Cryptocurrencies are experiencing a formidable rise and have generated a buzz that has gone beyond the boundaries of trading, even hinting at the conquest of a particular status: an alternative to traditional currencies, also as a means of payment. Despite this latest comparison, however desirable (they are still currencies, albeit virtual), it is undeniable that, for now, the stage for cryptocurrencies is
mainly that of trading. In this article, we will address the topic of cryptocurrencies from a trading perspective, provide a clear definition of cryptocurrencies, illustrate the mechanisms, market dynamics, market movers, and platforms.
What are Cryptocurrencies
Cryptocurrencies are virtual currencies. Not just digital, as the euro or dollar can also be, but truly virtual. They do not exist from a material point of view. There is no physical equivalent (metal coin and banknote) of the various Bitcoin, Ethereum, Litecoin, etc. This element creates profound differences, both in the functioning mechanisms and in practical use, compared to traditional currencies. Another element capable of profoundly affecting everything that revolves around cryptocurrencies is their... Acephaly. This term, borrowed from medicine, can confuse ideas, but it is useful to understand what we are talking about. All traditional currencies (euro, dollar, pound, yen, and the like) have an institution behind them that regulates their supply, an institution chaired by decision-makers, who act based on economic and even political evaluations. These institutions are known as "central banks". The ECB, the FED, the Bank of England (BoE), the Bank of Japan are all central banks.
Cryptocurrencies (all of them) do not enjoy the same privilege. This characteristic, which represents a novelty in monetary history, determines major consequences both in the use of the monetary instrument and in exchange rate dynamics (the exchange rate, so to speak). Above all, it generates positive consequences and negative consequences, which affect trading activity. It is true, in fact, that a currency without central banks behind it is a currency free from conditioning, almost impossible to manipulate directly, and therefore whose price is at the mercy, like any other asset, of the law of supply and demand. However, it is also true that if there is no central bank behind it, an organism capable of intervening when shocks occur is missing. Moreover, since the actions of central banks are somehow predictable, the price movements generated by them are also predictable, and this facilitates the analysis work of traders. If a currency, like cryptocurrencies, is not managed by a central bank-like institution, it does not offer traders a strong foothold for price analysis. In short, there are pros and cons.
However, if it is true that central banks, when it comes to cryptocurrencies, exit through the door, it is also true that in a certain sense they re-enter through the window. After all, there must be some sort of constraint that regulates the money supply. Well, this constraint is not exercised by an entity, but by a series of mechanisms that keep liquidity under control. Firstly, these mechanisms often coincide with a "finish line", certainly not irreversible but still existing. Some cryptocurrencies, like the famous Bitcoin, are programmed to be "finite". A maximum number of Bitcoins that can circulate in the market is foreseen, once reached, no more will be issued. Secondly, these mechanisms often coincide with methods of "mining", i.e. creation of currency from the bottom, generated by an algorithm that becomes increasingly difficult. Just as obtaining "traditional" currency is made more difficult, because more expensive, when reference rates rise; in the same way, obtaining virtual currency is made progressively more difficult by the fact that the difficulty of mining - which almost always comes down to identifying an encrypted code - grows with increasing liquidity.
Then, there is the chapter on security. The internet is a hacker's paradise, so a good virtual currency must be hacker-proof. Here, the methods are disparate but all belong to the
blockchain family. Let's take the example of Bitcoin. Those who want to violate a code, and appropriate currency in an illicit way, would have to violate a register that contains all the transaction codes made up to that moment. This constraint is given by the fact that when a transaction takes place, the entire register is modified. It's like adding a link to an immense chain.
This method is secure, but it has costs. Not in economic terms, let's be clear, but in terms of time. Modifying the "global" register slows down transactions. The duration is variable, but generally, to determine with certainty that the transaction has been successful, a few hours are needed. In more recent cryptocurrencies, the duration of transactions is significantly shorter, but we are still far from the standards of traditional currencies. This characteristic (slowness of transactions) represents the main reason why cryptocurrencies have not established themselves as a means of payment, except in rare cases. The current situation and future prospects suggest that virtual currencies are and will remain essentially a trading tool.
The most important cryptocurrencies
Before delving into the relationship between cryptocurrencies and trading, it is good to paint an overall picture of the phenomenon. It is good, therefore, to introduce and illustrate the most used cryptocurrencies.
Bitcoin. It is the prince of cryptocurrencies, the one that opened up a world and served as a trailblazer for all the others. It is also the one that performs the best, partly because it has been presiding over the market for a long time and is the best known, and partly because of its actual value. Currently, in mid-November 2017, it is worth more than 7,000 dollars. It is obtained in two ways: exchange for goods and currencies, thus by purchasing it; mining, the process of extracting the code. Once it was within the reach of many, now impressive computing powers are needed. Recently, new versions have appeared that are able to solve some structural problems. Bitcoin Cash, which streamlines the blockchain and makes transactions much faster; Bitcoin Gold, which makes the mining process simpler. Despite some sudden crashes in the past, it remains the cryptocurrency with the best prospects.
Ether. It is actually the result of an innovative system of contracts, so-called "smart" transactions, called Ethereum, because it is secure and fast. The currency, which takes its name, is its concrete emanation. Ethereum is the main candidate to dethrone Bitcoin, or at least to give it fierce competition. Currently, in mid-November 2017, it is worth more than 300 dollars. It was born in 2016.
