The cryptocurrency market is growing rapidly. More and more traders are deciding to invest in cryptocurrencies through online trading and, more generally, they are interested in the world of cryptocurrencies.
How to invest in cryptocurrencies – Cryptocurrencies Trading
The cryptocurrency market is growing rapidly. More and more traders are interested in the world of cryptocurrencies.
But what are cryptocurrencies? How to invest in cryptocurrencies and on which ones, given that there are really many in circulation today? And also, are cryptocurrencies safe?
Questions to which we will give comprehensive answers in our complete guide on cryptocurrencies. Do not be fooled by appearances: understanding how to use cryptocurrencies is not difficult, whether you want to use them to buy online, or you want to use them to invest. So let’s start by explaining what a cryptocurrency is.
What is a cryptocurrency?
The term cryptocurrency has now entered the vocabulary of most people. Just as the cryptocurrency market is now known by most of the traders who operate online.
To explain what a cryptocurrency is in simple terms, it can be said that cryptocurrencies are used both as exchange and purchase currencies online, and as an asset to invest in through trading. For example, the most famous cryptocurrency, namely Bitcoin, also reached $ 20,000 share towards the end of 2017.
Cryptocurrencies are therefore digital currencies, which however have big differences compared to normal national currencies. Here are the main ones:
Decentralized system: unlike normal currencies, there is no central bank that deals with “printing” money, controlling its flow, and so on. Anonymity: many cryptocurrencies manage to guarantee a high level of anonymity in the exchanges that take place between users, also for purchases and sales.
Limited number: most cryptocurrencies have a “limited” number of money that can be “produced”.
Security: the transactions that take place with cryptocurrencies are completely safe, precisely for the particular network on which they occur (as we will explain in the following paragraphs).
Online only: cryptocurrencies, although they have a value and can be used to make purchases, do not have a “physical” counterpart. That is, there are no banknotes or coins related to cryptocurrencies, because all transactions take place online (however, they can also be used to make purchases in shops or withdraw money at the ATM).
In fact, cryptocurrencies are “kept” inside electronic wallets, called “e-wallets“. There are many people who decide to approach the world of cryptocurrencies perhaps to trade on cryptocurrencies, speculating and gaining on the changes in value of these virtual currencies.
Others instead do it to mine cryptocurrencies, an activity that allows you to earn these cryptocurrencies without buying them directly (a topic that we will explain in detail in the following paragraphs), and then maybe resell them at a later time.
History of cryptocurrencies
When it comes to the cryptocurrency market and these new “digital currencies”, few really know the whole story behind the development and subsequent “boom” in the use of cryptocurrencies. Because in reality, the concept behind the functioning of cryptocurrencies is not as recent as it is often thought.
In fact, to be precise, the technical concepts behind the functioning of cryptocurrencies already existed in the 80’s. During those years, David Chaum invented an algorithm that will remain the basis of modern encryption methods for the internet. The algorithm in question allowed the exchange of information between two parties, securely and without this information being altered during the exchange.
And it is he who, after moving to the Netherlands, decided to found “DigiCash”, together with a group of cryptocurrency enthusiasts. DigiCash was responsible for producing a cryptocurrency, which was then sold to individuals who could use it for exchanges and purchases.
The main difference between today’s cryptocurrencies and DigiCash was the fact that the latter was not “decentralized”. That is, DigiCash had a monopoly on cryptocurrency: it produced and controlled it, just like a “normal” bank. The fate for DigiCash, however, was not one of the best.
The financial authorities of the Netherlands have not looked at DigiCash’s attempt to create an alternative currency to the national one, which can be spent on the internet. For this reason, DigiCash was forced to sell its cryptocurrency only to banks and financial institutions, no longer to individuals.
Such a drastic change of course and the relative cut to the potential catchment area led DigiCash to bankruptcy in the early 90’s. Also because DigiCash itself refused an agreement with Microsoft, which would have liked to implement cryptocurrency on its systems to allow Windows users to make purchases.
