Is Cryptocurrency a Good Investment? A Beginners’ Guide to Crypto Trading
The recent crash of the Bitcoin bubble has left many in a state of confusion on whether to withdraw from the cryptocurrency market or not. Besides, upcoming traders and investors are also wondering if they should venture into cryptocurrency.
You know, there’s no point staking your hard-earned income on an investment scheme that doesn’t promise a return. Well, I doubt if there is such an investment arrangement anywhere that promises a 100 per cent return on investment.
Volatility is a critical characteristic of cryptocurrency trading which is dependent on many factors. Some of these factors include volume available in the market, regulation/restriction by a region or central authority, market noises, users’ and investors’ sentiments, media hype, etc.
When the value of a currency appreciates, the market is said to be bullish, and the holder of such currency makes a profit. Otherwise, if it depreciates, the market is bearish, and the holder loses a fraction or all of their investments.
An Overview of Cryptocurrency
Cryptocurrency is any digital currency that is backed by cryptography and traded over a decentralized network. The first ever known cryptocurrency is eCash which was developed and deployed by Dr David Schaum via his company, DigiCash, in 1990.
However, the most successful and widely considered first of its kind is Bitcoin. Other cryptocurrencies include Ether (ETH), Tether (USDT), Binance Coin (BNB), Dogecoin, Litecoin, and Bitcoin Cash, among several others.
There are 4 major types of cryptocurrencies by their function which are utility, payment, security, and stablecoins. Other types are asset-backed, non-fungible tokens, and DeFi tokens. Of all these categories, the most commonly known are the payment and utility tokens.
Bitcoin and Altcoins
While Bitcoin is considered a major decentralized digital currency, other cryptocurrencies aside from Bitcoin are considered an alternative to it. They are collectively referred to as Altcoins. Bitcoin is a payment token used for carrying out transactions.
Since it is decentralized, it is not controlled by a central authority but distributed over a wide network in the ecosystem. It is transacted over a peer-to-peer Bitcoin network and can be purchased on any exchange in the world. It is the leading currency in the digital space.
Altcoins as it sounds; is a combination of two base words namely “alternative” and “coin” and are simply currencies other than Bitcoin. Some people believe that Altcoins are any other cryptocurrencies apart from Bitcoin and Ethereum.
The latter’s opinion emanated from the fact that most cryptocurrencies are forked from one of the two. Irrespective of which of the two facts holds, altcoins are alternative cryptocurrencies that came into the limelight after the success of Bitcoin.
As an alternative option, they project themselves as better replacements for Bitcoin even though their features and popularity are not close to matching. Some altcoins use varying consensus mechanisms to authorize transactions and add new blocks.
There are over ten of thousand of altcoins in the market according to Investopedia’s Jake Frankenfield. Some altcoins are used within their respective blockchain to serve a purpose. An example is an Ether (ETH) which is used within the Ethereum blockchain to pay a transaction fee.
Factors influencing prices of Cryptocurrencies
1. Supply and Demand: The supply of a cryptocurrency increases when the demand increases. According to the Price Elasticity of Demand, the rise in the demand for these currencies is accompanied by an increase in the price.
The currency provider will have to hike the price since more people want to purchase the limited currency. However, when the supply increases, the price will fall since there are enough or more than enough to satisfy the available demands.
The market becomes competitive and a price dropfollows. This shows why cryptocurrency with more coin in circulation sells less than its counterpart with a limited coin in circulation.
2. Market Noise and Hype: The noise in the crypto market and media hype also contributes to the price difference of cryptocurrencies. At the first attempt of a coin, people feel excited and the demand becomes higher.
The condition explained above comes in and the price is temporarily driven to a higher level. However, when people start seeing the dark side of the coin and they start losing money, withdrawal follows.
It is a norm in the crypto world that a coin will be the talk of the market today and tomorrow, it is no more. The hype and speculation have led it to a collapse. Media and celebrity influences cannot be underestimated in this regard.
For example, the price of Dogecoin rises by 91% in May 2021 when Elon Musk made mentioned it. Where is Dogecoin in today’s chart though? Out of the picture!
3. Cost of production: The cost of mining and producing a particular cryptocurrency might have an underlying effect on the price of the currency. This can be concerning the power consumption or hash rateof the network.
The more complicated it is to mine a cryptocurrency, the more tedious it is to mine in bulk, making the supply inadequate. The price elasticity of supply will come into play and this will affect the price of the available ones.
4. Competition: The competition between thousands of new and existing cryptocurrencies daily is yet another determinant of price action. The rise in competition results in a decrease in the prices of some currencies, including the major ones.
As established earlier, when a new project or token is launched in the market, crypto enthusiasts will be eager to check it out. If it is promising, they hang around it for a while, if it is not, they move on to another one.
5. Restriction, Regulations and Legal Requirements: As much as cryptocurrencies are decentralized, they are still indirectly affected by regulations or restrictions placed on them in some regions.
