Risk Warning: Cryptocurrencies can fluctuate widely in prices and are therefore not appropriate for all traders. Trading cryptocurrencies is not supervised by any EU regulatory framework.
The first cryptocurrency to capture people’s imagination was Bitcoin back in 2008. Since then hundreds of altcoins have appeared on the scene. Despite cryptocurrencies hitting the headlines every day people know very little about them. This includes many traders. So before we jump in let's ask ourselves the question, what are cryptocurrencies?
- What Are Cryptocurrencies?
- Size of the Cryptocurrency Market
- Should I Invest in Cryptocurrencies?
- Which Cryptocurrencies Could I Invest in?
- What Drives the Price of Cryptocurrencies?
- What do Experts Say About the Future of Cryptocurrencies?
- How to Invest in Cryptocurrencies
- How to Pick a CFD Broker to Invest in Cryptocurrencies
What Are Cryptocurrencies?
In their most simple form, cryptocurrencies are digital or virtual currencies. They use cryptography to process transactions and create new coins. All transactions are stored on the Blockchain. This gives the ledger a data structure that is well insulated from hackers and can be copied to any computer. The use of cryptography also makes it very difficult to forge coins.
Cryptocurrencies are very popular due to their decentralized nature. Many users believe this gives users protection from Government interference and manipulation. There is also the hope that cryptocurrency will help break the monopoly banks hold over currency.
The idea that Bitcoin was built upon has proven to be versatile and now there are hundreds of different altcoins. These range from simple Bitcoin clones to currencies like Ethereum and Ripple which are designed with very specific utilities in mind.
Size of the Cryptocurrency Market
- The current number of unique active users of cryptocurrency wallets is estimated to be between 2.9 million and 5.8 million.
- The lines between the different cryptocurrency industry sectors are increasingly blurred: 31% of cryptocurrency companies surveyed are operating across two cryptocurrency industry sectors or more, giving rise to an increasing number of universal cryptocurrency companies.
- At least 1,876 people are working full-time in the cryptocurrency industry, and the actual total figure is likely well above two thousand when large mining organizations and other organizations that did not provide headcount figures are added.
- Average security headcount and costs for payment companies and exchanges as a percentage of total headcount/operating expenses are similar but significantly higher for wallets.
Should I Invest in Cryptocurrencies?
Cryptocurrencies are a high-risk investment. Prices tend to fluctuate and the market can be unpredictable. There is the risk that you could lose a lot if the market moves against you.
Cryptocurrencies are for traders who are looking for a high risk, potentially high reward investment.
Which Cryptocurrencies Could I Invest in?
There are a huge number of cryptocurrencies out there and it can be hard to decide what to invest in. To make your choice a little easier, let's take a look at 8 of the most popular cryptocurrencies:
|21 million||ASIC||Proof of|
|Scalable decentralized digital currency (Bitcoin Cash can process a larger number of transactions simultaneously)||2017|
Created by a faction of the Bitcoin Community
|21 million||ASIC||Proof of|
|Designed to allow users to program specialized “smart contracts” that allow for more flexibility than coins like Bitcoin||2015|
|Around 100 million soft cap||GPU||Proof of work currently, with a plan to switch to the Casper proof-of-stake protocol|
|Created as an "Upgrade" to |
|84 million||GPU||Proof of|
|Centralized enterprise blockchain solution for banks, payment providers and digital asset exchanges||2012|
|100 billion||Not Mined||N/A|
Privacy through untraceable transactions and stealth addresses
Nicolas van Saberhagen (Pseudonym)
|18.3 million||ASIC||Proof of|
|Private and instant transfers||2014|
|18.9 million||ASIC||Hybrid Proof of work/Proof of Stake|
|Chinese smart contract system||2016|
Da Hong Fei
|100 million||N/A||Proof of service|
When you think of cryptocurrency one word usually springs to mind. Bitcoin. It’s the cryptocurrency that started it all. Bitcoin is pretty much the gold standard for a cryptocurrency. It is used to buy goods or services electronically and can also be used as a way to pay for goods in foreign currency while avoiding the transaction fees. Bitcoin is by far the most popular cryptocurrency out there and many traders start here.
How to Invest in Bitcoin
A disagreement within Bitcoin's user base on how to resolve the problem of long transaction times led to a hard fork. The solution was to dramatically increase the blocksize while removing Segwit. The users decided to part way with Bitcoin and Bitcoin Cash was born.
How to Invest in Bitcoin Cash
Ethereum is one of the most promising cryptocurrencies out there. Ethereum itself is a decentralized platform that enables so-called “smart contracts and distributed applications”. It is Designed to run without any downtime, fraud or interference from third parties. Ethereum is a programming language running through a blockchain. Its token Ether is used to run applications within the network. It is also bought and sold as a conventional digital currency. The potential applications of Ethereum are incredibly promising.
How to Invest in Ethereum
Litecoin was created with the aim to be the silver to Bitcoin’s gold. It was designed to generate four times as many coins as Bitcoin. It achieves this through faster block generation. Litecoin improves on many of Bitcoin's shortcomings. This has helped it gain industry support and popularity.