After the failure of DigiCash, most of the development in the field of transactions on the web took place mainly through traditional channels: at the end of the 90’s PayPal was born, which in the following years would become a leading company in the sector of digital payments and money transfer between users.
In the same period, however, we must mention “e-gold”, a company based in Florida (USA), which dealt with reselling its cryptocurrency. The company was in charge of buying gold from users, who could also send them old jewelry, coins, costume jewelery and more generally anything made of gold.
In exchange for purchasing gold, the company provided users with their own cryptocurrency, which was e-gold. Users could thus use e-gold to:
- Make exchanges with other users
- Buy real gold
- Resell the e-gold in exchange for dollars
At the beginning of 2000, e-gold had a large following in the USA: millions were active users and the e-gold platform managed transactions that amounted to billions of dollars a year. But then, the decline came.
E-gold became an easy target for hackers and other attackers. There were many scams that revolved around e-golds, especially those based on phishing to steal access data to e-gold accounts. And on the other hand, the e-gold platform was not exactly “impenetrable” and the security systems were often bypassed, thus facilitating the task of the hackers.
By 2005 e-gold’s business had significantly shrunk, and there were many doubts about the legality of e-gold transactions. E-golds were often used to carry out Ponzi scheme-style scams, or to launder money. In 2009 also e-gold closed its doors once and for all.
And it is precisely in 2009 that the most important cryptocurrency in the world, bitcoins, began to spread. Satoshi Nakamoto is the pseudonym of the inventor, or group of inventors, of this cryptocurrency. The purpose of Satoshi was not exactly to invent a real cryptocurrency, but to invent a “digital money“, a goal that many had tried to achieve without success.
Satoshi planned his system so that it could function in a decentralized way, since all previously created centralized systems had always failed. His invention, which many believed impossible, marked the birth of cryptocurrencies as we know them today.
How a cryptocurrency works
Ok, so cryptocurrencies are based on a decentralized system. But how exactly does this system work? How does a cryptocurrency work? By following us step by step, we will explain how a cryptocurrency works in an understandable way and within everyone’s reach. Because, after all, cryptocurrencies are not so difficult to understand.
If we reduce the definition of cryptocurrencies to the bone, we can say that they are nothing more than “entries within a database that cannot be changed unless under specific conditions”. We will explain this in detail.
To be a decentralized system, cryptocurrencies are based on a real network of computers (called “nodes”). Each computer connected to the network to make transactions has a record of all transactions made so far on the network.
A transaction is nothing more than a file containing the following information: “Marco gave X bitcoin to Alice” (therefore the two wallets between which the transaction occurred and the amount moved, since the names are not shown), in addition to the private key of Marco’s account.
This transaction is then transmitted within the network, making it run between all the computers. In this way the transaction is known by the whole network, even if it takes some time to be confirmed.
Confirming the transaction is a fundamental step in understanding how cryptocurrencies work. In fact, until a transaction is confirmed by the network, it is “waiting” to be carried out. Only after confirmation the transaction is added to the register of all transactions and the cryptocurrency movement between users takes place.
At this point the transaction is no longer editable and becomes part of this transaction register, which in jargon takes the name of “blockchain”. The task of confirming the transactions belongs to the “miners“, who make the computing power of their computers available to the network (which is used to manage the network of a cryptocurrency and confirm the transactions).
We know what you’re thinking: “blockchain”, “miner”, “cryptocurrency wallets”, “private key”. Terms that can be confusing. So let’s explain them precisely.
Cryptocurrencies – Blockchain
As we said, the blockchain can be considered as a public register of all transactions that took place with a given cryptocurrency. Each transaction is confirmed and added to this register, which obviously increases in length over time (and which can always be consulted).
Identical copies of the blockchain are saved on the “nodes” of the network, that is, the computers and servers of the so-called “miners”. As we said, a transaction must first be confirmed in order to be added to the blockchain (only then the actual cryptocurrency exchange takes place).
