What is cryptocurrency trading? How does cryptocurrency work? Cryptocurrency trading is strong among retail traders. There are thousands of digital coins available, and a large number of exchanges, platforms and resources to choose from to learn how to trade these digital assets. So, what is cryptocurrency trading? Now let's get to know.
What is cryptocurrency trading?
Cryptocurrency trading is to speculate on the price of cryptocurrency against the U.S. dollar and other fiat currencies or against other cryptocurrencies in an attempt to profit from its highly volatile fluctuations. Increased volatility puts cryptocurrencies at risk. Their prices may suddenly be unfavorable to your transaction, resulting in losses.
Crypto trading may also mean trading derivatives to speculate on price fluctuations.
Cryptocurrency is a decentralized digital currency. It works through a peer-to-peer (P2P) transaction inspection system without a central server. Because cryptocurrencies run on decentralized computer networks, they are not issued or controlled by central authorities.
Currency transactions are different from cryptocurrency transactions, which means that cryptocurrencies are different from fiat currencies, such as GBP or USD. Legal tender is issued by the government and guaranteed and controlled by the central bank.
Retail traders can buy and sell cryptocurrencies on various exchanges, ranging from P2P exchanges to centralized and decentralized exchanges (DEX).
Unlike traditional currencies, cryptocurrencies exist as shared digital ownership records stored on the blockchain. When a user wants to send a cryptocurrency unit to another user, they will send it to that user's digital wallet.
Traders can also choose derivatives such as CFD, options and futures contracts to speculate on the price of currency without actually owning them. With CFD, traders can open long and short positions at the same time to speculate on price rise or fall. However, please note that CFD involves the use of leverage, which will magnify profits and losses.
Basic knowledge of cryptocurrency transaction
As with any other tradable asset, cryptocurrency transactions have a buyer on one side and a seller on the other. When there are more purchases than sales, the price of cryptocurrency will usually rise as demand increases. When there are more sales orders, prices usually fall as demand decreases.
In the open market that never closes, the value of Bitcoin and counterfeit coin is changing every second. There are different ways to trade cryptocurrencies, from buying coins and tokens through exchanges to selling them in exchange for fiat currency, trading cryptocurrency pairs to potentially profit from price difference fluctuations, or trading derivatives.
Note that cryptocurrencies are very volatile. Their prices may quickly go against your position, causing losses. The more complex the transaction, the greater the risk involved.
How does cryptocurrency work?
Cryptocurrency is a digital coin running on the blockchain network. It uses cryptography to protect transactions, control supply and verify transfers.
Blockchain is a digital database that stores encrypted currency transactions in blocks, requiring complex mathematical calculations to record and verify. Cryptocurrency coins and tokens are stored in exchanges or electronic wallets and are very secure because they use unique public and private key pairs to verify the currency owner.
Cryptocurrency allows you to use applications and services on the blockchain, pay for goods and services, and trade.
With the introduction of Bitcoin (BTC), the story of cryptocurrency began in 2009. The first decentralized cryptocurrency was created by individuals or groups using the pseudonym Nakamoto. Cryptocurrency itself has become popular among traders and asset classes.
Their total market value will reach a record high of US $2.954 trillion in 2021, with more than 9929 digital tokens available for trading. By November 2022, the number of tokens will increase to 21612.
The success of Bitcoin paved the way for many other alternative cryptocurrencies (known as counterfeit currencies), which aim to improve Bitcoin's weaknesses, such as energy intensive mining and high use costs, reduce transaction costs and create competition.
Although various cryptocurrency projects have different operation methods and objectives, Bitcoin and counterfeit currency have four key characteristics:
Cryptocurrency has no central authority, which is different from fiat currency controlled by the authorities and the central bank. In contrast, cryptocurrency transactions are processed and verified by an open distributed network.
Invariant and irreversible
The invariance of cryptocurrency is based on several principles: no one except the private key holder should be able to move the crypto asset. All transactions are recorded on the blockchain, and its consensus mechanism should prevent any transaction from being hidden or changed.
Generally, cryptocurrency holders do not need to prove their identity when conducting transactions. They use their digital identities and digital wallets to securely verify transactions. You should note that the addresses of blockchain wallets that store cryptocurrencies are not completely anonymous - they are pseudonyms, which means they act as placeholders for the identity of the wallet owner. However, some cryptocurrencies are more anonymous, such as zcash (ZEC) and monero (XMR).
Scarcity or limited supply
The supply of fiat money is unlimited, which enables the central bank to manipulate its value through monetary policy. In contrast, many cryptocurrencies encode a limited and predefined supply in the underlying algorithm, which makes them deflationary in nature. Some of the most popular cryptocurrencies, such as Bitcoin, have a fixed or upper limit of maximum supply, while other cryptocurrencies can be increased according to the scheduled schedule, or new supply can be added in the future, depending on the development of the project.
How did cryptocurrency come into being?
There are two main ways to create cryptocurrency coins and tokens: mining and mortgage.
The mining of cryptocurrency is a process. The new currency uses the Proof of Workload (PoW) consensus mechanism to circulate on the blockchain to verify transactions and add new blocks. For example, Bitcoin uses PoW to mine new Bitcoin.
1. Transaction inspection
The mining computer selects pending transactions from the pool and ensures that the sender has sufficient funds to complete the transaction.
2. New block creation
The mining computer compiles effective transactions into a new block, and tries to generate encrypted links to it by solving a complex algorithm. When the computer creates a link, it adds the block to the blockchain file and updates it through the network share.
Each time a new block is added to the blockchain, a new coin will be created and paid to the miners of the new block as a reward.
Cryptocurrency pledge is an alternative process through which new coins are circulated using the PoS consensus mechanism. Ethereum has been running PoW at first, but has completed the transition to PoS in 2022.
The computer on the PoS blockchain network does not process new blocks by solving complex cryptographic algorithms, but mortgages the cryptocurrency by locking it into the network in exchange for the right to become a verifier.
In general, the above content introduces in detail what is cryptocurrency transaction and how cryptocurrency operates. I believe you will understand it after reading it. In short, the cryptocurrency market is not regulated, and there is a risk that some coins or tokens are scams. You can consider using a reputable cryptocurrency exchange that implements security steps such as authentication.