Cryptocurrencies are digital means of exchange (virtual currencies) and can therefore be exchanged like any other currency. Bitcoin was the first to start trading in 2009, outside the control of governments and financial institutions, i.e. in a decentralised manner. These types of virtual currencies have a limit and are created by “miners”. They are so called because they do the process through which cryptocurrency transactions are verified and new units are offered. Miners collect the latest verified transactions into blocks, these blocks are encrypted and linked to the existing blockchain, also called blockchain (a shared digital ledger where all transactions of a given cryptocurrency between two parties are recorded). They are rewarded in cryptocurrencies for doing this.
Characteristics of cryptocurrencies:
- They can be transferred instantly to anyone anywhere in the world.
- There is no official market and they can be traded 24 hours a day, all year round.
- They are very volatile, their price can vary a lot in just a few hours.
- They are widely accepted, although not yet globally accepted.
- They are not regulated at the moment
- No system to compensate for losses in case of fraud, or technical failure
- They are limited
- Transactions are recorded in a shared ledger
- Their value is not exclusively linked to the performance of a particular economy
- Their value depends on the commitment of users to maintain their price when converting them into traditional currencies.
There are a large number of cryptocurrencies currently available, all with their own characteristics and applications, among them we can highlight:
Bitcoin
It was the first cryptocurrency and the best known today. It is used as a means of payment globally. It was created in 2008 by Satoshi Nakamoto, which is not known if it is a person or a group of anonymous people, as this name is a nickname. Bitcoin has a limit of 21 million units. Bitcoins are divided into submultiples, called satoshis.
Its chart is the same as that of any other currency and it is quoted against the currency of several countries. Therefore, you can make a technical analysis of Bitcoin as you do with any other financial asset, such as stocks.
Bitcoin Cash
On 1 August 2017, the new version of bitcoin was made and those who had bitcoins then, went on to hold that same amount in Bitcoin Cash. It allows for faster transactions and lower fees.
Litecoin
The litecoin was considered as the silver of the Bitcoin, the latter being considered the digital gold. It was one of the first currencies after Bitcoin, created in 2011 by Charlie Lee, ex-executive of Coinbase (platform where most cryptocurrencies are bought). It has an improved encryption of Bitcoin, being much faster. This is its main advantage. However, it has lost popularity nowadays.
Dogecoin
It was created in 2013 by Billy Markus and Jackson Palmer, copying Litecoin’s technology. It is exchanged in a decentralised way.
There are 100 billion coins, and it is the second most exchanged after Bitcoin, being the cheapest with respect to fees and is faster than Litecoin.
Ethereum
It was created in 2011 by Vitalik Buterin. Ethereum, in addition to serving as a currency for transactions such as Bitcoin, also allows for smart contracts, such as financial exchanges, crowfunding platforms and intellectual property. It uses blockchain technology but there is no limit on the number of coins.
Ripple
Ripple is a pre-mined, debt-based currency, created in 2012, known as XRP. An XRP is an IOU (promissory note), i.e. a debt. Ripple is actually the name of the company that created it but it is associated with the currency.
Ripple does not use blockchain technology and is not decentralised, which requires the identity of the trader to be known. It is faster than Bitcoin and there are 100 billion Ripples. However, not all of them are in circulation as the company keeps half of them as collateral. There are already banks operating with it.
Neo
Neo (formerly Antshares) is a cryptocurrency created in China, which is backed by the Chinese government because it is considered a national creation. There are cryptocurrencies that are banned in China, such as Bitcoin.
This is an advantage, it is already known as the “Chinese Ethereum” and there is a lot of interest in it.
Digital Cash (Dash)
It was created in 2014 by Evan Duffield. It differs from other digital currencies in that it allows instant transactions and private transactions. These functions are not managed by miners, but are processed by masternodes on a second level. It is decentralised like Bitcoin but eight times faster. At the moment it is not very well known. However, some experts consider it to be one of the safest currencies because its masternodes must have at least 1,000 Dash to act.
Despite all the advantages that cryptocurrencies may have, you should be aware of the following:
- They are not yet legalised but some governments are already starting to develop regulations on cryptocurrencies. However, you should take into consideration that it is mandatory to pay taxes on cryptocurrencies, according to the legislation of most countries.
- There are so many cryptocurrencies and no one knows for sure which ones will be the most prosperous in the future, so perhaps the safest thing to do would be to invest in the most popular, accepted and well-known cryptocurrencies.
- Transactions are irreversible, which means that if you make a mistake and send them to someone else, you will have lost your cryptocurrencies.
- Exchanges still invest a lot of money in security. Therefore, it is not known whether they are as secure as you think.
Recommendations to avoid cryptocurrency scams
Because cryptocurrencies have attracted people with little or no financial knowledge, this has led to the emergence of many scammers, so you need to be careful.
The main scams are promises of large investment returns, exchanges that take your money, fake ICOs, supposed “brokers” of dubious origin, among others. For this reason, and as with anything you set out to do, you should educate yourself well on the subject. You must read, practice in demo, learn from experts, in order to create your own trading or investment system with cryptocurrencies.
In addition, it is recommended to buy cryptocurrencies on verified platforms and never invest on anyone’s recommendation. There are many people with their own interests.
And of course, never invest all your money in cryptocurrencies or a very large percentage of it, as no one knows for sure what will happen to it. Only invest money that you don’t need and that you can lose.
In the resource section “Recommended brokers” you will find verified and reliable cryptocurrency brokers.
Main uses of cryptocurrencies
Buy to hold for a while
This is how the first people began to invest in cryptocurrencies, they bought to see what would happen as it was something very new, and when they became popular they sold them obtaining a profit, as in the case of Bitcoin, which skyrocketed in price in 2017.
Some also speculated in the short term with them, buying on low days and when there was a good movement, generating a profit, they sold them.
Speculating with cryptocurrencies using derivatives
There are Cfds (available 24 hours a day, every day) and futures (such as Cboe XBT) on cryptocurrencies. They have the advantage of being able to trade in the short term, on a leveraged basis, quite a few units of Bitcoins or Ethereums for example. However, as we have already seen, the risk is high as the loss can be greater than the money invested in the operation, due to the very high volatility of cryptocurrencies. If the move goes the way you need it to, it’s great.
RECOMMENDATION: If you are new to trading, cryptocurrencies are not recommended to start with. It is preferable that you start with not so volatile assets to learn how to trade and when you have more experience try crypto. Anyway, as always, if you do it first, practice a lot in demo.