Cryptocurrency market has been a leading investment destination in the past couple of years. However, cryptocurrencies remain controversial even after a long way with regards to both technological advancement and increasing popularity. Some praise the cryptocurrencies stating that they are the future money or the next internet. While others still perceive cryptocurrencies as fraud. We can see that for every person claiming that cryptocurrencies are investment bubbles, there’s another person insisting that they represent the next generation of finance.
What Is a Cryptocurrency?
Cryptocurrencies are digital assets that use cryptography, an encryption technique for security. Cryptocurrencies are primarily virtual currencies designed to buy and sell goods or services. They lack the intrinsic value as they are not redeemable for another commodity, like gold for example. Unlike traditional currencies, they are not issued by a central authority, which raises doubts about their legality and credibility among some investors. On the other hand, this defining feature of cryptocurrencies makes them theoretically immune to government interference or manipulation.
Cryptocurrencies are perceived as secure online payment gateway which are denominated in terms of virtual tokens. The term Crypto refers to the multiple encryption algorithms and cryptographic techniques that safeguard these virtual currencies. We can say that increasing popularity of cryptocurrencies is derived from its groundbreaking technological innovation.
How do Cryptocurrency Markets Work?
The decentralization of cryptocurrency markets has several efficiencies including the cutting off of almost all the costs associated with banks, less expensive transactions that can be sent and received internationally and the fact that financial derivatives can be coded directly onto certain cryptocurrency blockchains, which is a good alternative for financial intermediaries.
What is Blockchain?
Blockchain is an organizational method for ensuring the integrity of transactional data, and it is an essential component of cryptocurrencies.
Blockchain is a decentralized digital ledger of transactions that is duplicated and distributed across the entire network of computer systems. It is a shared digital register of recorded data. For cryptocurrencies, it is the transaction history for every unit of the cryptocurrency, which shows how ownership has changed over time. Blockchain works by recording transactions in what is known as ‘blocks’, with new blocks added at the front of the chain. Blockchain technology has very unique security features that normal computer files lack.
What affects Cryptocurrency Markets?
Cryptocurrency markets are highly dominated by supply and demand forces. However, as they are decentralised, they remain free from many of the economic and political concerns that usually affect the movements of traditional currencies. Prices of cryptocurrencies often show high volatility due to the uncertainty surrounding the crypto market. However, there are many other factors that drive prices such as:
- Supply and demand: The total number of coins and the rate at which they are released, destroyed or lost. The higher the demand and lower the supply, the higher the price of a crypto.
- Market Capitalisation: Which is the value of all the existing currencies.
The cryptocurrency market cap topped $3 trillion for the first time in November 2021.
- Reputation: The way the cryptocurrency is portrayed in the media and how much attention it is getting, especially by major investors.
- Integration Level: The extent to which the cryptocurrency easily integrates into existing financial transactions such as e-commerce and online payment systems.
- Regulatory Changes: As the regulation of cryptocurrencies has yet to be determined, value is strongly influenced by expectations of future regulations. In an extreme case, prohibiting local holding of cryptocurrencies will be a possible option. While this may cause the ownership of cryptocurrency to be moved offshore in such a case, it would still severely undermine their value.
BTCUSD has a major effect on the cryptocurrency market. The value of all coins is usually impacted by the value of Bitcoin against the USD. The price of the majority of coins will move down if the Bitcoin loses value against the dollar and vice versa.
Pros and Cons of Cryptocurrencies Investments
Cryptocurrencies enjoy significant advantages such as transparency, 24/7 accessibility, decentralization, security, and their great potential for appreciation. On the other side, disadvantages of the market may include extreme market fluctuations and high uncertainty which makes it hard to predict future prices.
Some investors are attracted to the cryptocurrency market due to its high volatility. A cryptocurrency’s price may fluctuate over 10% in a single trading day. This would be great only if you’re looking for risky high returns, but if you’re a risk-averse investor then investing in cryptocurrency may not be for you.
Is Cryptocurrency Trading better than Forex and Stock Trading?
Cryptocurrency trading is a more risky investment than forex and stock trading, but it depends on what you’re trading and how you are trading it. Before trading cryptocurrencies, you have to be aware that you risk losing your money to the market. If you really believe in the future of cryptocurrencies, then holding your crypto assets for the long term may be more beneficial for you.
It is important to understand that analysis of the Cryptocurrency Market is not a straightforward process as the typical analysis used to evaluate financial markets or forex. Cryptocurrency trading is a largely speculative field and the effect of supply and demand is very unpredictable.
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