Cryptocurrency is designed to work like any other, as a medium of exchange through the use of cryptography that serves the purpose in creating and controlling additional units, known as coins or tokens. Cryptography serves the purpose of verifying the transfer of assets. Where forex is controlled by central banks, cryptocurrency is decentralised and a distributed ledger is used in transactions.
Cryptocurrency has become substantially more popular in the past three years with the market cap of all cryptocurrencies reaching around $260 billion. By the end of 2017, it had surged and reached a $520 billion market cap.
What Should You Know Before You Start Trading Cryptocurrency?
1. Substantial resistance from professionals
With the increase in popularity, the trading of cryptocurrency, and cryptocurrency itself has faced a lot of opposition. Especially from Wall Street professionals – such as Warren Buffet and Jamie Dimon – and financial regulators.
2. Blockchain technology
Cryptocurrency is transferred through the use of blockchain technology which acts as a public ledger that records all transactions. Cryptocurrency coins, or tokens, are stored on this blockchain.
Most cryptocurrencies have their own blockchain and depending on the size, some transactions are executed significantly faster than others. Bitcoin transactions, for example, take longer than Litecoin transactions.
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3. Ease of access and affordability
Cryptocurrency can be bought and sold at any given time, anywhere with minimal barriers to entry.
Larger cryptocurrencies – such as bitcoin and ether – are substantially more costly and this often puts a lot of traders off without considering that each coin across cryptocurrencies are bought in fractions as well. Traders can invest in cryptocurrencies such as bitcoin with a relatively small amount.
Crypto-platforms differ and there are fees involved with trading these currencies that may exceed any profits made, thus traders need to ensure that they understand the full cost before they invest.
4. Regulatory Issues
Strict regulations are in place to ensure that consumers and investors (and their funds) are protected through the provision of tools and remedies to minimise loss and damage, but with cryptocurrency, there is no central regulating authority that offers such.
In fact, cryptocurrency is still unregulated in many African countries.
Traders who invest in cryptocurrency need to fully understand that there is no security that the coin’s value will be retained.
5. High volatility
Due to cryptocurrency being an unsecured investment along with a lack of regulation, cryptocurrency can be manipulated, and large price swings are frequent.
Cryptocurrencies can substantially gain or lose half of its value within a day resulting in significant risks when holding crypto as they can potentially create big losses for investors.
6. Difference in trading platforms
Cryptocurrency is bought and sold on trading platforms that facilitate such transactions where cryptocurrencies can be exchanged for others as well as fiat currency.
These platforms are often not authorised or licensed by reputable regulatory authorities and there is additionally a lack of minimum requirements that the cryptocurrency issuers are subjected to before their currency may trade on a platform.
In addition, some exchanges are not monitoring trading activity to identify manipulative trading behaviour.
7. Cybersecurity risks and threats
Exchanges are often victims of cyber attacks as they hold their users’ cryptoassets. Hackers set out with the purpose of obtaining funds. Unfortunately, exchanges are hacked often, disrupting trading activities and causing a loss of user funds.
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8. Coin availability
There is a finite amount of bitcoin in circulation, and this adds to the reason why bitcoiners trust it more than conventional currencies, as money can be printed for various reasons, including economic and inflation purposes.
Bitcoin is limited to 21 million coins. This supply can not be artificially increased.
9. The risks involved with wallets
Cryptocurrencies are transferred with a degree of anonymity, with the wallets resembling that of an individual’s actual wallet. The same detrimental risk involved with losing one’s wallet, applies to cryptocurrency wallets.
Even though there are numerous trading platforms that offer the option for such a wallet to be linked to a trader’s username and password, it increases vulnerability to cyber attacks should the trading platform be targeted.
10. ICOs and precautions that have to be taken
Initial Coin Offerings (ICOs) are similar to IPOs (Initial Public Offerings) where companies introduce a coin to the market, instead of shares.
There are thousands of cryptocurrencies globally and each companies have set their sights on their cryptocurrency becoming the next bitcoin. Traders should take care, as with investing in IPOs, not to do so lightly.
The risk involved with investing in ICOs should be evaluated thoroughly as traders stand a great chance of incurring losses substantially larger than what they can afford.
Before investing, investors should watch for trends in the news and wait for professional commentary on new ICOs.
Cryptocurrency has seen an influx in growth and popularity due to consistent growth in the direction of a more digitalised world. But as with all investments, there are still great risks involved along with the chance of gaining profits.
Traders need to evaluate their exposure to risk as well as their willingness and whether they can afford such risk. Cryptocurrency is overtly easy to access and trade but thorough research is needed.
Traders need to ensure that they evaluate trading platforms and providers of trade in cryptocurrency to ensure that with reasonable measure, client funds are not compromised.