What Are Cryptocurrencies?

Bitcoin is the world’s biggest cryptocurrency but there are over 1,000 more. Here’s why they matter.

Crypto Basics

The trading world couldn’t help but take notice when the price of Bitcoin broke through the $7000 barrier. While Bitcoin was the first cryptocurrency, there are many others as well. What are cryptocurrencies, and how can traders profit from the more than 1,000 different kinds that are currently available?

A cryptocurrency is a kind of digital currency that only exists online. This type of money differs from the digital money you use every day (cards and online transfers denominated in the currency of your country) in that it is not issued by any banks or governments.

Bitcoin and a large number of other cryptocurrencies, such as litecoin and ethereum, are created through a process called “mining”, while other cryptocurrencies, such as ripple and neo, are directly supplied in the market. These cryptocurrencies are also known as pre-mines.

What is Bitcoin?

Let’s take a closer look at Bitcoin before learning more about cryptocurrencies. For traders interested in incorporating cryptocurrencies into their trading, having a basic understanding of Bitcoin is essential. Bitcoin was developed in 2009 by an unidentified person or group of individuals using the pseudonym Satoshi Nakamoto in order to enable quick payments without the need for a centralized authority.

The equally innovative blockchain technology serves as the foundation for this revolutionary concept. Blockchain can be compared to a document that is accessible to everyone and contains all Bitcoin transactions. Blockchain technology makes cryptocurrency transactions transparent for anyone to see and verify, which is precisely why Bitcoin can function without a bank.

The Bitcoin Network
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Key Characteristics of Bitcoin

1. Limited supply
Bitcoin was programmed by Satoshi to have a supply of 21 Million. This is a key piece of information when evaluating the price of an asset. What it means is that no bank can pump more currency into the market (one form central banks do that is known as quantitative easing). For that reason, Bitcoin is often seen as inflation-proof and is often compared to gold.

2. Minable
Bitcoin is created through mining. This means, developers join the network and volunteer to verify Bitcoin transactions, so that the system can operate without authorities getting involved. In return, they get rewarded in Bitcoins for the time and electrical power they put into it.

3. Fast transactions
Bitcoin transactions are verified on average every 10 minutes. This means you can use Bitcoin to send money anywhere in the world within 10 minutes even during the weekend. As impressive as this might sound, Bitcoin is no more the fastest method of payment available, due to the rise of new cryptocurrencies with focus on transaction speed.

Why Are Cryptocurrencies So Volatile?

The volatility of cryptocurrency markets is absurd when compared to bank-issued money, also known as fiat money. For comparison, the typical weekly volatility for forex pair is less than 1%. In contrast, Bitcoin’s weekly volatility in 2017 increased to as much as 60% annually, while other cryptocurrencies saw even greater fluctuations.

What are some of the causes of this volatility, then? As traders and investors take in the new information, market history teaches us that when a market is new, there may be abrupt price changes. Before the market becomes established, there will be spikes in price followed by drops.

There is no doubt that the current levels of volatility present a wealth of opportunities for day traders, even though some may argue that cryptocurrency prices move in a bubble-like manner. This is especially true on weekends when Bitcoin historically reaches its all-time highs.

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History of Bitcoin Price Movements

In light of this volatility, let’s see some of the drastic price changes that Bitcoin has experienced since 2013.

Bitcoin price chart 2013 – 2017
  • Spring 2013 highs: Between March and April 2013, Bitcoin experienced its first significant increase, rising from $30 to $230. The bailout of Cyprus and the bank’s confiscation of sizable deposits are thought to be some of the possible causes. Bitcoin-held funds are shielded from such occurrences.
  • November 2013 jump:Bitcoin makes headlines once more after reaching $1,000 as demand from China increases and the US senate expresses interest in this as-yet-unknown cryptocurrency.
  • January 2015 lows: Bitcoin falls after China imposes restrictions and William Ulbricht, the founder of Silk Road, an online marketplace for illegal drugs, is imprisoned.
  • 2017 highs: Bitcoin smashes through the $10,000 mark. Traders and investors alike cannot afford to ignore cryptocurrencies anymore.