The basics of investing in cryptocurrency
This guide provides a quick overview of the five steps needed to trade (buy/sell) cryptocurrencies such as Bitcoin (BTC), Ethereum (ETH) and Ripple (XRP).
Here at Starttrading.com, we completely understand that it can be quite daunting starting your cryptocurrency trading career. To help you understand the basics of cryptocurrency trading, our team have put together this guide to help you when getting started – providing you with a basic understanding when opening an account with different trading platforms.
What is a cryptocurrency?
Built on blockchain technology that only exists online, cryptocurrencies are a tradeable digital asset or digital form of money. This virtual money is not backed by a government or a central bank of any country. Without government control and interference, the transfers can be done with minimal processing fees – avoiding the high fees charged by traditional financial institutions.
One of the most famous cryptocurrencies is Bitcoin, which was invented to create an alternative currency for anyone who wanted to opt out of the traditional banking system during the 2008 Financial Crisis. Cryptocurrencies like Bitcoin want to make financial transactions more open and accessible to everyone around the world – which is why they have become so popular in recent years.
How do cryptocurrencies work?
When it comes to cryptocurrencies and bitcoin exchanges, there are a number of basic concepts that you need to understand:
A public ledger can be viewed as a data management or storage system – a very similar concept to a database system of bank records. However, unlike those in a bank, this system is self-run and self-governed without the interference of outside parties.
An example of a public ledger is a blockchain and all confirmed transactions are included in the blockchain, with the integrity and the chronological order of the data being enforced with cryptography.
Within a cryptocurrency network, hundreds and thousands of individuals maintain a copy of the ledger. This allows everyone to know the number of how many crypto tokens are in circulation and what transactions are authentic to be recorded – which prevents any misuse like double-spending.
Mining is the process of confirming various cryptocurrency transactions and adding them to the blockchain digital ledger. Every time a transaction for a cryptocurrency is made, miners are then responsible for ensuring the authenticity of information and updating the blockchain with the transaction.
The data is assembled into a system called ‘blocks’ which is then verified by cryptocurrency miners to ensure they are legitimate. Once a block is filled to capacity with transaction details, more information is mined and are once again added to the blockchain by the network participants.
A transfer of funds between two digital wallets is called a transaction, which then gets submitted to a public ledger and awaits confirmation.
When each transaction is made, the wallets use an encrypted electronic signature which provides a mathematical proof that the transaction came from the owner of the wallet. The miners then confirm the transactions and add them to the public ledger. The signature also prevents the transaction from being altered by anybody once it has been issued.
How can Starttrading.com help you?
Online trading with cryptocurrencies works very similar to stock market trading. However, cryptocurrencies can be high-risk investments so it is important to have a good understanding of your trading strategy before you invest in bitcoin and other digital currencies. Feel free to enrol in our free online trading course is designed to help you become a profitable trader.