The confirmation usually arrives in a few minutes, although this time varies widely. In fact, to speed up the time required to confirm a transaction, it is possible to pay a “commission” to the miners, who will therefore give priority to transactions with the highest commissions (even if in the end all transactions are always confirmed).
During the waiting period for confirmation of the transactions, the amount of cryptocurrency involved is “blocked” until the transaction is confirmed (for security reasons and to avoid duplication problems of the cryptocurrency). And unlike other online payment systems (such as PayPal), refunds are not possible.
Each user of a cryptocurrency network has a private key that identifies him within the network, and allows him to trade with other users. The same users can generate a private key, with which they can therefore obtain and spend cryptocurrencies.
Without the private key, cryptocurrencies linked to that key can neither be spent nor transferred. If on the one hand then the private key system is excellent for security, you must always be careful not to lose your private key (since you would lose access to your cryptocurrencies).
Every user who has cryptocurrencies has a cryptocurrency wallet. The wallet contains the user’s cryptocurrencies, and can be saved on the computer, on the cloud, an external hard drive. Not only that, there are also online wallets offered by companies that deal with this service and also act as exchanges (to buy and sell cryptocurrencies).
Even if the wallets of online services are still always exposed to the risk of hacking. For example, one of the most popular bitcoin exchanges in Japan, Mt. Gox, was forced to close its doors after hackers sneaked into their servers and stole over $ 450 million worth of bitcoins.
In theory, anyone can become a “miner” of a cryptocurrency. Practically, especially for more established cryptocurrencies such as bitcoins, it is not always possible. But who is a miner and what does a cryptocurrency miner do?
The miners make available the computing power of their computers and servers to verify and confirm the transactions that take place with cryptocurrencies. The miners then add new “blocks” to the blockchain, where new transactions are contained in each block (which are then confirmed).
Without the figure of miners therefore, transactions could not take place between users of a cryptocurrency. Anyone can become a miner. Or at least in theory. In practice, you need the necessary equipment that is not always within everyone’s reach.
In fact, the more time passes, the more mining of a cryptocurrency becomes difficult and requires more and more computing power. In fact, almost all cryptocurrencies have a “finite” number of currency that can be issued.
Whenever a block is added to the blockchain, the miners who participated in the confirmation of that block (and the related transactions within it), get a “reward”. That is, the system generates a reward in the form of a cryptocurrency which is awarded to miners who dealt with the confirmation of the block.
Miners then earn new cryptocurrency through mining. Not only that, because as we said, to speed up the confirmation of transactions within the blocks, users can pay commissions to the miners, who will therefore prioritize their transactions. Therefore miners can also earn commissions by confirming a block of transactions.
Only that, having cryptocurrencies a finite number of currency units to be able to “issue” through this system of block confirmation rewards, it is only natural that the more time goes on, the more complicated things get for the miners.
Confirming the blocks requires more and more computing power, and the “reward” that is assigned to the miners decreases as you get closer to the finished number to be issued. For this reason, becoming a miner of a cryptocurrency that has been active for years and with a very large user base, such as Bitcoin, can also require a significant initial expense. And it is for this reason that people prefer to mine other “younger” cryptocurrencies.
In order to become a miner, you need:
- Necessary hardware for mining;
- Necessary software for mining;
- A wallet where to store the cryptocurrencies earned through mining.
How to use a cryptocurrency
Now that we understand how a cryptocurrency works, the question arises: “how do you use a cryptocurrency?“. Cryptocurrencies must be considered as normal currencies, so they are used to buy and sell products / software / services online. But also to make payments between individuals or money transfers.
For what concerns online trading, cryptocurrencies are often seen as assets to invest in both long and short term. Or as an asset to speculate on thanks to CFD trading on cryptocurrencies. But if we want to use cryptocurrencies, maybe to make a purchase, how can we do it?
