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Despite the major pullback in 2018, however, cryptocurrencies are on the upswing again; there’s money to be made for savvy traders. Of all the markets, crypto may be the riskiest, but if you’re willing to put in the time and research, the market is ripe for winning trades.

What is cryptocurrency?

Cryptocurrency is digital currency – it doesn’t exist in the physical world and it has no intrinsic value. The lack of intrinsic value isn’t necessarily a knock against it; the fiat currencies in circulation around the globe aren’t backed by physical commodities, either. The ‘crypto’ in cryptocurrency refers to the fact that it’s based on cryptography. Blockchain, the technology that enables cryptocurrency, uses a sophisticated form of cryptography. In order to understand cryptocurrencies, you need a rudimentary understanding of blockchain.

Blockchain is a chain of transaction records, or blocks, each containing an encrypted hash mark of the block immediately before it. The blocks are connected by cryptography, and because each contains an encrypted replication of the data in the block before it, it’s impervious to tampering. As transactions are validated by a network of millions of independent computers, or nodes, the ledger is transparent, distributed, anonymous, and permanent.

Traders hesitant to jump right into cryptocurrencies can still profit off blockchain technology with a lower level of risk.

Cryptocurrency Trading

Key differences between cryptocurrency and conventional currencies

  • Cryptocurrency has no physical form; it’s entirely digital.
  • Cryptocurrency is entirely anonymous; when you use your bank account (debit card, credit card, checking or savings account), the vendor gets your personal information.
  • Cryptocurrency exists outside the reach of the legal system and financial regulators; it can’t be frozen or garnished by government agencies.
  • Cryptocurrencies aren’t backed by a central authority; traditional currencies are backed by government. They tend to be highly volatile.
  • Crypto exchanges are relatively unrelated; Forex and other markets are heavily regulated.

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A brief history of cryptocurrency

Bitcoin, the first – and most widely traded – cryptocurrency first hit the market in 2009, but a lot was going on in the crypto world to set the stage for its launch.

1998 – 2008    Two proto cryptocurrencies, B-Money and Bitgold, were under development, but never formally launched.

2008    Someone writing under the pseudonym Mr. Nakamoto published a paper about a peer-to-peer digital cash system dubbed ‘Bitcoin’ to a cryptography forum.

2009    The Bitcoin software was made publicly available and the first Bitcoins were mined.

2010    The first Bitcoin transaction was recorded. Someone traded 10,000 Bitcoins for two pizzas. Those same 10,000 Bitcoins would be worth about $80 million today. The first cryptocurrency exchange, bitcoinmarket.com, was launched, and ultimately failed.

2011    The first Bitcoin alternatives emerged, Namecoin and Litecoin chief among them. Bitcoin reached parity with the USD.

2013    The first Bitcoin crash occurs; the value of one Bitcoin plummeted from $1,000 to less than $300. It would be years before it reached $1,000 again. Mt. Gox, the largest crypto exchange, launched; it would ultimately handle over 70% of all Bitcoin transactions.

2014    Mt. Gox inexplicably goes offline, resulting in the theft of 850,000 Bitcoins that were never recovered.

2016    Ethereum, the first legitimate Bitcoin competitor, was launched in the world’s first ICO.

2017    Bitcoin’s price breaks $10,000.

2018    The year of the Great Crypto Crash; cryptocurrencies lost 80% of their market capitalisation.

2019    All but four of the top 20 cryptocurrencies have recovered from the crash and are currently trading in the green.

Key crypto facts

Before you jump into trading cryptocurrencies, there are a few things to keep in mind. Even if you’re an experienced trader in other markets, crypto has its own unique characteristics, and it’s important to understand the market before you risk your capital.

