Cryptocurrency: Let’s understand it together!
If you are one of the early investors in Bitcoin then congrats! You would be now reaping financial benefits and probably not reading this article. If you spent your money purchasing some liabilities and never thought about investing in the world of cryptocurrency then it is never too late to start now.
I could imagine that you are either an employer with a moderate income who is willing to make profits rapidly or a college student hoping to pay back his student loan and enjoy his adulthood. So to clear everything out, this article won’t make you a multi-millionaire and won’t minimize your trading risks but rather would give you a fair introduction and sufficient knowledge about the cryptocurrency market and its terminology so that you can begin your journey straight away!
Table of Content
1.Centralization vs Decentralization
2. Crypto Terminology
3. Simple Analysis
4. Your Very First Trade
5. Conclusion
1-Centralization vs Decentralization
If you have watched the social dilemma movie, you would probably have an idea about how big companies gather millions of data everyday and sell them around making huge profits. Either it is Facebook, Snapchat or even your bank account, you are always trusting a third party to store your information on their centralized servers. Each time you create a new account on one of those platforms, you agree to their Privacy Policy and allow them to use, disclose and collect information about you. The whole idea about centralization refers mainly to the use of a middle man to help establish transactions. In our case, we would be taking the bank setup where you trust them with your money in exchange for security and monitoring. Thus, in a central exchange there is always a central authority that governs and handles the network.
On the other side of the spectrum, decentralization simply refers to omitting the third party from taking control over the network. With the introduction of blockchain technology, the idea behind it was to make transactions verified by users themselves without going through a centralized authority. With such an approach, we avoid data censorship and give the community the full power and the full control over the network. Information can not be altered or deleted and the environment itself is open for development and less prone to hacking in contrast to what happened to Twitter in 2005.
What does this have to do with cryptocurrency?
To simplify things, let’s look at an example. Imagine three friends Jack, Ted and Sam meet up for dinner. After they are done, Jack pays the bill and all of them decide to split the expenses amongst each other. Now on the next day, when Ted sends his share to Jack, the transaction goes through without a hitch and Jack receives his money. As for Sam, he was unable to complete the process since his bank account shows some issues at the moment. He does not know whether this is related to the banking servers being down, the high fees or maybe his account was blocked suddenly. To solve these problems, the concept of cryptocurrencies came into existence!
Cryptocurrencies are almost like any other currencies except that they are completely digital. They run on a technology called blockchain and you can use them to shop online, buy food or clothes and even trade them. You can not hold them as they flow over a decentralized network. This means that no single group is allowed to duplicate or control their supply. If you own one bitcoin for example, you have either mined it yourself or got it from someone who at some point mined it. Mining is the process of verifying payments and keeping the system secure. Every time a transaction is confirmed, the fees allocated for it would go to the miners as a reward for doing the work of calculating the cryptographic signature.
What is blockchain and how does it work?
You can think of blockchain technology, in an old fashion way, as a transaction database system that stores a ledger of transactions and keeps record of it. Ledger in simpler terms is similar to a spreadsheet shared amongst all network devices which is updated every time a new transaction occurs.
As the name suggests, blockchain is a sequence of blocks where each block holds information that is immutable. Whenever a transaction is initiated, a block is created and verified by a huge number of computers. Once completed, the block is added to the sequence. Each block is related to the previous one, it contains answers to a difficult mathematical problem that verifies the sequence. Hence, each transaction occurs in a peer to peer system and not by a central authority. Those complex mathematical puzzles are nothing more than computing hashes as quickly as possible. A hash will randomize any input of any length by generating a specific output. A small change in the input results directly in a new output. Thus, finding a single hash requires some sort of ‘blind guessing’ which takes millions of attempts or more precisely all the network to be involved in this process. For more advanced details, you can read this awesome guide.
2- Crypto Terminology
Whenever people talk about cryptocurrencies, they tend to use words like bull market, sell order and many other technical terms that might seem difficult at first. Hence, in order to successfully complete your first trade, you need to have a basic understanding of those key words. In this section, we will try to explore them together. Let’s get started!
Fiat currencies: Currencies issued by banks or governments such as dollars, euros and the japanese yen.
Stablecoins: Their value depend on either one of the fiat currencies such as the U.S dollar(USD) or commodities such as precious metals. They are less volatile and often used in exchange platforms. ex: USDT.
Currency Pair: EUR/USD is an example of a currency pair, it states how many U.S dollars we need to buy one euro. Euro is the base currency. A base currency has always a value equal to 1 whereas USD is the quote currency.
Altcoins: Any cryptocurrency different than bitcoin is called altcoin.
Shitcoins: Coins with no future project, they do not have any added value and they are much more of a hype. They are most susceptible to generate huge profits within a short period.
Exchange Platforms: They are online platforms where you can purchase cryptocurrencies using fiat money and trade or hold them. Binance and Coinbase are among the most known exchange platforms.
Whales: People who perform trades using big amount of money and therefore result in market manipulation. Whenever a whale sells his holdings, the market will experience a sharp decrease and vice versa.
Paper/Diamond hands: Paper hands are folks who sell very fast and rely heavily on their emotions whenever entering a trade. Diamond hands are holders, they stay optimistic despite the market fluctuations.
Bull/Bullish: A bull run is when people are on long positions. The coin chart will have green candles. This means that buyers outnumber the sellers
Bear/Bearish: Contrary to the bull market, a bearish market is when the price is experiencing a downtrend, illustrated by red candlesticks.