First, you need to own cryptocurrencies. This means that somehow you will have to buy them (unless you want to become a “miner”). To buy them, the most convenient “place” are the so-called “exchanges”, sites where you can buy and sell different types of cryptocurrencies. But also to exchange their cryptocurrencies for real money.
There is also the alternative of the forums, where users passionate about cryptocurrencies participate and where there is usually a section for buying and selling cryptocurrencies. In this case, however, the transactions take place between individual users without real control, so you have to trust the other user and the reviews he has accumulated over the years in his favour. It is advisable to always use an exchange for the first purchases.
At this point, it is advisable to store the newly purchased cryptocurrencies on a wallet. If you used an exchange to buy cryptocurrencies, you will have an online wallet at your disposal (therefore accessible from the exchange site). Although it is not really the safest place, given that exchanges have repeatedly been hacked.
It is therefore always recommended to have a wallet outside the exchange site where you purchased the cryptocurrencies. At your disposal you will have several possible choices:
- Online wallet: The classic wallet of the exchanges, comfortable option to practice, ma not the safest.
- Mobile wallet: thanks to an app, you will have access to your wallet directly from your mobile phone.
- Desktop wallet: the most used option, it allows you to have a wallet on your computer.
- Paper wallet: it’s a wallet which is printed on paper thanks to 2 QR codes. One code is the public address of the wallet (where you will receive the cryptocurrencies), the other one is the private address (that you can use to spend cryptocurrencies).
- Hardware wallet: it’s possible to use an external hard disk or a USB drive to save your wallet.
Once you have your wallet, remember to make backup copies of it. Because if you lose your wallet, you will also lose the cryptocurrencies stored there. Once this is done, once you have your wallet you can start spending the cryptocurrencies you have bought: currently cryptocurrencies are mainly used to buy online or make private transactions with users. Rarely there are shops that accept cryptocurrencies as a payment method.
Bitcoin: the first cryptocurrency
Bitcoin was the first cryptocurrency, introduced in 2009 by the mysterious Satoshi Nakamoto. Over the years, bitcoins have increasingly spread around the world. At the beginning they seemed more like a currency for the “underground” of the internet, that is, for environments that are not highly recommended or only for people who are very experienced in computer science.
But, over time, many have seen the reality: bitcoins, as well as cryptocurrencies in general, are a real revolution in the global economy. In fact, these are decentralized currencies, no longer under the control and monopoly of governments, which allow rapid payments all over the world.
Like all cryptocurrencies, it is not subject to bank control: everyone can create it (through mining) and everyone can use it. Bitcoins can be used to buy items or services online, but they can also be converted into real money, or they can be used for transactions between users.
Bitcoins, like most cryptocurrencies, are a finite number currency. This means that sooner or later the maximum limit of issued bitcoins, equal to about 21 million bitcoins, will be reached.
The availability of new coins grows as a geometric series every 4 years. Half of the possible coins were generated in 2013 and reached three quarters in 2017.
Bitcoins have a high level of anonymity, given that the only data available in the blockchain (which is the public transaction register) are only the addresses of the wallets between which the transactions take place (and the related amounts).
Even though Bitcoins aren’t the “perfect” cryptocurrency anyway. In fact, its value fluctuates strongly during the course of the year, and the volatility skyrockets when events related to this cryptocurrency occur.
For example, in August 2017 there was a talk about Bitcoin Hard Fork, an event from which Bitcoin Cash was born, causing a separation within the bitcoin community (and also at the system level in the cryptocurrency).
Then another split, the one from which Bitcoin Gold was born, has been achieved. Not only that, but Bitcoins are always at “risk”, given that very few countries have taken positions for or against cryptocurrencies.
But when it happens, many problems arise. For example, China has recently blocked Bitcoin exchange platforms. Such news caused 40% of the bitcoin price to drop in just one week (although it later recovered).
