Imagine you have a coin. And that coin is not in the form of gold, silver, or any precious metal.
The truth is that you can’t even hold or carry it inside your pocket. Now you’re probably thinking…
“What kind of coin is that?”
“What is it exactly?”
We call it cryptocurrency.
Cryptocurrency is just a medium of exchange and they are a means of making transactions digitally. In my explanation of cryptocurrency, I’ll be using bitcoin as the main example.
Bitcoin is a digital currency which means that it only exist electronically. In fact, it is not issued by any central issuing authority, so there’s no organization to decide when to make more coins, figuring out how many coins to produce, keeping track on where they are or investigating fraud. This renders it immune to government interference and manipulation.
To make it easier to understand, you don’t have to go to the bank in order to process a transaction, so it is easier to transfer funds between two parties in a transaction.
Now your next question is probably “how does it work as a currency”, or “does it even have any value at all?”
Bitcoin wouldn’t exist in the first place without the whole network of people and a thing called cryptography. Bitcoin is sometimes described as the world’s first leading cryptocurrency.
So we start with this thing called “THE BLOCKCHAIN”
What is the Blockchain?
The blockchain is a public ledger of all the transactions that have ever occurred on the bitcoin peer-to-peer network.
It’s a very long record log dating back to when the first bitcoin was created in January 2009.
So, as long as you make transactions on Bitcoin the ledger will continue to grow as it adds more ledger to the network. Hence the reason why we call it ‘THE BLOCKCHAIN’.
When you send someone bitcoins, it’s not like you’re sending them a large data of files. Instead, you write the exchange on that ledger.
Pedro sends Pepe 12 bitcoins.
Wait.. you’re probably thinking “you said that bitcoin doesn’t have a central authority to keep track of everything that is happening in cryptocurrency”.
Even though the blockchain is a central record, there’s no official group of people that update occurring ledgers and keep tracks of everybody’s money like a bank usually do. Anybody can volunteer to update everyone’s blockchain making it up to date. It all works properly because lots of people are tracking the same thing for accurate transactions.
You are playing a card game with your friends and all of you left your money at home. There’s no money on the table. The game starts, and and you all start getting some notes and writing down who wins, who loses, and for how much. Your ledgers are all kept separately.
At the end of the game, you all compare what you’ve written down.
In that way, you can confirm if someone tries to cheat or make a mistake on purpose to make a little money themselves. You can call your notes as a block of transactions and eventually, your notebook will have chains of information. Hence: Blockchain.
The people who keep track of that information are known as “MINERS”.
What Happens in A Transaction?
In order for a transaction to even occur in the first place, you need to have a digital wallet on the bitcoin network. A wallet has two things, a public key and a private key.
This key plays a very crucial role in the cryptographic nature of cryptocurrencies. The keys are represented by random numbers that make up your address.
For you to authenticate your transactions, you need to have these two keys involved. In order for that message to be true, it needs to be signed by your private key, which basically functions as your personal ID or your digital signature.
Your private key is the only way for you to create a message. After signing the message, the message gets sent off to the bitcoin network.
The public key acts as your verifying mechanism which tells people that your message is genuine and is signed by your digital signature or your private key.
What is Bitcoin Mining?
Now we’ll be getting into the “mining” aspect of this process.
Once your transaction is sent to the bitcoin network, the network will quickly announce it to the people who are maintaining the ledger = the “MINERS” and they will know they have a task computate.
The miners will use a computational algorithm to verify the validity of each individual transaction. With this, you can make sure that there’s no fraudulent transactions taking place.
Now I’ll be explaining the cryptography.
The process that miners use for verification of individual transactions is called a cryptographic hash function or (SHA256).
This means that the “miners” will use this kind of process with their computer to guess and check 2^256 computational algorithms in order for them to get the correct answer. The probability of guessing the correct answer is 1/115 QUATTUORVIGINTILLION. After solving the transactions, it will be added to the blockchain ledger.
There is a reason why the cryptographic hash function is trusted in our modern security systems. The system of solving cryptographic hash functions is what helps prevent double spending (where people send a bitcoin twice).
Many people spend thousands of dollars on mining rigs for them to be the first one to solve the transaction and add it on to the blockchain.
What do they get for solving transactions?
After solving the transaction, you will be rewarded with bitcoins straight to your digital wallet. As of 2018, miners are rewarded with 12.5 bitcoins. As of April 26, 2018, 1 bitcoin price has a worth of $7427.
$7427 x 12.5 = $92,837.5
Now you know why we call it mining. The analogy is that you are mining new bitcoins. This is why people invest in mining rigs so they can be the first one to solve the transaction and be added to the blockchain ledger.
How To Trade Bitcoins and Crptocurrency?
To trade bitcoins or cyrptocurrencies you need to open a Forex trading account with a broker that accepts bitcoin.
The other option is to have a digital wallet an invest.
If you want to be an investor, you can hold on to your bitcoins for a period of time in the hopes that your cryptocurrencies value will appreciate.
If you chose to be a trader, you typically trade cryptocurrencies on short-term moves with leverage looking for profits, using the volatility of the market to buy and sell in and out of trades. Basically; Buy Low & Sell High.
Trading with a system like price action, rather than investing in cryptocurrencies and bitcoins is a lot faster and can present a lot more trading opportunities to get in and out of the markets speculating on the price going higher and lower.
You are also able to use your price action trading skills to find and enter trades on a broker who accepts cryptocurrency trading.
Trading cryptocurrencies allows you to enter and exit with small costs and a very small turn around times.
Other than profit and losses, there are also risks and benefits you can get with trading cryptocurrency.
What are the Benefits of Trading Bitcoins?
There’s no central bank to randomly manipulate inflation or interest rates.
You don’t need to reveal your bank account or credit card details to make withdrawals or deposits.
Start Small (in fact can virtual / demo trade for free)
Some can start with a minimum deposit of $25 with some bitcoin forex trading firms.
There are Forex brokers that offer high leverage that range up to 1:1000 bitcoin trades. However, approach leverage and margins with caution as it may lead to bigger wins, but also losses.
You can carry out a transaction with anyone globally. Eliminate global boundaries.
Bitcoin and other cyryptocurrencies can be high in volatility. This means there can be a lot of trading opportunities, but unregulated brokers can use this to take advantage, putting traders at risk.
To make sure you are trading with tightly regulated brokers that have a long track record in the industry, read about Bitcoin and Cryptocurrency brokers that are tightly regulated here.
Cryptocurrency trading has many advantages, but you must also take into account the risks such as the high volatility to make sure you are prepared. There are a lot of cryptocurrencies out there, so do your research and choose wisely on where to invest your money.