Cryptocurrency trading is gaining momentum among retail traders, and there are thousands of digital currencies available and a wide range of exchanges, platforms, and resources through which these digital assets are traded.
Cryptocurrency trading speculates on the price of cryptocurrencies against the US dollar and other fiat currencies or against other cryptocurrencies, trying to take advantage of their extreme volatility, however, the increased volatility makes cryptocurrencies risky, as their price can suddenly move against your trade causing losses, Cryptocurrency trading can also mean buying and selling derivatives to speculate on price fluctuations.
Cryptocurrency is a decentralized digital currency, and it works through a system of peer-to-peer (P2P) transactions without a central server, and since digital currency trading works on decentralized computer networks, it is not issued or controlled by a central authority, unlike fiat currency that It is guaranteed and controlled by the government and the central bank.
Traders can also choose derivatives such as Contracts for Difference (CFDs), Options and Futures to speculate on currency prices without actually owning them, using CFDs traders can open both long and short positions to speculate on rising or falling prices, but note that CFDs involve On the use of financial leverage, which magnifies both profits and losses.
Types of digital currencies
Cryptocurrencies fall into three main categories: Bitcoin, altcoins, and tokens.
Bitcoin is the first cryptocurrency Bitcoin is still the world's leading cryptocurrency by market capitalization It is a global peer-to-peer digital payment system that allows parties to transact directly with each other without the need for an intermediary such as a bank Bitcoin is often referred to as the alternative digital currency to fiat and gold, but regulators argue it is riskier and cannot be compared.
Altcoins are defined as digital currencies that are an alternative to Bitcoin. Altcoins can differ from Bitcoin in several ways, some may have a different economic model and others may use different underlying algorithms or block sizes.
Altcoins include a wide range of different uses, for example: Ethereum is the world's first programmable blockchain, which enables developers to create and deploy decentralized applications (dApps) and smart contracts. Also, IOTA is specifically designed to be a new layer for data transmission and transaction settlement for the economy. Machine and the Internet of Things (IoT).
Unlike Bitcoin and altcoins, tokens do not run on their own blockchain, they are built on top of an existing cryptocurrency's blockchain. BAT), NEO is often referred to as the Chinese competitor to the Ethereum token and a platform for dApps and smart contracts, and it also hosts many tokens including (GAS).
What drives cryptocurrency prices?
The value of a cryptocurrency is primarily determined by supply and demand, just like any other asset or product, there are many factors that influence the interest of traders and investors in cryptocurrencies and the supply of coins and tokens in circulation.
1. Supply and demand
As with any tradable asset whose price is shaped by the dynamics of supply and demand, when demand outweighs supply, prices go up, and when demand subsides, the price goes down. Similarly, limited supply supports the price. Every cryptocurrency project sets its supply mechanism at Its release, for example: Bitcoin has a cap on its supply and a rate for mining new coins.
The price of bitcoin has skyrocketed in recent years as growing interest from individual and institutional investors has fueled demand faster than the rate at which new coins are being mined. Cryptocurrencies can see a surge in demand in response to announcements such as new features, upgrades, exchange listings, and partnerships that drive adoption. A common mechanism to limit the increase in the circulating supply of new coins being created.
2. Commissioning of production
Cryptocurrency mining requires expensive computers and large amounts of electricity supply, the more miners on the blockchain the harder it becomes to solve the cryptocurrency calculations and the more difficult it is to mine the cryptocurrency, so as to maintain a constant rate of block generation, but the harder the cryptocurrency mining, the higher the cost .
If the price of a cryptocurrency falls below the cost of production, some miners may stop mining, which in turn reduces the rate at which new coins are added to the supply.
With the price of bitcoin plummeting in 2022 amid a broader cryptocurrency market, bitcoin mining companies have taken a hit, for example: Core Scientific (CORZ) and Argo Blockchain (ARB) shares plunged amid mounting bankruptcy fears.
3. Availability in stock exchanges
Smaller cryptocurrencies tend to be listed on a few exchanges which limits the access of traders, if they are trading thinly they may have wide spreads in the bid offer which deters some investors, but if a small cryptocurrency is listed on larger exchanges with a larger number From users, it can increase demand and push up the price as it becomes more accessible to more traders.
New cryptocurrencies are constantly being launched, and while it can be difficult for one project to differentiate itself from another, some have been successful in providing an improvement or alternative to an existing network or offering a new service. As adoption of a new cryptocurrency grows, this usually drives up the price and can That reduces the demand for competing projects.
For example: Cardano has positioned itself as a competitor to Ethereum, as the platform is used for smart contracts and decentralized application creation.
5. Paper currency inflation
Investors can choose to buy cryptocurrencies as a store of value to hedge against fiat currency inflation. This creates increased demand and usually pushes up the price of the cryptocurrency.
6. Governance mechanisms
Cryptocurrencies with stable governance mechanisms tend to encourage more investor confidence compared to a project without a transparent system of decision-making and protocol changes, however, if the governance system is too slow to introduce improvements it may make investors less interested in the project.
Attracted by the decentralized nature of cryptocurrencies, investors can resist the prospect of the industry becoming regulated by government agencies, reducing their interest in buying coins and tokens if they anticipate the introduction of regulations.
Strict regulatory provisions in China have caused cryptocurrency prices to crash several times in recent years as they have restricted trading. They have also seen mining capacity shifted to other countries such as the United States.
For example: the price of XRP has been severely affected by the ongoing lawsuit with the US Securities and Exchange Commission. The regulator accuses Ripple of misleading XRP investors, something that XRP competes with.
The potential for regulation in the US has created uncertainty among investors, so adopting clear regulations can provide clarity and increase demand as investors who have been out of business will enter the market.