What Is Cryptocurrency and How to Trade It?
Cryptocurrencies have certainly made an ostensible impact on the markets as a whole and the way we process payments and financial transactions. As such, many traders and investors may be interested in trying to potentially benefit from these digital currencies’ movements.
Accordingly, this article delves into how Cryptocurrencies, the definition of Crypto, and how to trade it, among other substantial factors. Here’s what you need to know about Cryptocurrencies and Crypto trading:
Cryptocurrency Definition: What Is Cryptocurrency?
Cryptocurrency, otherwise abbreviated as Crypto, is a form of digital currency that got its name based on the fact that they use cryptographic techniques that would serve as alternative payment methods.
What Is Cryptography?
Cryptography employs codes to safeguard information and communications, ensuring that only authorized individuals can comprehend and handle the data as intended. And this is exactly what Cryptocurrencies do.
Blockchain vs. Cryptocurrency: Are They the Same?
When talking about Cryptocurrencies, the word blockchain may often come to mind. While Crypto and blockchain may get intertwined, it is important to note that these two are different entities that work together to generate what Crypto intends to do.
The difference between the two is that Crypto is a digital currency and blockchain is the technology on which it is based. Moreover, Blockchain is a shared database used to store information in blocks that use cryptography for maximum security.
Finally, while Crypto works on blockchain technology, blockchain is used to operate things beyond Crypto like secure data usage and supply chain management.
Types of Cryptocurrency
The Cryptocurrency market can be very multifaceted and rich, and therefore, it may be important to distinguish the different types of Cryptocurrencies.
Accordingly, there are two main types of cryptocurrencies available. These are coins and tokens.
Coins are cryptocurrencies that operate on their own blockchain and serve similar purses to traditional money. The most famous examples of Crypto coins include Bitcoin and Litecoin.
On the other hand, Crypto tokens use existing blockchains (and not their own blockchains). Additionally, they can also be integrated into software applications and they can also represent digital art like NFTs. One of the most prominent examples of tokens is Ether, which operates on the Ethereum blockchain.
In addition, it is crucial to bear in mind that there are approximately six distinct categories of Crypto tokens when discussing them. These categories are as follows:
- Transactional: Transactional tokens work similarly to traditional currencies. However, they offer lower transaction fees and work fastly to transfer money. Bitcoin, for example, is considered a transactional token.
- Governance: As the name entails, governance tokens allow their holders to vote on certain activities.
- Utility: Users can utilize these tokens to gain access to a service or product built on a blockchain. Within the ecosystem, these tokens serve as a means of payment for various services. Examples of utility tokens include Ethereum’s gas token; used on the Ethereum network to pay transaction fees.
- Security: Security tokens are on-chain instruments that serve similar functions for blockchain projects and/or digital assets in a similar fashion to real-world securities. Through security tokens, shares of a company or other enterprises, such as real estate or equities can be sold without the use of a broker.
- Platform: These types of tokens support dApps on blockchains by increasing their security and supporting transactions.
- NFTs: NFTs or Non-Fungible Tokens are unique cryptographic assets that provide ownership of items ranging from art to GIFs and clothes to videos. The Merge is the most expensive NFT piece and one of the most prominent examples.
What Is Cryptocurrency Trading?
Generally speaking, Cryptocurrency trading is essentially the act of buying and selling cryptocurrencies with the intention of making a profit. In other words, Cryptocurrency trading refers to trading on Crypto price swings with the hopes of reaping profits.
How to Trade Cryptocurrency?
Given its popularity and the buzz it made over the years, many traders and investors may be interested in investing in cryptocurrencies.
This can be done in multiple ways like buying and selling Crypto on a Cryptocurrency trading platform or a Crypto exchange which would require you to have ownership of the Cryptocurrency as well as needing to find a Crypto wallet to store it away from hacking attempts.
Another way to trade Crypto includes Futures contracts which allow you to gain exposure to Crypto without having to own them, store them, or worry about them getting hacked.
Cryptocurrency Futures are contracts between two parties that allow traders or investors to stipulate on the future direction of the underlying Cryptocurrency’s price. In other words, through Crypto Futures traders may gain exposure to Cryptocurrencies without having to own them.
How Do Cryptocurrency Futures Work?
Futures traders can decide whether to buy or sell the Cryptocurrency Futures based on the Crypto’s price swings. Afterward, once the Futures contract nears its expiration date, traders get to choose whether to close them or roll them over. Rolling over a Futures contract means extending the contract’s trading beyond its expiration date.
