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What Are Cryptocurrencies And Why Are They Important?

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These electronic currencies have a huge impact on the market

Cryptocurrencies are digital currencies that can be used to purchase goods and services. These electronic currencies use online ledgers that are protected with layers of cryptography to secure online transactions.

I stumbled upon the strange concept of digital currencies while trying to cash out an investment. Displeased with the payment options the company offered, the rep suggested I cash out with Bitcoin.

The idea of cryptocurrencies sounded strange to me at the time so I told the rep I would get back to her. I had questions that needed to be answered.

How safe were these things? How easy would it be to convert them into cold hard cash?

Well, it turns out Bitcoin is the next best thing to fiat currency. Transactions are non-reversible, unlike debit and credit card transactions, making it the more secure way to receive payments online.

Conversely, you need to be more diligent when paying for goods and services with cryptocurrencies since you won’t be able to reverse the payment if the vendor ends up failing to deliver said goods or services.

After some research, I decided to give Bitcoin a try and withdrew about a quarter of my investment. I ended up increasing the money by 10% selling it to users on a site called LocalBitcoins.

Cryptocurrencies still have a long way to go when it comes to being widely accepted globally as a form of payment and, as of now, they still mostly attract traders and speculators looking to capitalize off the exponential value growth many cryptocurrencies have enjoyed in the past few years.

Out of the countless cryptocurrencies that have been created, Bitcoin remains the most popular and most valuable. The price of a single Bitcoin has now passed $57,000 thanks to mainstream companies like Tesla supporting the currency with a whopping $1.5 billion purchase.

It was the first cryptocurrency I stumbled upon, while it was a little over a hundred dollars.

The future looks bright for cryptocurrencies as a growing number of people learn about these new payment systems and the advantages they have over fiat currencies like being able to send funds to anyone on the planet without having to deal with conventional – not so efficient – payment systems like western union or the wire transfer system.

If you’re still having a hard time understanding how cryptocurrencies work, think of them as casino chips or arcade tokens. The value of a cryptocurrency is whatever the market decides it is.

You can purchase crypto for a specific amount, use it to pay for goods or services, or send it to someone who also has a wallet – storage – for the cryptocurrency.

You can also convert the cryptocurrency back to fiat if you want.

However, unlike casino tokens, the prices of cryptocurrencies are volatile. That means a purchase of cryptocurrency you make today, might be worth more or less in a short amount of time.

For example, Bitcoin was worth about $20,000 to close out 2020, yet the price has soared to almost $60,000 by February 2021.

The first time bitcoin breached the $20,000 mark, it ended up crashing down to about $2,000 before its current upswing.

Still, the pattern of many cryptocurrencies is an upward one, so there are many opportunities for patient, savvy investors to make profits off the price swings.

Differences Between Cryptocurrencies And Other Assets

Cryptocurrencies have a few similarities with traditionally traded commodities and securities. These include:

  • Like traditional assets like stocks, the value of any cryptocurrency at any time is determined by the market
  • Just as it has been the case since the first stock market was opened a few centuries ago, the general trend for cryptocurrency prices is upward
  • Many of the financial technical analysis tools used to predict price movements of stocks can also be used to predict cryptocurrency price movements

However, there are some key differences that some investors would say make cryptocurrencies the better option.

1. Limited regulation

While regulations governing the use of cryptocurrencies continue to increase, cryptocurrency trading markets are not yet as regulated as traditional stock markets and other investments. For instance, all stocks on the NYSE must be approved by the SEC.

Crypto does not have such an agency backing its authenticity.

You can get started trading cryptocurrencies without even having to provide identification for entry-level accounts. It provides investment opportunities for people who do not have access to traditional mediums.

Getting started with stocks requires you to submit formal accreditation and that’s only if you have enough funds to meet minimum requirements.

Limited regulation isn’t always a good thing since it also brings more risk. Cryptocurrencies and cryptocurrency markets manipulate their numbers in ways companies trading on exchanges like the NYSE and NASDAQ would never dare.

This means trading metrics like volume and market capitalization are not as reliable when predicting crypto price movements. This increases your risk, particularly when engaged in margin trading. Prices can drastically move in either direction, simply due to manipulation.

I had to learn that lesson the hard way when a Monero pump led to my biggest loss ever trading cryptocurrencies. I had shorted a significant amount of the cryptocurrency since my preferred technical signals indicated prices would slide downwards.

