So you want to get into cryptocurrencies?
There are many to chose from, and a few key things to know about when getting started.
What is a Cryptocurrency?
A cryptocurrency is a digital currency. It is unique from other currencies in that it is verified by a software program rather than official authority institutions.
To illustrate what cryptocurrency is, let me first discuss details about currency.
In the United States, currency is governed by the Federal Reserve. When its needs new money, it requests 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.
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 blockchain.
Whenever a transaction is made, it must be verified by the blockchain.
There is a lot of content on the net that describes the verification process better than I could. 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.
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.
Image: Bitcoins in Circulation
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Image: U.S. Dollars in circulation
Notice the different arcs in the graphs. As time progresses, the rate of new U.S. money increases. While, the rate of new bitcoins in circulation decreases.
A few key things to know
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.
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Investing in Cryptocurrencies
Cryptocurrencies can be traded using trading techniques used on other currencies.
1. Research
Understand what techniques and styles of trading have been successful in different cryptocurrencies.
Understand the pros and cons of different currencies.
Understand 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.
If 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.
You get the point.
2. Make a plan
Pair the knowledge you gained from step 1 with your skillset 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.
3. Start Trading
Get a digital wallet from a secure provider.
Attach your digital wallet to the exchanges you’ll use and make your trades.