Furthermore, it is important to note that Futures contracts are regulated and traded on the Chicago Mercantile Exchange (CME). To find out more about how Futures contracts function, read our “What Are Futures and How Do You Trade Them” article.
Unique Features of Cryptocurrency Futures
To some, Cryptocurrency Futures may sound appealing due to the fact that they offer flexibility through a rollover. Cryptocurrency Futures also provide traders with the option of gaining exposure to Cryptographic assets without owning them as well as leveraged trading.
Moreover, the Futures market is known for its liquidity, as such, Cryptocurrency Futures can offer traders more liquidity than other types of contracts.
It may also be worth noting that Futures contracts like Plus500’s Micro Bitcoin and Micro Ether provide traders with access to the Cryptocurrency market at a fraction of the price of a regular Futures contract. In other words, traders get to trade on Cryptocurrency price movements by paying less. To read more about Micro and E-Mini Futures, check out our “E-Mini and Micro E-mini Futures Contracts Explained” article.
Since Bitcoin’s inception in 2009, Cryptocurrencies became more popular and many new Cryptocurrencies became in circulation. As of 2023, sources report that there are over 22,000 Cryptocurrencies in circulation.
However, while there is certainly a notable amount of Cryptocurrencies out there, there are Cryptocurrencies that are considered to be more popular than others in that these have the highest trading volume (as of May 30, 2023). Here are two of the most popular Cryptocurrencies:
- Bitcoin: Bitcoin is often referred to as the first Cryptocurrency and is definitely among the most traded and most popular Cryptocurrencies. Bitcoin is a digital currency that acts as a form of alternative currency. This popular Cryptocurrency enables monetary transactions without the need for third-party authorization.
- Ethereum: Ethereum is an open-source decentralized platform that is based on blockchain technology. The platform aims to support smart contracts and DeFi applications. Ethereum’s native Cryptocurrency is called Ether (ETH) and is considered the second-largest cryptocurrency by market capitalization (as of May 2023).
A Brief Timeline of Crypto’s History
To gain a better understanding of how the Cryptocurrency market functions nowadays, traders may want to acquire the essence or fundamental aspects of its rich history. Here’s a brief recap of Crypto’s history:
Here's a timeline of the main highlights in the Cryptocurrency market’s history:
- 2009: Someone or a group of people under the pseudonym Satoshi Nakamoto created Bitcoin, the first decentralized cryptocurrency in January 2009.
- 2010: the first cryptocurrency exchange, Bitcoinexchange.com (now defunct) emerged in March 2010.
- 2010: Perhaps among some of the most famous Crypto stories. In May 2010, a man called Laszlo Hanyecz exchanged 10,000 bitcoins for two pizzas.
- 2011: The first Alternative Cryptocurrencies (Altcoins) like Litecoin were launched.
- 2015: In July 2015, Ethereum, the second most popular Cryptocurrency in the world was created.
- 2017: Bitcoin surpassed $20,000, leading to a surge in the number of cryptocurrencies as the Crypto market as a whole experienced a memorable bull run.
- 2018: The Crypto market crashed as broad sell-offs driven by regulatory scrutiny pushed Bitcoin prices downward.
- 2020: As the economy suffered in light of the COVID-19 outburst, Bitcoin surged as investors turned their focus toward it.
- 2021-2023: Volatility across the Crypto sector materialized as Crypto experienced sharp sell-offs on the one hand and rose on the other.
To conclude, Cryptocurrencies are certainly popular assets that have revolutionized the markets and the way we process payments nowadays among other things. To trade these without having ownership of them, traders may open a Futures contract with Plus500.
VIRTUAL CURRENCY DERIVATIVE DISCLOSURE
The purpose of this disclosure is to remind customers that, just like any other speculative investment, trading futures on virtual currencies, including Bitcoin, has certain benefits and various unique and potentially significant risks. While futures on virtual currencies must be traded on regulated futures exchanges, trading these products involves a high level of risk and may not be suitable for all investors. In accordance with National Futures Association (“NFA”) Interpretive Notice #9073, please find the following NFA and CFTC Advisory Notices regarding associated risks of trading virtual currency futures: NFA Investor Advisory – Futures on Virtual Currencies Including Bitcoin: https://www.nfa.futures.org/investors/investor-advisory.html
CFTC Customer Advisory: Understand the Risks of Virtual Currency Trading:
Customer Advisory: Understand the Risks of Virtual Currency Trading | CFTC