed for your verification. It is possible to link your digital wallets to your bank accounts, credit cards and debit cards. This is how you can pay for purchasing your cryptocurrencies.
Now, you need to connect yourself to an exchange for cryptocurrencies, much like a stock exchange. Here you can exchange traditional currencies, like the Dollar or the Euro, for cryptocurrencies. This is where the buying and selling takes place. Different exchanges offer different services to investors based on security, transaction fees, reliability etc. you should do your research before choosing a good exchange. Some examples of popular exchanges are Coinbase, Square Cash, Robinhood, etc.
You can then place your order for your cryptocurrency in exchange for traditional currencies. Although some currencies are worth thousands of dollars, you can still invest in small parts or fractions of one coin. Once your order is executed, it will be stored on the linked wallet. It is advised to have multiple storage options for your currency to maintain security.
Another way to trade cryptocurrencies is through peer-to-peer transactions. Once you find someone who is willing to buy/sell cryptocurrency. You can meet them personally for the exchange or perform the exchange online.
Pros and Cons of Trading Cryptocurrencies
Trading cryptocurrency comes with its own set of pros and cons. The benefits are –
- Ease of Use: Once you have your cash converted to cryptocurrency, it is easy to make use of digital cash to make transactions and also perform trades. You simply need to track the prices of your cryptocurrencies and perform buy/sell operations as needed.
- Universally Available: since your currency is available online in digital form, you can access it anywhere around the world with safety and ease. You can also make changes to your trades based on your investment objectives.
- Financial Transparency: With cryptocurrency, traders have a sense of financial transparency as they can clearly see where and how their money is involved.
- Growth Potential: The value of cryptocurrency fluctuates often. It is a good source for investors to grow their money and make use of market fluctuations.
- Portfolio Diversification: Cryptocurrencies are a great way for investors to diversify their portfolio and allocate risks. They are close to liquid money and can be traded easily without much hassle.
- No Counterfeit Issues: since cryptocurrency is created using specialised algorithms, it is nearly impossible to counterfeit your currency value.
However, you should be wary of trading with cryptocurrency due to the following reasons –
- Lack of Accountability: There are no authorities or governing bodies looking over the functioning of cryptocurrencies globally, this is why they lack the accountability that other securities offer.
- Not backed by the Government: Cryptocurrencies are not legal tender or fiat money, they are not a true substitute for money approved by the government. The exchange mechanism for cryptocurrencies is not secured by the law.
- Price Fluctuations: Although investors thrive on fluctuations, there is no guarantee that price changes in cryptocurrency will always lead to profits for investors. Unfavourable circumstances can also make the prices of cryptocurrencies fall.
- Risk Factor: They carry the same risk as any other investment venture. It is advised not to invest all your funds into one place.
Before delving into cryptocurrencies further and starting investmenting by yourself, note that they do not enjoy the same status as tangible currency and are not a 100% substitute for real money. Unlike real money, cryptocurrency is not legal tender – this means that the government does not recognize it as real money. But they can be treated as any other form of investment whose value changes with time. Although you can perform all transactions the same as tangible money, any cases of digital cash companies not returning your money may not be protected by the Government.