What is Cryptocurrency? How does it Work and Why Is it Volatile?
Everything Guide to Investing in Cryptocurrency by Lead To Trade
What is Cryptocurrency?
Cryptocurrency trading is a very exciting prospect. With very little investment and effort on your part, you could theoretically come into a small fortune. Unfortunately, the flipside of that is that you can lose everything just as quickly.
This is why it’s important to stay informed and educated. We want you to be successful, so we’re here to help you navigate the world of cryptocurrency. Luckily, cryptocurrency only seems complicated. When you break it all down, the basics of crypto trading are just that: basic. There is complex stuff involved, but that’s all behind-the-scenes stuff that traders don’t need to understand.
How Does Cryptocurrency Work?
All cryptocurrencies — Bitcoin, Dogecoin, Litecoin, Ethereum, you name it — are digital currencies. There is no physical counterpart. When you trade crypto, nothing actually changes hands in the literal sense. What does happen, however, is that the transaction is recorded in an online ledger called a blockchain. This technology is at the centre of all cryptocurrencies.
You don’t need to understand how blockchain works. You’re welcome to learn, of course, but you don’t need to know the intricacies of the technology to trade crypto.
All you need to know is that it’s completely safe. In many ways, it’s safer than traditional currency. The transactions sit safely behind a system of verification and encryption. What’s more, it’s all recorded digitally, so nobody can defraud you and say that a transaction never took place.
Plus, nobody can steal your cryptocurrency without having a considerable amount of your information, so theft isn’t a worry, especially not in the traditional sense.
In essence, if you buy $50 of Bitcoin, you don’t have anything physical to show for it. What you do have is an online record showing that you bought it. Whatever app you use to buy the currency will reflect your current balance in your digital wallet.
Once you trade it off, there will be a record of that, too, which means that you won’t have that Bitcoin anymore. The blockchain will show that you traded it away. Of course, your digital wallet will contain whatever currency you traded it for, and if you have a balance of USD (or CAD, GBP, etc), you can transfer that into your bank account.
Is Cryptocurrency Trading Risky?
In short: absolutely.
Cryptocurrency is extremely volatile, which makes trading it a much bigger risk than trading traditional stocks. However, with that volatility comes the potential for massive profits in a much shorter time than if you were to trade stocks. It’s a typical risk-reward situation. The bigger the risk, the bigger the possible reward.
This goes back to the importance of being well informed regarding cryptocurrency. It’s not difficult to download a trading app and start dabbling in cryptocurrency. If you don’t know what you’re doing, however, you stand the chance of buying into crypto that’s not going anywhere or even in the middle of a freefall.
When investing and trading, there is no “correct” decision on where to put your money, but there are certainly good decisions and bad decisions. Doing your research is the key to making good decisions.