How to Invest in Litecoin
Ripple is a unique coin in that the main offering isn’t the XRP token itself. The Ripple network is designed to act as a bridge between one fiat/cryptocurrency and another. It also allows the seamless transfer of real-world assets. This utility has gained Ripple the support of many major banks. Ripple has the potential to be the most disruptive cryptocurrency out there today.
How to Invest in Ripple
Monero is designed to provide its users with as much anonymity as possible. Like Bitcoin, Monero is designed to buy goods and services. Unlike Bitcoin, Monero is designed to do it completely anonymously. In the Bitcoin blockchain, it is possible to see every transaction on the blockchain. Monero only stores a temporary address. So users will know a transaction took place but will be unable to trace the source. If a privacy-focused coin sounds right for you, check out our guide on how to invest in Monero.
How to Invest in Monero
Dash was created to fix perceived flaws in the Bitcoin concept. Originally called xcoin, then darkcoin and now Dash the currency was designed to address the slow transaction speeds and lack of anonymity within the Bitcoin network. Dash can confirm a transaction in second and has workarounds to prevent so-called double spending. Dash also mixes the transactions of multiple users using coinjoin which helps to anonymous transactions. If you want to learn more about what Dash has to offer, take a look at our guide on how to invest in Dash.
How to Invest in Dash
NEO is a new take on Ethereum’s smart contracts, leading many traders to dub it the “ethereum of China”. NEO takes the Ethereum network and improves on it in just about every way. The Chinese cryptocurrency also closes certain gaps that made Ethereum vulnerable to hackers. The cryptocurrency took a hit when China moved to legislate against ICOs. Despite this don’t count NEO out yet. The cryptocurrency could make a comeback soon If you want to learn more about how to invest in Neo check out our guide.
How to Invest in NEO
What Drives the Price of Cryptocurrencies?
The cryptocurrency market is characterized by steep rises and sudden dramatic falls. The market is volatile but it is possible to understand the peaks and troughs. An interesting quirk of cryptocurrency is that coins tend to rise and fall in tandem. If one currency rises you should expect to see others follow suit.
One of the main drivers of cryptocurrency price is media attention. As a currency hits the news you will see an influx of new traders. This tends to precipitate a huge rise in value. Early traders note this and engage in profit-taking. Other traders panic and a rush to sell ensues, leading to a drop in price for a time.
The prospect of regulation also makes cryptocurrency traders very bearish. When China moved to ban Initial Coin Offerings the market entered into a veritable free fall. Almost every cryptocurrency suffered huge losses in value. The market slowly began to recover towards previous levels as traders calmed down.
Individual currencies are influenced by very specific factors. The most common reason a cryptocurrency see's a boost in value is support from the financial sector. For example, the Ethereum Enterprise Alliance gaining new members gave Ether a big boost. You need to understand the factors that influence each currency if you want to see real returns on your cryptocurrency investment.
What do Experts Say About the Future of Cryptocurrencies?
Experts are deeply divided what is in store for cryptocurrencies. Some have argued that Bitcoin and other cryptocurrencies are everything from a fad to an outright fraud. JP Morgan boss Jamie Dimon took a particularly harsh approach.
In his view, Bitcoin is fit only for:
Many in the financial sector are very skeptical of Bitcoin. Instead, organizations like JP Morgan have thrown their support behind Ethereum and Ripple.
Other established experts believe that cryptocurrency has far-reaching potential. Christine Lagarde of the IMF has previously discussed the potential of cryptocurrencies to supplant traditional fiat currencies. She believes that states with an unstable national currency may elect to adopt cryptocurrency. This would lead to a shift away from the United States Dollar. This prospect becomes more likely as market caps increase, creating a more stable environment.
Unsurprisingly, experts within the industry are optimistic. Most believe that as cryptocurrencies mature the market will stabilize. This will put an emphasis on the utility of the currency, rather than the perceived value speculators give it.
How to Invest in Cryptocurrencies
So, you’ve decided that you want to take the plunge. The next step is to figure out how to actually buy cryptocurrencies. This is not always a straightforward process. There are a few different ways you can invest in cryptocurrencies. Many users chose to invest using one of the many exchanges such as Bitfinex. This involves buying your coins with fiat currency and then storing them in a virtual wallet. This approach has advantages but it can be tricky to set up the better exchanges and there could be other unexpected problems along the way.
The biggest risk is that your exchange may run into problems. in 2013 MtGox fell foul of FinCen money laundering laws and users were unable to withdraw their money in USD. Shortly afterward, a hack resulted in the loss of almost $500 million Bitcoins.
In more recent history the Bitfinex hack once again resulted in traders losing out. In August of 2017 attackers made off with $72 million in cryptocurrency. Bitfinex then took the step of reducing everyone's account balance by 37%. This meant every user lost something, rather than have individual users lose everything. In both cases, traders lost out because they had no protection under the law.
This risk is too big for many traders but there are alternatives.
The best option is to use a regulated CFD broker. A CFD or Contract for Difference is a popular form of derivatives trading. It enables you to speculate on the rising or falling prices of cryptocurrencies.
