Cryptocurrency guide for beginners

Cryptocurrency is a form of digital or virtual currency that uses cryptography for security. Unlike traditional currencies issued by governments (fiat currencies), cryptocurrencies operate on decentralized networks based on blockchain technology. Cryptocurrencies are decentralized digital or virtual currencies that leverage cryptographic techniques to secure transactions, control the creation of new units, and verify the transfer of assets.

Bitcoin, created by Satoshi Nakamoto in 2009, was the first cryptocurrency and remains the most well-known. Since then, thousands of alternative cryptocurrencies (commonly referred to as altcoins) have been created, each with its own features, use cases, and underlying technology.

Cryptocurrencies are used for various purposes, including as a medium of exchange, store of value, investment assets, and for facilitating decentralized applications (dApps) and smart contracts on blockchain platforms like Ethereum. As the cryptocurrency market continues to evolve, regulatory frameworks, technological advancements, and market adoption play significant roles in shaping its future trajectory.

How Does Cryptocurrency Work?

●Blockchain Technology
In cryptocurrency transactions, a network of computers running blockchain software verifies and executes payments between parties. The blockchain serves as a transparent ledger, recording all transactions for network transparency. Miners or validators verify transactions and are rewarded with compensation, such as newly minted cryptocurrency or transaction fees, for adding validated transactions to the blockchain log. Recipients access funds using their private keys, ensuring secure ownership and transaction authentication within the decentralized network. This process fosters trust, security, and efficiency in peer-to-peer digital transactions without the need for intermediaries.

●Decentralized Networks
Cryptocurrencies function on decentralized networks of computers known as nodes, which employ consensus mechanisms like Proof of Work (PoW) or Proof of Stake (PoS) to validate and authenticate transactions. These consensus mechanisms ensure the integrity and security of transactions without relying on a central authority such as a bank or government. In PoW, miners compete to solve complex mathematical puzzles to add transactions to the blockchain, while in PoS, validators are chosen to validate transactions based on the amount of cryptocurrency they hold. This decentralized approach enhances transparency, resilience, and trust in cryptocurrency networks globally.

●Cryptocurrency Wallets
Cryptocurrencies are digital assets that are transferred over the Internet. A digital or cryptocurrency wallet is a storage facility for your crypto holdings. Cryptocurrency wallets technically store private keys, not the actual crypto funds themselves. A private key functions as a password that verifies ownership of crypto holdings and is essential for initiating transactions. Because cryptocurrencies exist on the blockchain, access to digital assets is facilitated through private keys, which securely manage and authorize transactions. Wallets serve as interfaces to interact with blockchain networks, allowing users to view balances, send, and receive cryptocurrencies, while ensuring the security and confidentiality of their private keys is paramount.

●Cryptocurrency Mining
Bitcoin mining involves the process of validating and adding new transactions to the Bitcoin blockchain by solving complex mathematical puzzles. Miners compete to solve these puzzles using computational power, aiming to be the first to find a valid solution. Once a solution is found and verified by the network, the miner responsible for solving the puzzle is rewarded with a predetermined amount of newly minted bitcoins. This process not only secures the network by verifying transactions but also introduces new bitcoins into circulation at a controlled rate, ensuring the integrity and decentralization of the Bitcoin network.

Factors contribute to cryptocurrency values

●Supply and demand
Limited or controlled supplies, as seen in Bitcoin's capped issuance, can elevate perceived value akin to commodities like gold. Cryptocurrency value follows the basic economic principle of supply and demand. When demand outstrips supply, prices rise. This principle is analogous to other goods; for instance, during a drought, grain prices rise due to reduced supply. Similarly, when demand for cryptocurrencies exceeds available supply, their value appreciates.

●Cost of production
New cryptocurrency tokens are produced through a process called mining. Mining for cryptocurrency involves using a computer to verify the next block on the blockchain. The decentralized network of miners is what allows cryptocurrency to work as it does. In exchange, the protocol produces a reward in the form of cryptocurrency tokens, in addition to any fees paid by the exchanging parties to the miners. As mining costs increase, it necessitates an increased value of the cryptocurrency.

●Investor sentiment
Speculation and market sentiment significantly influence pricing, attracting investors and fostering price appreciation. Increased user participation and network growth foster ecosystems, increasing transaction volume and reinforcing value perceptions.

●Competition
With thousands of cryptocurrencies and new tokens launching daily, the market is accessible to new entrants. However, establishing a viable cryptocurrency hinge on cultivating a dedicated user base. Success requires offering utility, addressing market needs, and fostering community trust. Differentiation through unique features and effective marketing strategies also plays a critical role in gaining user adoption amidst fierce competition.

●Governance and regulations
Cryptocurrency governance and regulations significantly impact its value by fostering market confidence and reducing uncertainty. Clear regulations can enhance investor trust, leading to increased adoption and liquidity. Effective governance frameworks within blockchain projects ensure transparency and stability, influencing long-term sustainability and valuation. Conversely, regulatory ambiguity or stringent measures can create volatility and hinder growth. As regulatory landscapes evolve, their impact on cryptocurrency value remains a critical consideration for investors and stakeholders.

How to invest in cryptocurrency?

1. Choose a platform
You can choose a CFD broker, like Markets.com, which will offer cryptocurrencies allow traders to speculate on the price movements of cryptocurrencies without owning the underlying assets.
Or, you can choose a traditional cryptocurrency exchange, where you can buy, sell, and trade cryptocurrencies

2. Depositing funds
If you are with a CFD broker, once your account is verified and approved, you can deposit funds into your trading account. CFD brokers usually offer various deposit methods, such as bank transfers, credit/debit cards, electronic wallets (e.g., PayPal, Skrill), and sometimes cryptocurrencies themselves.
If you choose a traditional cryptocurrency exchange, deposit fiat currency (such as USD, EUR) into your account to purchase cryptocurrencies. Some exchanges also allow direct deposits of cryptocurrencies.

3. Place trades
With funds in your account, you can now enter into CFD contracts for cryptocurrencies. You can speculate on the price movements of cryptocurrencies without owning the underlying assets.
Place buy orders for the cryptocurrencies you wish to purchase, specifying the amount and price. Consider using limit orders to control the price at which your order executes.

4. Stay informed
Stay informed about the latest developments in the cryptocurrency space, including technological advancements, regulatory updates, and market trends.

When considering shares, indices, forex (foreign exchange) and commodities for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss.

Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice. Trading cryptocurrency CFDs and spread bets is restricted for all UK retail clients.