Despite this, many continue to invest in cryptocurrencies as an asset for long-term investments, even if you are always exposed to episodes of strong volatility such as the one just shown. Otherwise, there is always the option to trade on cryptocurrencies thanks to CFDs or other derivative instruments.
If bitcoins were the first cryptocurrency, they certainly weren’t the only one. There are many cryptocurrencies that were created after the great boom in bitcoin fame. But not all of them managed to see “the light of the sun”: many remained only projects, others were unsuccessful and were quickly forgotten.
Others, on the other hand, were born from already existing cryptocurrencies. As for example the Bitcoin Cash, born from the very famous bitcoins.
Below you can find a list containing the most famous and used cryptocurrencies nowadays, even if it is a constantly updated list:
Ethereum. It is among the latest born for trading on cryptocurrencies, it was born in 2015. From an initial price of only 2 and a half dollars, in 2020 this digital asset is quoted on values of about 200 dollars.
Ethereum Classic.Ethereum classic is a project that differs from ethereum, in fact the architecture and algorithm are quite different. Ethereum Classic has little more than $ 1 billion in capitalization in 2020.
Litecoin. Born in 2011, it is a further alternative to bitcoins and based on a cryptocurrency exchange system with an open source protocol, that instantly sends online payments and, unlike the classic bitcoin, it has a more immediate and faster confirmation on the terms of the transaction and a more affordable price in terms of quotation.
Ripple. Born in 2004 by a web developer, based on the logic of sharing and exchanging virtual currency between members of the same community, it is definitively launched in the cryptocurrency sector by the Open coin start-up in 2012. In 2017 it reached $ 3, while in 2020 travels just over $ 0.20.
Monero. Available since more than two years in the cryptocurrency sector, it is based on a different protocol from bitcoins (cryptonote) and a more specific protection with respect to the identity of users who exchange the aforementioned virtual currency. It has still a low presence in the offers of online trading brokers, but the interesting numbers recorded, compared to easier access in terms of prices (bitcoins have exceeded 2000), must not be underestimated.
Dash. Created in 2014 with the initial name XCoin, it has a decentralized protocol for fast and, above all, secure online transactions.
IOTA. With around 700 million market capitalization in 2020, it is one of the top 30 cryptocurrencies in the world. Right from the start there was interest in IOTA, even if it is not one of the top cryptocurrencies.
You can also invest in cryptocurrencies with eToro’s Social Trading / copy Trading (see the new eToro Copyportfolio) – by copying the investment portfolio of the best traders based on the preferred criteria of importance.
OneCoin, the fraudulent cryptocurrency
Unfortunately, however, as in any business, even in the cryptocurrency market it can happen to run into scams. They are very few and, honestly, only common sense is enough to know how to recognize them. One of the scams that has had a lot of follow up in the past few years has been that of the OneCoin cryptocurrency.
To avoid such a scam, it was enough to see their “conferences” where they were looking for new “investors” to carry out the OneCoin project. Below you can see the European cryptocurrency ambassador OneCoin.
Only by seeing such a person, who tries to steal money from the audience by inventing stuff, it should have been enough to recognize immediately that OneCoin was a nothing else than a scam.
Typically, scams like this from OneCoin are based on the classic ponzi scheme. First, money is drawn from “investors” by selling cryptocurrency packages and other services (non-existent or otherwise of low quality). Then, after having deceived them by showing the fake potential of their investment, they are encouraged to look for further investors.
OneCoin scammed its investors not only by selling this phantom cryptocurrency that never existed, but also other services (if we can define them that way). Below you can see the “training” services for traders who wanted to operate in online trading. Absurd amounts to achieve absolutely nothing, since these packages never existed.
Scams like that of OneCoin leverage people’s ignorance of the cryptocurrency world and, more generally, of the topic of investment and online trading. Often these scams, however, are easily exposed, because they promise very high profits even with small or moderate investments, and sometimes even in very short times.