Crypto Currency

What is Cryptocurrency?

Cryptocurrencies are digital currencies, which have been created by private individuals, groups, and in some cases banks and other companies. Cryptocurrencies are not legal tender which means they are not readily exchangeable for goods and services in the way that national currencies are, but one day they may be — there are already many business which accept the larger cryptocurrencies as payment.

If you buy and sell cryptocurrencies in the real market, your transactions are made through a decentralized and encrypted system, which goes a long way towards ensuring anonymity.

Transactions in cryptocurrencies are enacted through blockchain technology, which also regulates a finite supply and the integrity of its ecosystem, ensuring that it cannot be debased.

The cryptocurrency market had in 2020 an average daily trading volume of approximately $4.1billion, making it about two-thirds as large as the Forex market. The first digital currency was Bitcoin, launched in 2009. Bitcoin is by far the largest and most famous cryptocurrency. In October 2020, the market capitalization of Bitcoin was estimated at $204 billion, and the market capitalization of all cryptocurrencies at $350 billion.

There are two ways to trade or invest in cryptocurrencies. If you want to buy real cryptocurrencies and hold the legal ownership, you can do this through major cryptocurrency exchanges. There is typically some kind of fee for ensuring security of the custodianship plus a commission, but this can be the most effective way to make a long-term investment. On the other hand, you can trade cryptocurrencies with most major Forex / CFD brokers today packaged as contracts for differences (CFDs) and as ownership is virtual — you are just betting on price fluctuations here — you do not have to worry about security and storage and any such associated fees. However, retail brokers apply overnight financing charges / swaps which mean in effect that you pay a fee for every day you keep a crypto trade open, which is why this route is better for short-term trading than long-term investing.

Pros and Cons of Cryptocurrencies

If you are buying and holding the legal ownership of cryptocurrencies, you will have security and storage issues which will impose a cost.

I mentioned earlier that major Forex currency pairs can be traded at a cost of only about 0.08% of the value of the asset traded. It is relatively considerably more expensive to trade cryptocurrencies. For example, the major cryptocurrency Bitcoin typically has a spread/commission structure of about 0.40% of the asset traded, about 5 times the cost of trading EUR/USD. This can make profitable short-term trading in cryptocurrency more challenging to execute in cryptocurrency than in Forex.

Cryptocurrencies, with the possible exception of Bitcoin, are much smaller in capitalization than the national currencies which are traded in Forex. They are more sensitive to micro issues that affect their own markets such as their integrity, adaptability, and popularity. In a sense, it is widely believed that in the end there will be a few successful cryptocurrencies which become widely used, so the value of the smaller cryptocurrencies will tend to rise or fall depending upon how their chances of becoming a “successful” cryptocurrency are seen.

Cryptocurrencies have, in recent years, been far more volatile than Forex currency pairs or crosses. Over a year, a cryptocurrency might rise in value tenfold – 1,000% - while a major Forex currency pair might typically fluctuate by 10% over a similar period of time. Forex currencies have central banks and national governments managing them, while cryptocurrencies really have nothing but market forces acting on them, meaning they are far more likely to fluctuate wildly in price. This means that large amounts of money can be made by trading or investing in them, but risk levels are much higher. Cryptocurrencies are also far less liquid than most national fiat currencies.

Due to their relatively high risk and volatility, most brokers offer trading in cryptocurrencies at very low rates of maximum leverage – typically 2 to 1 in more tightly regulated jurisdictions.

Unlike Forex, crypto markets tend to be open at weekends, meaning you can trade them on Saturdays and Sundays. You cannot do this with Forex with most brokers.

Finally, note that although more and more brokers are offering cryptocurrencies, typically only the larger cryptocurrencies such as Bitcoin, Ethereum, Tether, and Ripple are commonly available.

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