What are Cryptocurrencies and How to Trade Them

What are Cryptocurrencies and How to Trade Them

In 2008 to 2009, the world saw its biggest financial crisis since The Great Depression of the late 1920s. The financial crisis happened at a time of increased financial deregulation which led financial institutions to increase their leverage. To make more money, the institutions started offering risky financial assets known as collateralized debt obligations (CDS) and mortgage backed securities (MBS).

The financial system started to collapse when UBS – a top European investment bank – released its financial results which showed increased delinquencies in mortgages. Other banks started reporting similar numbers. As a result, the banks with the most exposure in these instruments started to develop problems raising money for their overnight funds. At the end, Bear Sterns was acquired for just $2 a share, Lehman Brothers collapsed, and insurance company AIG was rescued.
Millions of people lost their jobs and the trust in financial assets and regulators declined. To avoid the financial regulators, Satoshi Nakamoto wrote a white paper, pitching the idea of a decentralized currency which he named Bitcoin. His concept was of a currency that is not controlled by any person or any agency.

A few years after unveiling the concept, Bitcoin was adopted by many dark web sites. These are websites which can only be accessed using a special browser known as Tor. In these sites, people can buy and sell illegal products like drugs and hacked credit card numbers. The participants in these markets loved Bitcoins because the transactions could not be tracked.
The concept introduced by Satoshi Nakaomoto – who is yet to be known – introduced a new industry known as blockchain. One of the products of blockchain is cryptocurrencies. Today, there are more than 1,800 cryptocurrencies. In addition to this, the blockchain technology has been adopted in multiple industries including trading, commerce, and lending.

Today, cryptocurrencies have a market valuation of more than $280 billion. Bitcoin is the largest crypto with a market value of $111 billion. It is followed by Ethereum, ripple, Bitcoin cash, and EOS respectively.

To get these currencies, traders mine them using complex computers which solve complex mathematical formulas. After solving a mathematical problem, the computers are awarded with the cryptocurrencies. With these currencies, people can buy things online and in some physical stores.

Since there is demand for the currencies, technology has enabled people to trade on these assets through online exchanges. There are two main ways to trade cryptocurrencies. First, you can buy the currencies in exchanges and hold – also known on forums as hodl – and wait for their value to go up. Here in the Philippines, you can exchange your fiat to cryptocurrencies using Coins.ph and Abra and send them to exchanges to trade to other cryptocurrencies.

Second, you can use brokerage companies that offer cryptocurrencies CFDs (Contracts For Difference). In this model, you can either buy or sell the currencies with hopes that the price will go up or down respectively. In addition, you don’t have to pay the full price for a cryptocurrency. In other words, you can buy a small part of the cryptocurrency.

The difference between the two is that in the former, you have full control of the cryptocurrency. You can shop with it or give it away. The disadvantage of this is that your wallets can be hacked. This has happened in a number of crypto exchanges. On the latter, you don’t own any real currency meaning that you can’t shop with it.

As a caution, you should remember that cryptocurrencies are relatively new which makes them extremely volatile. It is not uncommon for the price of Bitcoin to fall by more than 10% within a day.

Tyrone is a passionate financial literacy advocate. He started this blog on November 2008 when he watched The Secret which talked about Law of Attraction because he wanted to become a millionaire and wanted to know how a millionaire acts. At the age of 26, he achieved his first million. To find out more about him, click here or follow him at Instagram

Leave a Reply

Your email address will not be published. Required fields are marked *

eight − seven =