My prediction started out being correct, then a pump by some group sent prices to the moon. My position was margin called, costing me about 80% of my holdings.

2. No minimums

Unlike many traditional investment opportunities, there are no minimum investments when it comes to investing in cryptocurrencies. It’s simply a matter of how much you can afford to invest – which should always be an amount you can afford to lose.

Things are not quite as simple with stocks or traditional securities. For example, you can’t invest in hedge funds if you don’t have at least $100,000 to invest. Such practices limit the number of people who have access to these opportunities.

When it comes to crypto, any money that you’re willing to put up is enough to start investing. This allows investors the freedom to invest as much as they please, further expanding who can buy and sell crypto.

The easy entry was one of the things that drew me towards cryptocurrencies. I loved the idea of being able to invest so little to potentially make a lot more.

3. Cryptocurrency valuation is based purely on speculation

The price of any given crypto is based on how much buyers believe it will be adopted in the future as a payment system. This is a huge factor why the prices of most cryptocurrencies are so volatile. Any little bit of news or tweets from respected entrepreneurs can lead to huge price swings in either direction.

For example, Elon Musk brought Bitcoin prices crashing down by 10% when he tweeted that Bitcoin was currently overpriced.

The SpaceX founder sent the price of the meme cryptocurrency DOGE skyrocketing when he made a few tweets about his fondness for the coin and announced he bought some for his sons.

Current rising prices indicate a growing number of people believe cryptocurrencies will be widely adopted in the future, but there are no guarantees.

Something better might evolve as technology improves exponentially or cryptocurrencies might simply end up failing.

Things are completely different with traditional stocks. People invest in companies like Tesla because they have a large base of loyal customers and a track record of delivering cutting-edge products the market loves.

Keep this in mind when purchasing cryptos since there is no guarantee prices will follow the upward trend many cryptocurrencies do. Some cryptocurrencies are simply bad ideas, while others are founded by shady people looking to profit off novice investors.

I’ve certainly invested in some cryptocurrencies that have ended up being valued at zero. That’s one of the reasons why I now only invest in cryptocurrencies I believe in.

Go over the whitepaper of any crypto you plan to invest in and make sure it’s something you think will be successful.

4. Cryptocurrencies aren’t back by real-world assets

Most cryptocurrencies like Bitcoin aren’t tied to real-world assets which brings an additional layer of risk unlike the stocks of traded companies. Let’s stick with Tesla to explain how this works.

The value of their stocks is tied to their products and customer base, and it’s also tied to real-world assets like production plants, equipment, vehicles, production materials, properties, and office buildings.

All these things have real value, and they can be liquidated if the company ends up going under.

However, Crypto isn’t housed in any real-world place and it isn’t backed by government institutions. Whatever it’s trading for is what it’s worth, so you can’t stock up on it like other traditional commodities like gold or silver.

Benefits Of Investing In Cryptocurrencies

Cryptocurrencies like Bitcoin and Ethereum provide investment opportunities anyone can join in on. Stocks are the closest traditional investment to cryptocurrencies but the many regulations surrounding them prevent many from joining the market.

Brokers might require a minimum investment, while some opportunities might be reserved for citizens of specific countries.

Other benefits cryptocurrencies have over conventional securities and stocks include:

  • Larger profit and loss margins: Profits margins are a lot larger when investing in cryptocurrencies compared to stocks. The higher volatility of cryptos leads to large price swings, while stock investments might take years before any substantial profit is realized. This also leads to larger losses when price predictions turn out to be wrong
  • Global access: Most cryptocurrencies are used worldwide allowing anyone to invest with them. Cryptocurrencies have emerged as the most efficient way to transfer assets globally, with transactions being completed within minutes, no need for identification or verification, and lower transaction fees compared to traditional wire transfer services
  • 24/7 markets: Cryptocurrency markets run 24/7 365 days a year so there are always opportunities to invest. Traditional stock markets typically operate between the hours of 9:30 a.m. to 4 p.m. of the local time, Monday through Friday. Stock investors have to wait until the markets are open when events and news that affect the stock occur when markets are closed
  • Increased anonymity: Investing in cryptocurrency does involve submitting all sorts of paperwork to process your account. Many exchanges allow you to trade significant amounts of cryptos before having to submit any paperwork. That is slowly changing though as governments around the globe attempt to place some regulations on the market

There are a variety of Cryptos on the market

Getting Started With Cryptocurrencies

Cryptocurrencies have already created thousands of millionaires and many more will be created in the next few decades.