The main advantage of a regulated broker is that they comply with standards designed to protect traders. Rather than directly owning your cryptocurrency you can instead purchase it on a short or buy position. This allows you to enjoy price rises without ever having to own a coin. It also ensures you are protected from another MtGox.
Important: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail trader accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
How to Pick a CFD Broker to Invest in Cryptocurrencies
There are a huge number of CFD brokers out there and picking the best one can be difficult. The first thing you should always do before selecting a broker is to make sure that you are using a regulated broker. These brokers have to comply with high security and ethical standards to ensure that your investment is safe. There are a few things to consider when picking a regulated broker. We'll explain what to look for when picking the best brokers to invest in cryptocurrency.
Commission and Spreads
The market is highly competitive and this means that very few regulated brokers charge commission fees. Instead, they make money by charging on the spread. This is usually a percentage per “unit” (or token) which can add up quite quickly with the low-value high-density currencies. Some brokers, such as markets.com, are very upfront about their costs. They include a minimum spread per unit in USD which makes it very easy to figure out exactly what you are being charged.
You should also keep an eye out for any commissions for holding a position overnight. Be aware that many brokers charge a premium for this kind of service. If the market moves against you it proves to be very costly to hold a position overnight.
Every broker will come with extra features to help you manage your cryptocurrency investment. These range from the risk management tools at Plus500 (76.4% of retail CFD accounts lose money) to the unique social trading aspects of a more newbie-friendly broker like AvaTrade.
The features a broker offers should not be overlooked. Useful features can make more of a difference than a tight spread. Many new traders will find the features offered by a broker like AvaTrade invaluable.
More experienced traders might find the large numbers of instruments and pattern recognition tools offered by CMC Markets to be more helpful. When you are looking for a broker for your cryptocurrency investment it is really important to consider extra features. If you find some that work well for your investing style it can make a huge difference.
Try the Demo Account
The overwhelming majority of regulated brokers come with some form of a demo. This will allow you to test their system and see if it is to your liking before you invest anything. This is useful because it gives you a chance to see if the platform works for you. There are lots of different styles and formats out there and it is really worth taking advantage of the opportunity to try before you buy.
Whichever broker you settle on make sure you only invest what you can afford to lose.
Whether you decide to use a regulated broker or invest through an exchange make sure that you follow the golden rule of investing. Only ever risk money that you can afford to lose. Even if you use a regulated broker you can still lose all of your cryptocurrency investment if the market turns against you.
So, you’ve decided that you want to take the plunge. The next step is to figure out how to actually buy cryptocurrencies. This is not always a straightforward process. One way to invest is by using a cryptocurrency exchange. This involves using fiat money to buy tokens that you then store in a digital wallet. You can then trade those tokens for different currencies on the exchange.
Using an exchange can be a risky prospect. Not all of them are made equal and while there are some fairly safe ones there are others that are risky to use. There are a few main criteria that you should take into account when trying to choose a new exchange. Let's break them down:
Fees Associated With Trading
This will be the deciding factor for most users. An exchange needs to make money and this is often done through fees. There are a variety of different fees that an exchange might charge.
This is a fee that’s levied on any trades posted to the exchange. These take the form of a maker or taker fee. Users are charged a fee to place a trade on the market or to take someone up on a trade. These typically range from 0% to around 1% depending on currency pairs or payment method.
This is the fee that you pay in order to deposit or withdraw currency on the exchange. Generally, it is cheaper to deposit than withdraw. Some exchanges allow you to deposit using a credit card but this typically incurs fees between 3-4%.
This is a fee for exchanging between currencies on your account. It’s a basic fee and the percentage will vary wildly depending on the currency pairs.
Generally, you’ll want to choose exchanges that have low fees. Sometimes the exchanges with higher fees offer more features so it can be a bit of a trade-off.
Whether You Can Remain Anonymous
The vast majority of traders will want to use an exchange that has ID vetting. This is to keep track of users and make sure that anybody engaging in illegal or fraudulent activity on the exchange can be caught. Most exchanges engage in some form of ID verification and this will be preferable for most users.
If you are concerned about your identity being linked to your Bitcoin for philosophical reasons you are best looking at a site like LocalBitcoins.
Not every exchange offers the same variety of currency pairs. Some focus exclusively on a single currency, usually Bitcoin. Others have an eye-watering number of altcoins available and you can make almost any trade imaginable.
Always Do Your Research
It is really important that you take your time to research the history of any exchanges you choose to use. Generally, you will want to use older and more established exchanges as they have a better history. You also need to be aware of any particular quirks of a certain exchange. For example, LocalBitcoins has a rating system so that you can check whether a user is trustworthy. Always make sure to check recent comments to verify that you are not walking into a scam.
Whatever exchange you settle on make sure you only invest what you can afford to lose.
Whether you decide to use an exchange make sure that you follow the golden rule of investing. Only ever risk money that you can afford to lose. Even if you use a safe exchange you can still lose all of your cryptocurrency investment if the market turns against you.