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Trading CFDs demands expertise, in-depth knowledge, and awareness of the associated risks, making it unsuitable for all; Leveraged trading involves a significant risk of losing all invested capital within a short time period.

Trading CFDs demands expertise, in-depth knowledge, and awareness of the associated risks, making it unsuitable for all; Leveraged trading involves a significant risk of losing all invested capital within a short time period.

Cryptocurrencies are digital assets protected by cryptography. As a relatively new technology, they are very speculative, thus it is critical to understand the dangers before investing. The image shows Bitcoin and is related to an article on cryptocurrency trading.

Cryptocurrency trading: All you need to know in 2024

Cryptocurrency trading has become mainstream, but that wasn’t always the case. In 2024, Bitcoin, the world’s biggest cryptocurrency, blasted beyond $50,000, causing a frenzy in the crypto market. But what is cryptocurrency trading? How does it work? And more importantly, how do you trade it? In this article, Finbok takes a deep dive into the world of cryptocurrency trading, shares valuable insights, and helps all South African traders.

Cryptocurrency trading – What is cryptocurrency?

A cryptocurrency is a digital or virtual currency. It is protected by a unique encryption, making it nearly impossible to counterfeit and easy to track. Most cryptocurrencies operate on decentralized networks that employ blockchain technology—a distributed ledger enforced by a distant network of computers. Cryptocurrencies are distinguished by the fact that they are rarely issued by a central authority, making them potentially impervious to government meddling or manipulation. Cryptocurrencies are digital or virtual currencies backed by cryptographic technology. They enable safe online payments without the need for third-party intermediaries.
Cryptocurrencies are digital assets protected by cryptography. As a relatively new technology, they are very speculative, thus it is critical to understand the dangers before investing. The image shows Bitcoin and is related to an article on cryptocurrency trading.
Cryptocurrencies are digital assets protected by cryptography.

Cryptocurrency Trading: Rise of Blockchain

The term “crypto” refers to the numerous encryption algorithms and cryptographic programs that protect these assets. These include elliptical curve encryption, public-private key pairs, and hashing functions. Blockchain technology is key to Bitcoin and other cryptocurrencies’ attractiveness and functionality. As the name implies, a blockchain is essentially a collection of linked blocks of information on an online ledger. Each block comprises a series of transactions that have been independently verified by each validator on the network. Every new block generated must be validated before confirmation, making it nearly hard to falsify transaction histories. The content of the online ledger must be agreed upon. The contents of the online ledger must be agreed upon by a network of individual nodes, or computers that manage the ledger. According to experts, blockchain technology can benefit a wide range of sectors, supply lines, and processes, including online voting and crowdfunding. Financial organizations, such as JPMorgan Chase & Co. (JPM), Tesla (TSLA), and PayPal are leveraging blockchain technology to reduce transaction costs by simplifying payment processing.
Forex Trading is the process of buying one currency and selling another with the goal of making a profit from the trade. This image shows the Forex Trading market and is related to an article on FX by Finbok.com
The cryptocurrency trading market is a gateway to huge potential profits but also substantial risks.

Cryptocurrency trading – Types of Cryptocurrencies

Many cryptocurrencies were established to make it easier to work on the blockchain that underpins them. Ethereum’s Ether (ETH) token was initially intended to be used as a form of payment for validating transactions and opening blocks. When the blockchain switched to “proof-of-stake” in 2022, ETH took on the role as a crypto-staking mechanism. Ripple’s XRP is intended to be used by banks to facilitate cross-border transactions. Because there are so many cryptocurrencies on the market, it’s crucial to grasp the different varieties.

Cryptocurrency trading – Types of Tokens

Knowing if the coin you’re considering has a purpose can help you decide whether it’s worth investing in—a cryptocurrency with a purpose is likely to be less hazardous than one without one. Typically, when you hear about cryptocurrency varieties, you hear the coin’s name. However, coin names are distinct from coin types. Here are some of the types you’ll encounter, along with some of the token names in that category: XRP and ETH are two utility tokens. They perform specialized functions on their respective blockchains. Transactional tokens are supposed to be used as a payment method. Bitcoin is the best-known of these. Governance tokens, like Uniswap, reflect voting or other rights on a blockchain. Platform tokens support blockchain-based applications like Solana. Security Tokens: Tokens signify ownership of an asset, such as a tokenized stock (value transferred to the blockchain). MS Token is one example of a securitized token.

Cryptocurrency trading – Top 10 cryptocurrencies

The top 10 most popular cryptocurrencies: As of March 2024
  1. Bitcoin (BTC)
  2. Ethereum (ETH)
  3. Binance Coin (BNB)
  4. Tether (USDT)
  5. Solana (SOL)
  6. Cardano (ADA)
  7. XRP (XRP)
  8. Polkadot (DOT)
  9. USD Coin (USDC)
  10. Dogecoin (DOGE)

Cryptocurrency trading – How Does Blockchain Work?

You might be familiar with spreadsheets and databases. A blockchain is similar to a database in that it allows information to be input and saved. However, the primary distinction between a regular database or spreadsheet and a blockchain is how the data is organized and accessed. A blockchain is made up of programs known as scripts that perform the same functions as a database: entering and accessing information, as well as saving and storing it. A blockchain is distributed, which means that numerous versions are saved on various machines and must all be identical for it to be genuine. The blockchain collects transaction information and stores it in blocks, similar to how cells in a spreadsheet store information. Once full, the data is encrypted using a technique that generates a hexadecimal number known as the hash. The hash is then placed into the block header and encrypted alongside the other data in the block. This generates a series of blocks that are linked together.