Missed out on the cryptocurrency rush? Don’t worry, there are still many ways to make money off these commodities. Here are some profitable ways to dive into the world of cryptos:

Holding:  You might have heard some “cryptocurrency experts” mocking this investment strategy, but it’s probably created more millionaires than any other tactic. This is what you do when you believe in a cryptocurrency.

You buy as much as you can afford (an amount you can afford to lose), and you forget about the investment until it reaches a certain price.

For example, anyone who bought a few Bitcoins when the price was around a hundred dollars four years ago, would have a profit of over $150,000 at this point. This is one of my favorite trading strategies and I’ve found the risk involved to be minimal if you do your homework

Peer-to-peer trading: This strategy requires more of your time, but there are nice profits to be made on sites like Paxful and LocalBitcoins.

You buy cryptos from users just like you for a few percentage points lower than the market price and you sell it to other users for a few percentage points higher than the market price.

The difference between these two prices gives you a nice profit. This strategy is riskier than holding though since there is always a risk of a buyer charging back a payment or trying some other fraudulent trick.

This was the first trading strategy I tried when I found out about cryptocurrencies and you start making profits as soon as you start trading. Stick to honest, established users to minimize the risk of chargebacks and scams

Arbitrage trading: This strategy has become increasingly difficult to implement as a growing number of people trade and invest in cryptocurrencies. It involves making profits off price differences between different exchanges.

The arbitrage strategy typically works best when you have a decent volume of items to trade. I don’t use this strategy much, but it can be profitable, particularly now that you can use a bot to do most of the work for you

Day trading: This involves capitalizing on the wide price swings many cryptocurrencies experience on any given day. For example, on the day this article was written, the daily low for Ethereum was $1,885, while the daily high was $1,976.

Buying close to the daily low and selling near the high gets you a nice profit. This is arguably the hardest way to make money off cryptocurrencies and you need to be able to accurately predict price movements.

This is one of my least favorite strategies given how hard it can be to predict cryptocurrency prices due to market manipulation. It does work for some people though

Long-term trading: The idea behind this strategy is buying when prices are low and selling close to historic highs. It can take months or years to make profits off this strategy, but it tends to be one of the more profitable strategies when done right.

I like this strategy a lot since it requires minimal effort and profit margins tend to be huge. I simply buy some crypto that is currently underpriced and I set a target sell price.

I set an alert on my phone and forget all about the transaction. A week, month, or year later, I get a notification letting me know my target price has been reached. Simple

Risks

Most cryptocurrencies aren’t backed by any real assets, so there is always a chance their value goes down to zero if people stop using them. Some of the main risks of trading and investing in cryptocurrencies include:

  • Losses due to poor price predictions
  • Chargebacks and other scams when trading peer-to-peer
  • Hackers. Major exchanges Like Mt. Gox and Cryptopia were hacked, costing users all of their cryptocurrencies`
  • Exit scams and shady ICOs
  • Manipulation. Cryptocurrency markets are more manipulated than stock exchanges. You don’t want to be on the wrong end of a pump-and-dump

What The Future Holds For Cryptocurrencies

It is impossible to know with certainty what the future holds for cryptocurrencies, but I think it’s only a matter of time before they become normalized as a payment system all over the globe.

As a person who uses a variety of payment processors like PayPal and Payoneer to pay contractors I work with and to collect payments from my clients, nothing compares to cryptocurrencies.

Cryptocurrencies provide a significant upgrade to current banking systems. It’s easier to transfer funds to anyone, anywhere with cryptos. Transactions are typically completed within minutes.

If you have ever had to use traditional money transfer services like Western Union to send funds to family members or contractors halfway around the world, you already know things do not work so smoothly when sending through more conventional methods.

Cryptocurrencies provide you with a once-in-a-lifetime investment opportunity that can be very profitable from peer-to-peer trading to simply holding any cryptocurrencies you have until their prices reach a profitable mark.

The best part, virtually anyone can purchase and make money off cryptocurrencies.

Cryptocurrencies are just getting started and there is no doubt they will create many billionaires and millionaires in the future. It all starts with making your first cryptocurrency purchase.

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