The vast majority of traders have heard of cryptocurrency, blockchain, mining, and cryptocurrency trading. At the same time, the majority of traders want to, but haven’t started trading the most famous cryptocurrency – bitcoin. Why? It seems that we need to find a lot of new and incomprehensible information. We have decided to make this task easier and in one article we will briefly walk through the most topical issues.
What is Cryptocurrency?
Any digital currency that is protected by various cryptographic technologies is considered to be the cryptocurrency. Cryptocurrency cannot be held in one’s hands. This is a digital equivalent of the monetary units that exist in virtual space.
Four main advantages of cryptocurrencies over fiat money:
- Preservation of internal value. States will constantly print money. In fact, the printing press never stops at all. Naturally, fiat money is constantly depreciating, at least at the expense of inflation. This does not happen to the cryptocurrency. The number of issued tokens is limited. This explains the phenomenal growth of such cryptocurrencies as Bitcoin.
- Decentralization. There is no single centre responsible for everything that happens to the cryptocurrency. No one can retroactively cancel any transaction. Nobody can change the rules of the game, which are written in the smart contract. The control over cryptocurrencies belongs not to the Central Banks, but to their users located in all regions of the world
- Anonymity. We can see all the transactions that take place online. But we cannot see who exactly owns this or that wallet. Anyone can absolutely anonymously create a new wallet and store, transfer any number of bitcoins, remaining completely anonymous to states and criminals
- Instant and cheap transactions all over the world. A standard bank transfer, from one country to another, takes 3-4 working days and costs 10-50 euros. It often requires additional documents.
It is possible to transfer the cryptocurrency from the wallet to the wallet in a few seconds, with minimum commission costs and without providing any documents
Any cryptocurrency is based on distributed registry technology (blockchain). Despite the seeming complexity, the technology can be explained in simple words.
Blockchain is an account book used by all participants in events. This book is dynamic and constantly updated. On the pages of the book can be added any events, from cryptocurrency transactions, to the result of the survey, voting or identification of real estate objects.
The main difference of such a book from our usual records is that these data are stored simultaneously by all users. Any new entry appears simultaneously in each of them. This ensures that the system cannot be fooled, which means that there is never any doubt about the information provided.
Thanks to blockchain, it is possible to eliminate a huge number of intermediaries: banks, real estate agencies and even brokers (in the case of decentralized cryptocurrency exchanges).
What is mining?
Creation of cryptocurrencies, such as BTC or ETH, is called mining. Any company or person can participate in mining. This will require the use of computing power, which is used to select digital signatures (hash). After each new signature is found, a new block of data is closed.
The miner who finds this signature is rewarded with cryptocurrency. Thanks to the work of miners, the network is maintained in working order and its protection from duplicate transactions is guaranteed.
High profitability of last years has led to that miners use more and more powerful equipment. And the high level of competition forces individuals to unite in huge pools that guarantee fair rewards in proportion to the computing power expended.
Well, what for do traders need all this?
A fair question with a simple and clear answer. What is important for short-term traders? The increased volatility. When nothing happens in the market, it is almost impossible to earn money. And when volatility grows, or even better, when a trend is established, there are a lot of points to enter the deal. You can put a relatively close stop and a distant take profit.
Average daily fluctuations of BTC reach 3-10%, and the trends give the opportunity to earn thousands of percent of profit, without using leverage at all. Compare this with the dynamics of the EUR/USD pair, which changed by only 5% in the first half of 2019.
Risks of cryptocurrency trading
The use of leverage, provides traders with huge opportunities. The main thing is to remember about the corresponding risks. Therefore, it is necessary to carefully correlate the levels of stop loss and the size of margin used for trading, as the risks, due to the high volatility of bitcoins, are higher than in the Forex market.
Another significant disadvantage is that the BTC/USD pair is practically immune to fundamental analysis. There are no company reports here, no effect by the change in the unemployment rate or the increase/decrease in retail sales, etc. The market is completely driven by the emotions of traders and rumors.
Example of trading with Bitcoin CFD
Below is the daily BTC/USD chart. Here we can see how one of the basic figures of technical analysis – levels – is successively tested. 4 levels are marked with red horizontal lines on the chart. Breakthrough of each of these lines gave traders an opportunity to enter the market.
A question may arise. Why is this market so inefficient? The answer is that the market is new. There are no large hedge funds and large algorithmic companies in it. It means that the situations when traders are specially trapped are much less than in the Forex market.
Today we can say with 100% confidence that trading CFD BTC should be included in the arsenal of each active trader. At least for those moments when usual currency pairs are in a passive state.