Litecoin. It is the third most famous currency in the world and, from this point of view, it competes with Ether. However, it is less liquid than the other two, and even less than Ripple. It follows Bitcoin in its mechanisms and functioning, although it is faster in transactions. Currently, in mid-November 2017, it is worth just under 50 dollars. It was born in 2013.
Ripple. It is a young currency, on the market for only a few months. It is worth mentioning because it is one of the few virtual currencies born in the last year able to express a certain potential. Currently, in mid-November 2017, it is worth about 0.20 dollars. Its peculiarity lies in the extreme speed of transactions, which last about 5 seconds. This standard could elevate it to the role of competitor of traditional currencies.
The cryptocurrency market, obviously, is not limited to Bitcoin, Litecoin, Ether, and Ripple. There are numerous ones. Worthy of mention, in particular, are: NEM, Dash, Iota, Zcash, NEO.
The performance of cryptocurrencies
Before offering some guidelines on cryptocurrency trading, it is good to resolve a doubt: is it convenient? Is it worth it? Answering these questions is certainly not easy, also because, as in all things in life - and trading is no different - there are pros and cons. Certainly, the typical cons of currency trading become even more burdensome in the case of virtual currencies. Volatility, for example, of Bitcoin and company is high, almost extreme. The important thing, however, is to know that the biggest advantage, profitability, is at least potentially able to compensate for the disadvantages. It's really true, virtual currencies, and the reference here is mainly to Bitcoin, produce performances at the limit of conceivability. It is enough to look at any chart to realize this. In this paragraph, we will talk about the market performance of the main four cryptocurrencies. The reference period will be November 2016 - November 2017.
Bitcoin. It is hard to believe the numbers, but they are real. In November 2016, after a brief period of stagnation, Bitcoin began to rise. The reason can be traced back to the interest from banks, institutions, companies, which gave it a new dignity. Since then, a triumphant ride, interspersed from time to time by brief downward trends, however never longer than a month. Today, mid-November 2017, one Bitcoin is worth more than 7000 dollars, and marks a growth of 1000% in one year. Which asset is capable of producing these numbers? The prospects are good, also because, parallel to the process of legitimizing Bitcoin, a certain tendency towards renewal is being appreciated, as can be seen from the birth of Bitcoin Cash and Bitcoin Gold. In parentheses, Bitcoin Cash, born in May 2017, has already reached 1180 dollars.
See Bitcoin / Dollar quote in real time
Ethereum/Ether. The world's second most important crypto currency has produced growth rates similar to Bitcoin. In fact, higher, even though it should be considered that Ethereum started from a much lower price. In any case, in November 2016 an Ether was worth less than 4 dollars, today it is worth 63 or a little more. We are at growth rates close to 1500%.
See Ethereum / Dollar quote in real time
Litecoin. If you think that Bitcoin's success overshadows other virtual currencies, you are mistaken. Obviously, we are far from Bitcoin's numbers, but still the growth rates are exceptional. A demonstration of this is provided by Litecoin, which in the last 6 months has gained 300%. Currently, it is worth more than 60 dollars.
See Litecoin / Dollar quote in real time
Ripple. This cryptocurrency is out of the chorus. It is an oasis of stability in a frenetic context. From this point of view, it can represent a good reference point for traders. In any case, it has been traveling for a year at around 20 cents of a dollar, equal to a traditional currency of a medium-small country.
See Ripple / Dollar quote in real time
The market movers of cryptocurrencies
It is difficult to talk about the market movers of cryptocurrencies. As already extensively explained previously, behind virtual currencies there are no central banks, which guarantee a certain amount of market movers. There are no reference rates to follow, nor securities purchase plans that can be used to predict market trends. This is one of the reasons why, although placed in a generally upward trend, cryptocurrencies are very volatile. Almost everything is decided by the law of supply and demand. Precisely, almost. This "almost" is to be found in sentiment, which is the only foothold for predicting prices (if we exclude technical analysis).
The news that can make an impression on investors are those that push towards a legitimization of this or that cryptocurrency. For example, the endorsement of an important exponent of finance or even a policy maker.
Another aspect to consider lies in the performance of traditional safe-haven currencies, such as the dollar, euro, and pound. If the market is in a chaotic situation, and these three currencies are losing ground, cryptocurrencies could be further pushed upwards.
Brokers and Platforms
How do you materially trade cryptocurrencies? There are two alternatives: physically buying and selling the currency, thus doing real Forex, or using the currencies as an underlying asset, through CFD trading. The best alternative is the latter, as the slowness of transactions does not play in favor of medium and short-term trading approaches. It is more appropriate, therefore, to play on price variations... CFDs, then.
The best broker for those who want to trade cryptocurrencies is
AvaTrade. Among the advantages of this broker, in the part dedicated to cryptocurrencies, stand out:
- The offer of assets: you can invest with Bitcoin, Bitcoin Cash, Ethereum, Ripple, Dash, Litecoin, Moneo, Neo.
- Low minimum deposits (100 dollars)
- Competitive Swap rates
- Possibility to go short on each pair
- High leverage, up to 20:1
- Twenty-four hour assistance service
- Support in 14 languages
- Real-time charts
- Competitive platforms, such as MT4, MT4 Mac and AvaTrade Go (proprietary platform dedicated to mobile trading).
