Before modern-day currencies, people traded wealth by bartering goods. Several valuable, once rare substances then began to stand in for coins and bills, such as salt, black pepper, and cowry shells. Civilisations then graduated to using precious metals such as silver, copper, bronze, and finally gold to symbolically stand in for value.
Next came the physical coins, and eventually notes we now associate with the word “money”. From there we evolved into using checking accounts, checkbooks, and credit cards.
And now, we’re turning another page in the history of money with virtual currencies. These virtual monies exist only in the digital sphere, lacking a physical form. Virtual currencies are stored in digital wallets, which don’t actually hold the currency itself, but rather the owners’ private keys. Each account on which digital wallets are stored has a private key known only to the owner and a public key shown on transaction records.
As of late, the most newsworthy type of virtual currency is cryptocurrency, a class of virtual currencies that implements cryptography for security. Cryptography — the art and study of code — makes these coins nearly impossible to counterfeit. That means that when someone owns crypto, what they really own is an immutable sequence of digital entries in a database. Cryptocurrencies are valuable because they provide a secure, decentralized currency repository with a transparent set of rules, presenting an alternative to fiat money in central banks.
Of course, digital money can be a bit tough to conceptualize. The site Bit Bonkers gives a visual representation of Bitcoin transactions as they occur, so you can actually see how it works for yourself.
Because all of this money is digital, making a transaction requires more technological sophistication than merely handing a dollar over to a merchant. It’s a rather complicated process, but we break it down for you in the following paragraphs:
Underlying all cryptocurrencies is groundbreaking blockchain technology. Each time a cryptocurrency is bought or sold, a transaction record is created and stored into a block. All transaction records include digital information about the amount sent/received, a timestamp, and the participants’ public keys. The most recent transactions make up the newest block, which references the previous block. In order for a block to be completed and for the system to move on to a new block, a difficult mathematical puzzle needs to be solved. The process in which users compete to solve this puzzle and create a new block is called mining, and the new block contains the solution to the mathematical puzzle, AKA the cryptographic hash. This links the blocks together, forming a chain (hence, the name “blockchain”).
Since every new block references the previous one, each new block confirms a transaction again. The more blocks confirming a transaction, the more secure and irreversible it becomes.
A single block can contain information about thousands of transactions, and a chain can contain an infinite amount. The entire blockchain is stored on a distributed, decentralized network of servers, also known as a public ledger. The multiplicity of the records of each transaction on the public ledger makes them very difficult to manipulate, and therefore quite secure. These transaction records are completely out in the open — anyone can look at them and the owners’ public keys associated with each transaction, providing a greater deal of transparency.
Crypto exchanges are virtual spaces where people can buy, sell, and trade cryptocurrencies.
Simple buying and selling can be done by using other crypto coins or even fiat. One common function of crypto is to trade currencies against each other or against fiat currencies. In order to trade, you need to start out with some base currency (with the exception of CFD trading).
Trading is done with pairs of coins, and in each transaction a crypto trader is buying a coin while selling another coin. Similar to the forex market, the order of the coins within pairs is generally fixed so you will always see ETHBTC and never BTCETH, same as you will always see EURUSD and never USDEUR.
As an example, in the transaction BUY 10 ETHBTC a trader is buying 10 ETH and paying their value in BTC, essentially selling a part of their BTC to buy the 10 ETH coins. The price for the 10 ETH coins is determined by the exchange, which is determined by the market. The reverse transaction SELL 10 ETHBTC will sell 10 ETH coins and BUY BTC for the worth of those coins as determined by the exchange rate.
Some popular exchanges include Binance, BitMEX, HitBTC, and Bittrex. Each exchange has its advantages – Binance is the largest by volume, Bittrex allows users to exchange over 190 currencies and buy them in USD rather than Bitcoin, HitBTC offers high liquidity, and BitMEX allows trading of special contracts, such as the perpetual contract.
The rates for each currency are set by exchanges. Of course, these rates aren’t determined arbitrarily — they’re dependent on market supply and demand.
Crypto trading tools
While the Internet is filled with information and tips on trading crypto, that data can be hard to parse. Luckily, there are a number of helpful tools out there that you can use.
One such tool is TradingView, which provides charts, summaries, expert analysis, and new trading ideas that can help guide beginners through the sometimes intimidating crypto trading environment. Plus, charts include easy-to-understand graphs and charts on crypto pairs across exchanges, so users have a visual overview of all aspects of the crypto market.
In the volatile world of crypto, it can be especially hard to stay on track. Fear, uncertainty, and doubt (known as FUD on online crypto forums) often bungle a sound trading strategy. Fortunately, there are ways to mitigate the impact of our human emotions, one of which is the use of automated trading software such as Capitalise.
The Capitalise platform gives crypto traders control over their trades and time. By automating trades, you’ll never find yourself torn over a last-minute emotional decision. Your hard-won strategies are always working, because Capitalise carries out trades 24/7 — so you can sleep soundly while the platform makes trades on your behalf. Capitalise connects to all exchanges, allowing you to see all your assets in one place. And while exchanges are often complex, Capitalise keeps it simple. Check it out at https://capitalise.ai