Investing in Cryptocurrencies- Things you should know

Investing in Cryptocurrencies- Things you should know

Cryptocurrency or the digital currency is on the rise. Also known as Bitcoin and it is not printed like your dollars or Euros or any of the world’s currencies. It is but a form of digital currency created and held electronically. No one controls it and they’re produced by people, increasingly businesses, running computers all around the world, using software that solves mathematical problems.

According to Wikipedia Bitcoin is a crypto currency and a payment system invented by an unidentified programmer, or group of programmers, under the name of Satoshi Nakamoto.  Bitcoin was introduced on 31 October 2008 to a cryptography mailing list, and released as open-source software in 2009.  There have been various claims and speculation concerning the identity of Nakamoto, none of which are confirmed. The system is peer-to-peer and transactions take place between users directly, without an intermediary.

These transactions are verified by network nodes and recorded in a public distributed ledger called the block chain, which uses bitcoin as its unit of account. Since the system works without a central repository or single administrator, the U.S. Treasury categorizes bitcoin as a decentralized virtual currency. Bitcoin is often called the first cryptocurrency, although prior systems existed and it is more correctly described as the first decentralized digital currency. Bitcoin is the largest of its kind in terms of total market value.

Few things to understand

In the United States, dollar currency is governed by the Federal Reserve Banks. When they need new money, they request it from the Bureau of Engraving and Printing. It’s printed by the Bureau and verified by the Federal Reserve. Each piece of money has specific elements that make it official.

US Dollar

These specific elements allow companies and banks to verify that you did not in any way counterfeit the currency. These elements have of course gotten more complex over the years.

Now, some of your cash is in a bank and you can access it online from your computer or on most handheld platforms. This is called digital currency.

A cryptocurrency is a digital currency. Each coin is verified by software on the internet rather than a governing institution. This software is known as the block chain. Whenever a transaction is made, it must be verified by the blockchain.

Understanding the Blockchain

Behind the scenes, the Bitcoin network is sharing a massive public ledger called the “block chain”. This ledger contains every transaction ever processed which enables a user’s computer to verify the validity of each transaction. The authenticity of each transaction is protected by digital signatures corresponding to the sending addresses therefore allowing all users to have full control over sending bitcoins.

Nobody owns the Bitcoin network much like no one owns the technology behind email or the Internet. Bitcoin transactions are verified by Bit coin miners which has an entire industry and Bit coin options. While developers are improving the software they cannot force a change in the Bitcoin protocol because all users are free to choose what software and version they use.

In order to stay compatible with each other, all users need to use software complying with the same rules. Bitcoin can only work correctly with a complete consensus among all users. Therefore, all users and developers have a strong incentive to protect this consensus.

So Bitcoin is nothing more than a mobile app or computer program that provides a personal Bitcoin wallet and enables a user to send and receive bitcoins.

The bitcoin protocol or the rules that make bitcoin work  say that only 21 million bitcoins can ever be created by miners. However, these coins can be divided into smaller parts (the smallest divisible amount is one hundred millionth of a bitcoin and is called a ‘Satoshi’, after the founder of bitcoin).

What’s important to know is it uses cryptography to verify coins are official and not fake. Where, governing institutions use hard-to-copy elements on their bills and coins.

How is new currency distributed?

This is called currency mining. Mining refers to the process of creating and verifying new coins on the blockchain. Anyone can do it but it relies on advanced cryptography to make it happen. There are pieces of software that do this. They are called miners.

Bitcoins are created as a reward in a competition in which users offer their computing power to verify and record bitcoin transactions into the blockchain. This activity is referred to as mining and successful miners are rewarded with transaction fees and newly created bitcoins.  Besides being obtained by mining, bitcoins can be exchanged for other currencies,  products, and services. When sending bitcoins, users can pay an optional transaction fee to the miners. This may expedite the transaction being confirmed.

The more coins that are verified, the more complex it is to verify new ones. This puts a limit on the amount of cryptocurrency in circulation. This is a selling feature for a lot of people. No governing body can issue more money into circulation and devalue everyone else’s coins. This is why a single bitcoin today is worth more than 500 times the american dollar.

Points to Note

  • There are dozens of cryptocurrencies that exist. Only a few have value.
  • There are dozens of exchanges. Only a few should be trusted.
  • Cryptocurrencies are not efficient. Bitcoin transactions have an average confirmation time of 10 minutes.
  • Due to the inefficiencies of the market. Exchanges can have arbitrages of over 5 dollars.
  • Cryptocurrencies trade 24/7. The markets are always running.
  • Cryptocurrencies are very volatile. In the last 4 years, Bitcoin went from 200$ to 1200$ then as low as 200$ and now it stands around ~730$ USD.

Investing in Cryptocurrencies

If you like to invest in Cryptocurrencies note that it can be traded using trading techniques used on other currencies.

It is important to do some research

Do some research and understand what techniques and styles of trading have been successful in different cryptocurrencies. You need to understand the pros and cons of different currencies and the inefficiencies of different currencies and exchanges.

Research the opportunities that lie in trading different currencies with different cryptocurrencies. I.e. Bitcoin and USD vs. Bitcoin and EUR. f you’re doing bot trading, understand what bots are available to you. If you’re into technical analysis, find what software is available to you.

Now make a plan

Pair the knowledge you gained from your research with your skill set and trading style. Make a plan that includes the cryptocurrency(ies) you will trade with. The exchanges you will trade on. The technique and styles you will use. The trades you will make. This isn’t new for cryptocurrencies, good forex traders make a plan and stick to it.

The most simple way of investing is buying the Bitcoin with real money on any exchange, then selling the BTC for any currency from the list.

Finally start trading

For trading in cryptocurrency get a digital wallet from a secure provider. Attach your digital wallet to the exchanges you’ll use and make your trades. Here find some of the best cryptocurrency investments for 2017.

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