Cryptocurrency trading – Transaction Process

Transactions follow a specific method, depending on the blockchain on which they take place. For example, on Bitcoin’s blockchain, initiating a transaction through your cryptocurrency wallet—the application that serves as the blockchain’s interface—starts a series of events. In Bitcoin, your transaction is sent to a ledger, where it is queued until a miner/validator selects it. Once it has been inserted into a block and filled with transactions, the block is closed and encrypted using an encryption method. Then the mining begins.

Cryptocurrency trading – Blockchain security

The entire network works concurrently, attempting to “solve” the hash. Except for the “nonce,” which stands for a number used only once, each one generates a random hash. Every miner starts with a nonce of zero, which is added to their randomly generated hash. If that number is not equal to or less than the target hash, the nonce is incremented by one and a new block hash is generated. This process continues until a miner produces a proper hash, winning the race and getting the reward. When a block is closed, the transaction is completed. However, the block is not considered confirmed until five other blocks are checked. Confirmation takes the network around an hour to complete because each block averages just under ten minutes. Not all blockchains follow this procedure. For example, the Ethereum network selects one validator at random from among all users who have staked ether to validate blocks, which are then validated by the network. This is far faster and less energy-intensive than Bitcoin’s approach.

Cryptocurrency trading – Are Cryptocurrencies legal?

Governments or monetary authorities issue fiat currencies. For example, the United States government backs each $1 bill. However, cryptocurrencies are not backed by any public or private entities. As a result, it has been challenging to argue for their legal standing in various financial jurisdictions around the world. It doesn’t help that cryptocurrencies have largely operated outside of the established financial systems. In 2023, the USDT token was launched which is tethered to the US Dollar which has been a milestone for the crypto market. In the United States, courts determined in July 2023 that cryptocurrencies purchased by institutional buyers are deemed securities, but not by ordinary investors who buy on exchanges. Enthusiasts hailed it as a crypto victory; nonetheless, crypto exchanges, coin launches, and sales to institutional investors are all subject to SEC regulations. So, crypto is legal in the United States, but regulatory bodies are gradually gaining traction in the business.

Cryptocurrency trading – Is it regulated in South Africa?

The FSCA established in October 2022 that cryptocurrency trading assets — referred to as “a digital representation of value” — are financial products subject to FSCA regulations under section 1(h) of the Financial Advisory and Intermediary Services Act. Every Bitcoin service provider must be authorized by the FAIS to conduct business in the sector and apply for a license. Existing suppliers needed to apply by the start or end of 2024.

Cryptocurrency trading – Are Cryptocurrencies a Safe Investment?

Cryptocurrencies have earned a reputation as risky investments because of large investor losses from scams, hacks, flaws, and volatility. Although the underlying cryptography and blockchain are largely secure, the technical intricacy of utilizing and keeping cryptocurrency assets can pose a substantial risk to new users.

Cryptocurrency trading – Risks

In addition to the market risks associated with speculative assets, cryptocurrency investors must be aware of the following dangers: User risk: Unlike traditional finance, bitcoin transactions cannot be reversed or canceled after they have been received. According to some estimates, approximately one-fifth of all bitcoins are currently inaccessible owing to forgotten passwords or erroneous transmission addresses. Regulatory risks: The regulatory status of several cryptocurrencies remains unclear, with many governments attempting to classify them as securities, currencies, or both. An unexpected governmental crackdown might make it difficult to sell cryptocurrency or result in a market-wide price decrease. Counterparty risks: Many investors and merchants rely on exchanges or other custodians to keep their cryptocurrency. A theft or loss by one of these third parties may result in the loss of one’s entire investment. Management risks: Due to a lack of consistent standards, there are limited safeguards against fraudulent or unethical management practices. Many investors have lost a lot of money because management teams failed to produce a product. Programming risks: Many investment and lending platforms employ automated smart contracts to manage user money. An investor who uses one of these platforms accepts the risk that a defect or vulnerability in the programs will lead them to lose their investment. Market Manipulation: Market manipulation remains a major issue in Bitcoin, with important individuals, companies, and exchanges behaving unethically. Despite these hazards, cryptocurrencies have experienced a considerable price increase, with the overall market capitalization reaching approximately $1.2 trillion. Despite the asset’s speculative nature, some people have made large fortunes by assuming the risk of investing in early-stage cryptocurrencies.

Cryptocurrency trading – Pros and Cons of Cryptocurrency

Cryptocurrencies were developed to revolutionize financial infrastructure. However, like with any revolution, there are trade-offs. At the current stage of cryptocurrency development, there are numerous discrepancies between the theoretical ideal of a decentralized system based on cryptocurrencies and its practical execution. Advantages:
  • Eliminates single points of failure.
  • It is easier to transfer payments between parties.
  • Removes third parties.
  • Can generate returns.
  • Remittances are simplified.
Disadvantages
  • Transactions are pseudonymous.
  • Pseudonymity enables illicit purposes.
  • Have become quite centralized.
  • It is expensive to participate in a network and earn.
  • Off-chain security concerns
  • Prices are highly variable.
Cryptocurrencies are digital assets protected by cryptography. As a relatively new technology, they are very speculative, so it is critical to understand the dangers before investing.