Understanding Cryptocurrency

Understanding Cryptocurrency

Cryptocurrencies are on a rise in the market and major cryptocurrencies like Bitcoin and Ethereum are gaining immense popularity.

Mostly cryptocurrencies are also known as ‘cryptos,’ and are driven by Blockchain technology. They vary from established fiat currencies in the sense they are decentralised assets presently unregulated or controlled by any one country, central bank or regulatory authority.

While cryptocurrencies are not accepted as legal tender in the majority of countries around the world, their ability to change the broader financial landscape has made them impossible to ignore and has paved way for many lucrative investment and trading opportunities.

The Blockchain technology that drives most cryptocurrencies also has wider implications for everything from client-server models to food supply chains and enhanced cyber security protocols.

Trading cryptocurrencies is quite different from more traditional markets like Forex or Indices as they are relatively new assets, they are not influenced by many of the same forces as other more established markets.

What Drives Cryptocurrency Markets?

Cryptocurrency markets works in accordance with supply and demand. Although, as they are decentralised, they tend to remain free from many of the economic and political issues which effect traditional currencies. While there is still a lot of uncertainty surrounding cryptocurrencies, the below-mentioned factors can have an important effect on their prices :-

  • Supply: the total number of coins and the rate at which they are released, destroyed or lost
  • Market capitalisation: the value of all the coins in existence and how users perceive this to be developing
  • Press: the way the cryptocurrency is portrayed in the media and how much coverage it is getting
  • Integration: the extent to which the cryptocurrency easily integrates into existing infrastructure such as e-commerce payment systems
  • Key events: major events such as regulatory updates, security breaches and economic setbacks

Functioning of Cryptocurrency Markets

Cryptocurrency markets are decentralised, which means they are not issued or backed by a central authority such as a government. Rather, they run across a network of computers. However, cryptocurrencies can be bought and sold via exchanges and stored in ‘wallets’.

Dissimilar to traditional currencies, cryptocurrencies exist only as a shared digital record of ownership, stored on a blockchain. When a user wants to send cryptocurrency units to another user, they send it to that user’s digital wallet. The transaction isn’t taken into account as final until it has been verified and added to the blockchain through a process known as mining. This is also how new Cryptocurrency Tokens are generally created.

What is Blockchain?

A blockchain is a shared digital register of recorded data. For cryptocurrencies, this is the transaction history for every unit of the cryptocurrency, which exhibits how ownership has changed over time. Blockchain works by recording transactions in ‘blocks’, with new blocks added at the front of the chain. Blockchain technology has distinctive security features which normal computer files do not have.

Network Consensus

A blockchain file is always stored on multiple computers across a network, instead of in a single location. It is generally readable by everyone within the network. This makes it both transparent and very difficult to change, with no one weak point prone to hacks, or human or software error.

Cryptography

Blocks are linked together by cryptography – complex mathematics and computer science. Any attempt to change data interferes with the cryptographic links between blocks, and can instantly be determined as fraudulent by computers in the network.

Important Factors to Consider Before Investing in Cryptocurrency

  1. Cryptocurrencies are varying in nature

The worth of cryptocurrencies goes through extreme ups and downs. In 2017, the worth of Bitcoin swung between USD900 and USD20,000! It’s almost like someone sneezes and the price drops! Investing in cryptocurrency is risky, to say the least. Certainly, all investing has a level of risk. However, you must always avoid unnecessary risks, particularly when it comes to your hard-earned money.

  1. There are lots of anonymities

There is still a lot that needs to be ironed out with how Cryptocurrencies Work. Comparatively speaking, only a small percentage of people in the world understand the system and know how to function it. Ignorance can you susceptible. It is always advisable that if you cannot explain your investments to a 10-year-old, you have no business investing in them to start with. You are setting yourself up for something risky.

  1. Cryptocurrencies can be employed in fraudulent activities

People who want to remain anonymous and refrain from regulation with banks or the government will use cryptocurrencies to make shady deals in the black market. Money laundering is also a concern in the crypto world. Having said that, not everyone who uses cryptocurrency indulges in fraudulence. Although if someone wants to commit criminal activity and avoid being tracked, the crypto world is an ideal place for them.

  1. Cryptocurrencies have a conjectural rate of return

Trading in cryptocurrency is somewhat similar to gambling. As it is exchanged from peer to peer without any tie to regulatory standards, there is no pattern to the rise and fall of its worth. You cannot forecast changes in advance or calculate returns like you can with growth stock mutual funds. There just isn’t enough data, or enough credibility, to create a long-term Investing Plan Based On Cryptocurrency.

 

Should you have an existing business or planning to setup a business related to cryptocurrency, and wonder if a financial business license is required to operate such a business, feel free to connect with our QX Trust team at +60 3 9212 6940 or consultant@qx-trust.com for a free consultation. Our experienced and friendly consultants shall be more than happy to enlighten you on the necessary requirements.