  1. Cryptocurrencies are extremely volatile. Bitcoin, the largest by far, gained over 3,300% in a single year. Between 2010 and 2017, Bitcoin went from $0.01 to over $20,000 per token. On the other hand, it has had four corrections of over 50% in a five-year period; by comparison, the S&P has only had three 50% corrections in almost 100 years.
  2. Cryptos have no underlying value. As they aren’t backed by governments and have no tangible fundamental backing, it’s extremely difficult, if not impossible, to assign them a realistic value.
  3. There’s a huge interrelated market. Blockchain, for one, is booming due in part to the cryptocurrency market. Both other industries, such as graphics card manufacturers, are also seeing double-digit growth due to the growth in ‘miners’, or people who process crypto transactions.
  4. The barrier to entry is low. Blockchain makes it possible for anyone with a team of coders and a little seed capital to bring a new cryptocoin to market. That’s why there are over 2,000 cryptocurrencies with up to 100 new ones being launched every month.
  5. Institutional money is flooding into crypto. Until 2019, most institutional investors avoided the crypto market, but that’s changing in a big way. With the launch of crypto ETFs and other vehicles, institutional investors are jumping in to profit off the market’s volatility. The effect of institutional money is too new to quantify, but it could drive prices up even more.
  6. Many major financial players are sceptical of cryptocurrency. Even though crypto is gaining traction as a legitimate investment, major players predict the crypto boom won’t end well. Jamie Dimon, CEO of JPMorgan Chase considers Bitcoin a fraud.
  7. The tax man wants his share. Just because cryptocurrencies are basically unregulated, they’re still subject to taxation. In the US, capital gains taxes apply, and in most EU countries, you’ll pay either capital gains or income tax on your crypto gains.

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Crypto and the regulators

Given the relative newness of cryptocurrencies, it’s no surprise that governments around the world are still grappling with meaningful ways to regulate them. Each country takes a different approach, with some countries (Afghanistan, Pakistan, Algeria, Bolivia, Bangladesh, Macedonia, Saudi Arabia and Vietnam) banning them outright.

In the US, Bitcoin is designated as a commodity and under the authority of the CFTC, the SEC has not approved any crypto products for trading on the exchanges.

The EU Financial Stability Board has appointed four regulators to oversee crypto assets, but individual member states have taken a patchwork approach to regulation. In most cases, the regulatory framework revolves around fraud prevention and public education.

Expect that to change in the coming months and years as governments step up their efforts to develop a cohesive regulatory system for these non-traditional assets and markets.

The future of cryptocurrencies

Nakamoto’s paper is 11 years old and a lot has happened in cryptocurrency in the intervening years. Blockchain poses a real challenge to central banks; cryptocurrencies provide a transparent distribution network free of manipulation by central governing powers.

That said, the crypto market isn’t positioned for smooth sailing. Many coins were ridiculously overvalued in the bull run up to the 2018 correction, and many people jumped out of the market. It became clear that an overall lack of knowledge about cryptocurrency and a generalised herd mentality that hyped the early gains grossly distorted the market. It’s not necessarily a bad thing that traders are taking a step back to learn more about this brave new world.

A few trends for the future are already emerging:

  • ICOs, which fell off precipitously during the crash, are back on the rise. As new coins come to market, it’s even more important for traders to educate themselves before plunging funds into a new coin.
  • Margin trading will ease off after the mega losses in the 2018 crash. At the same time, coins that trade directly with fiat currency will take off.
  • Volatility should level off – which is not to say that crypto volatility will fall in line with traditional markets, only that the years of 3,000% gains are probably over. Traders will still find plenty of price movement to profit from, but investors will likely not see quadruple-digit gains.
  • Lots of coins will call it quits. The bear market choked off a lot of new currencies, and the threat of new regulatory regimes will choke off many more. This requires a heightened sense of caution for traders.
  • Security tokens, which are backed by a stake in the company launching the coin sale, are poised to take off. Regulatory uncertainties have hindered the rise of security tokens, but as regulations are clarified, these new coins should gain popularity.

What are cryptocurrencies

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The advantage of AskTraders guides

As you’ve probably figured out, the cryptocurrency market is fluid, volatile, and constantly evolving – it’s nearly impossible for a retail trader to stay on top of trends and trading strategies.

The AskTraders guides and trading community solves the knowledge gap. We maintain a knowledge library of essential crypto basics, as well as topical articles about news and trends in the crypto universe. If you’re ready to trade crypto – or just want to know more – it’s a one-stop-shop for up-to-the-minute information and analysis. If you have questions, AskTraders’ guides have the answers.

Come back regularly for current news and insights about cryptocurrencies and proven trading strategies.

Ultimately, cryptocurrency is an exciting, fast-paced, and completely unpredictable market. It’s ripe for profit in the hands of a knowledgeable trader – it’s no wonder it’s one of the fastest growing markets, even in the face of uncertainties. AskTraders is here to help you decide if crypto is right for you, and how to make your best trades once you’re ready to take the plunge.