Cryptocurrencies are decentralized virtual currencies, meaning they do not fall under the control of financial institutions or governments. You can invest in or trade cryptocurrencies just as you would any other currency. There are different cryptocurrencies and each has its own characteristics. Those with significant market capitalization are: bitcoin, bitcoin cash, ether, litecoin, and stellar.
Cryptocurrencies are known to be an alternative to traditional currencies, although they were actually created with the intention of functioning as a payment method. In fact, they are accepted by several stores.
Cryptocurrencies have many more similarities to commodities, such as gold, than to forex. Indeed:
The performance of cryptocurrencies is not tied to the performance of a particular country's economy.
Interest rates and monetary policies do not impact the value of cryptocurrencies.
Investors prefer to own cryptocurrencies while waiting for them to increase in value, and then convert them into traditional currencies.
Cryptocurrency markets are decentralized, meaning that the currencies are not issued and are not protected by a central entity such as a government or central bank. Instead, cryptocurrencies are managed by a network of private computers and servers. However, cryptocurrencies can be bought or sold in an exchange account and held in ‘wallets,’ or cryptocurrency wallets.
Compared to traditional currencies, cryptocurrencies have a virtual value to those who hold them and are recorded on the blockchain, the technology that supports cryptocurrencies. If a user wants to transfer cryptocurrencies to another user, they can make a transaction at the recipient user’s wallet. The transaction ends after verification and registration in the blockchain, through a process known as ‘mining.’ Cryptocurrency tokens are also created in this way.
The blockchain is a shared digital ledger of data. For cryptocurrencies, the blockchain records each unit of cryptocurrency chronologically, which tracks the various transfers from one user to another. The blockchain records transactions within ‘blocks’ of data, and each new block recorded is entered at the beginning of the data chain.
Blockchain technology has data protection systems that traditional computer files do not.
A blockchain file is recorded on several computers across a network (with respect to a unique location), and is readable by those in the network. This feature makes the collected data transparent and very difficult to alter, free of weaknesses and therefore protected from hacker attacks, or human and software error.
The blocks are linked together by an encrypted system, the result of complex mathematical calculations and advanced computing. Any attempt to alter the data blocks the encrypted links between blocks and can be easily identified as fraudulent by network servers.
The process of ‘mining’ cryptocurrencies involves checking the most recent transactions and then adding new blocks to the blockchain.
The 'mining' computers select a set of transactions awaiting review, to verify the actual availability of funds to complete a transaction. This process involves checking the transaction data and comparing it with the data in the previous transaction history saved in the blockchain. A second verification is used to confirm that the sender of the transaction has transferred funds using a private key.
Miner computers record validated transactions within a new data block and generate the cryptographic link to the previous block by solving a complex algorithm. When the computer succeeds in generating the link, it saves the block from scratch in the most up-to-date version of the blockchain file and shares it within the network to perform the update.
Cryptocurrency markets move, as with other financial markets, based on supply and demand. However, because they are decentralized, they tend to be free of many of the factors that normally influence the bullish and bearish trends of traditional currencies. Despite the general skepticism surrounding cryptocurrencies, the following factors have the greatest impact on their prices:
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