For example, the ban on Initial Coin Offerings (ICOs) by China and the freezing of trading of several coins in September 2017 has a huge impact on the price of cryptocurrencies. Bitcoin prices significantly dropped during this period.
6. Crypto Influencers (Whales): Crypto Whales are those in possession of a large number of cryptocurrencies. They manipulate the prices of cryptocurrencies since they have them in large quantities and can buy or sell them at any desired price.
A person with a large amount of Dogecoin can decide to sell it out at their desired (lower price). This will make the price of Dogecoin fluctuate during the period and might reduce substantially after the wave is over.
5 Leading Cryptocurrency Exchanges
Cryptocurrency exchanges are platforms where you can make instant transactions, buy, sell, or trade with cryptocurrencies. You can make use of your traditional (fiat) currency in most of these exchanges and you exchange it for an equivalent digital asset.
There are centralized and decentralized cryptocurrency exchanges. The centralized exchanges offer ease of use, high liquidity, faster transactions, etc. On the other hand, decentralized exchanges offer lower transaction fees, grant users ownership of digital assets, save users some regulatory burdens, etc.
Most of the available exchanges run service 24/7 and they support anonymity, though you’ll need to pass their KYC. Below are 5 top cryptocurrency exchanges ranked by CoinMarketCap based on their site traffic, liquidity, trading volumes, and assurance in the correctness of trading volumes reported.
1. Binance: Binance is the world’s largest crypto exchange by the volume of traded cryptocurrencies daily. In August 2022, Binance recorded an average of $76 billion in traded volume in a day and a total of 90 million customers across the globe.
As a trusted platform with different subsidiaries like Charity, Trust Wallet, Binance Exchange, etc. users can trade, buy, sell, and store their digital assets on the in-built wallet.
2. Coinbase Exchange: Coinbase is a US-based crypto trading and investment platform where users can store, buy, sell, and exchange their cryptocurrencies. It is beginners’ friendly and accepts transactions from other digital wallets like PayPal.
At first, the platform provides a pro version which offers lower transaction fees and professional trade execution. Early this year, they announced ruling out the pro version and making the “advanced trade” feature available for all users.
The total volume recorded by the exchange as of 2021 is over $1 trillion, over eight times the volume in 2020.
3. FTX: FTX is a centralized crypto exchange created “by traders, for traders” and it is backed by reputable trading companies in the industry like Coinbase Ventures, OTPP, Temasek, Almeda Research, etc.
The platform has over a million registered members and has recorded billions of dollars of the daily trading volume. FTX supports over 300 cryptocurrencies and also offers other products like prediction markets, OTC desk, derivatives, options, etc.
4. Kraken: Kraken is also one of the top leading cryptocurrency exchanges based in the S which allows users to buy, sell, and trade different assets with relatively low commissions.
The platform supports over 100 crypto assets and 7 fiat currencies which are AUD, USD, CAD, EUR, GBP, JPY, and CHF. It is available as a mobile app, as well as a web platform.
5. KuCoin: With its mission to facilitate the global free flow of digital value, KuCoin was officially launched in 2017. It offers a simple registration process, a high level of security, and an amazing intuitive design.
The platform provides instant exchange services, purchases by credit or debit cards, futures trading, and an in-built Peer-2-Peer exchange. Presently, the platform has over 20 million users onboard and has recorded $1.2 trillionin trading volumes since its launch.
Other cryptocurrency exchanges include Binance.US, and Gate.io. Bitstamp, Gemini, Huoi Global, Bitfinex, AAX, MEXC, FTX US, Coincheck, Bybit, Bithumb, Phemex, Upbit, Coinsbit, ProBit Global, and Blockchain.com, among several others.
Should you trade cryptocurrency?
After getting you familiar with cryptocurrencies, the determinants of their price actions and the top exchanges used across the globe, there remains an unanswered question. Should you trade cryptocurrency?
As you can see from the data supplied for the exchanges’ users and traded volumes, you are not going to be the first or the only one to trade cryptocurrency — if you decide to start today. Tens of millions of people are registered on different exchanges to trade.
Well, the majority can be wrong.
The first and most important thing to know is that you don’t trade because others are trading. You must doyour research and fact-checking before you decided to start trading.
Trading cryptocurrencies can be risky since it is volatile and none of the listed determinants of price is within your control. It is a good investment if it is done properly and you apply the right strategy.
One of the best and most commonly used strategies is diversifying your portfolio. This entails investing in multiple currencies at a time so that when some fail, others will surely not. Having said that, cryptocurrency investment is not a very good way to build wealth for your future.
It is also important that you don’t put in more than you can afford to lose. Don’t listen to market noise, speculation, hype and celebrities’ publicity and endorsements.
Do your diligent part by researching extensively to get the fundamental, as well as the technical part of the market. You can also send me a mail for your inquiries.
Kindly share your thoughts about investing in Cryptocurrency. Do you think digital currency is a good investment scheme for investors?