What are cryptocurrencies?
Bitcoin is the world's biggest cryptocurrency but there are over 1,000 more. Here's why they matter.
Since the price of Bitcoin smashed through the price level of $7000, the trading world could not help but notice. Although Bitcoin is the first cryptocurrency, it is far from the only one. With over 1,000 types of cryptocurrencies available, what exactly are cryptos and how can traders benefit from them?
A cryptocurrency is a form of digital money that exists purely on the internet. The difference to the digital money you use daily (cards and online transfers denominated in your country’s currency) is that this type of currency is not issued by any bank or government.
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?
Before we dive deeper into cryptocurrencies, let’s take a closer look into Bitcoin. Understanding the basics about Bitcoin is crucial for traders interested in adding cryptocurrencies into their trading. Created in 2009 by an anonymous person or group of people under the nickname Satoshi Nakamoto, Bitcoin was designed to facilitate fast payments without the need for a central authority.
This revolutionary idea is based on an equally revolutionary technology called blockchain. Think of blockchain as a publicly available document where all Bitcoin transactions are stored. The reason Bitcoin can operate without the need for a bank is exactly because blockchain technology makes cryptocurrency transactions available for everybody to see and verify.
The Bitcoin network
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.
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?
When compared to bank issued currencies, also known as fiat currencies, volatility in cryptocurrency markets is outlandish. To put this in perspective, typical weekly volatility for forex pairs is below 1%. Bitcoin’s weekly volatility, on the other hand, reached up to 60% per annum in 2017, while other cryptocurrencies experienced even bigger swings than that.
So, what are some of the reasons behind this volatility? Market history teaches us that when a market is new there can be sudden changes in price, as traders and investors assimilate the new information. Periods when prices soar are followed by periods of prices plummeting until the market becomes established.
While some may argue that cryptocurrency prices move in a bubble-like manner, there is no doubt that the current levels of volatility offer numerous opportunities to day traders. That is particularly the case during weekends, when Bitcoin has historically hit its record highs.
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: The first big jump for Bitcoin was from $30 to $230 and happened between March – April 2013. One of the potential reasons is speculated to be the bailout of Cyprus and the seizure of large deposits by the bank. Funds held in Bitcoin are immune to such events.
November 2013 jump: Bitcoin grabs the headlines again for reaching $1,000 as demand for Bitcoin from China grows and the US senate shows interest in this still widely unknown cryptocurrency.
January 2015 lows: Bitcoin plummets following restrictions imposed in China and the imprisonment of William Ulbricht, the creator of Silk Road, an online platform selling illegal drugs online.
2017 highs: Bitcoin smashes through the $10,000 mark. Traders and investors alike cannot afford to ignore cryptocurrencies anymore.
Now that you have a solid understanding of Bitcoin and cryptocurrencies, find out
- How to trade cryptos
Losses can exceed deposits.