Demand and Supply:
Imagine you are living in a small village where there is a scarcity in apples. In other words, there is no enough supply to satisfy the villagers cravings for apples. Clearly, the number of buyers outnumbers the number of sellers which is also equivalent to demand being over the supply. Now, you came up with a smart idea and started importing apples from other cities and selling them at a higher price while making huge profits. Unfortunately, your neighbor Sarah got jealous and decided to compete with you in the apple's business. This competition increased the supply and as the cravings gradually vanished, the market now runs on a very low value. This is exactly similar to the cryptocurrency market. There will be always a demand run followed by supply run. It is the strength of each side that indicates the price movement. Identifying demand and supply zones on a chart will help you decide when to open or close a position.
Market Cap and Liquidity
The market capitalization is one of the metrics used to evaluate a coin’s worth. We find it often on exchange platforms or price tracking websites for cryptoassests. It refers to the actual value of all the circulating supply for a given coin.
Market cap = Total Circulating Supply * Price of each coin.
In the picture below, we can see that the Polkadot individual price is almost 24 times XRP’s price. However, the overall value of XRP is still much higher than Polkadot and that’s because of its total circulating supply. Therefore, the market cap gives us a better overview of the coin’s worth.
Large-Cap: Any cryptocurrencies that have a market cap higher than 10 billion dollars are considered large cap coins. They are less volatile and have a long term project. Investing in them is often considered ‘safe’.
Mid-Cap: Their market cap range is between 1 and 10 billion dollars. They are often expected to experience a rapid growth. They carry more investment risks.
Small-Cap: They fall under the third category, market cap below 1 billion dollars and they are the most volatile. They may explode in value and generate huge profits but they may also fall within a very short term and cause big losses. Before investing in them, you have to thoroughly do your own research.
Liquidity, on the other hand, refers to the ease at which an asset could be converted into cash. This sounds difficult to understand, right?
So an asset is basically anything that you own and that has a specific value, examples include equipments, cash, bank balance… Cash itself is the most liquid asset. If you are planning on selling your house, you certainly won’t do it instantly since there is not always a wide range of buyers. Hence, houses or real estate in general are considered low liquid assets.
In simpler terms, liquidity is how easily it is for a coin to be converted into another one. A highly liquid cryptocurrency is easier to buy or sell due to the wide range of offers and bids. Since sell and buy orders could be filled rapidly, the market would be considered less volatile as it is not prone to large trades resulting in a sharp decrease or increase. A coin’s liquidity is determined by the trading volume and its usability.
Order types:
Market Orders: Whenever making a trade order, you are either buying or selling. A market order will happen instantly, the trader specifies the amount he is trading and the process will happen at the market’s current best price. Once completed, the trade is then considered ‘filled’
Limit Orders: In contrast to the market order, trader will specify the price he is willing to sell/buy at. Hence, once the market reaches that price, the trade will be triggered. If the specified price is too high or too low and not reachable within a certain period, the order will not be executed. Trades who were placed first will be treated first even though they both have the same limit price. Therefore, if the market is highly volatile you may risk not completing your trade at that exact price.
Stop Limit Orders: The order is triggered once the stop price is reached. In case of buying, imagine you are waiting for a confirmation about market’s movement direction. If you set your stop price at, for example 45$, then once it is reached you are pretty sure the market is bullish but you still don’t want to buy at this price so you set a limit price at 43$. In case of selling, according to your analysis, you find out that if the price goes above 50$ then it might probably reach 58$ or 60$ after a certain time, so you set a threshold for the order limit to be triggered.
Wallets and Keys:
In a centralized system, as we saw above, the bank will go through the hussle of storing and monitoring your money. However, in a decentralized system, with no such thing as a bank, who will be doing this for you?
Wallets, in fact, are nothing more than a tracking software that allows you to receive, send and follow the price fluctuations of your current balance. This is done using a public and a private key. We will skip this for now and we will ty first to answer this question: Why don’t we just keep our money on binance?
If you do not have the keys, you do not own the coins.
When you keep your money on one of the exchanges, you fully trust them to securely keep your funds but you don’t actually own the coins. The only possible thing you can do is simply log in and out of your account and perform trades without having keys to the related wallet. This account could be deleted at any moment or worse, it could be hacked and your money would be gone forever. You can look at the Mt. Gox’s hacking event to know more about this. Now, we come back to the key types and their work mechanism. Basically, there are two types of keys: Public & Private. A public key is your identity on the network, it is similar to an email address. If someone wants to reach you or send you money, he will be using the public key. On the other side, the private key is a kind of ‘password’ used to authorize the transactions and grant you access to the funds. The concept of using two keys is called asymmetric cryptography and private keys should never be shared with anyone.
There are 4 types of wallets that you can use to store your money. You can choose one of them but ideally you should be avoiding web wallets.
Cold Wallet: An offline wallet that stores the user’s address and private key. It comes under the form of a device(USB stick, hard disk) and can be accessed via a software installed on your computer. Most famous examples are Trezor and Ledgor.
Mobile Wallets: Mobile applications that can hold cryptocurrencies: Atomic.
Desktop Wallets: Installable on different operating systems and can be used offline. They are the most advanced and tend to have increased privacy and security: Exodus.
Paper Wallets: As the name suggests, it is a paper that includes either a QR code or both types of your keys. It is really safe since the only way to steal your money is through stealing the paper.
3- Simple Analysis
Now that you have gone through the cryptocurrencies terminology and started to dive deeply into this field, there is one more step you need to complete before you start your trading journey!
You should learn to resist the temptation of finishing your first buy order without knowing enough about the coin you are purchasing. In this section, we will not be talking about fundamental analysis and advanced chart understanding concepts but we would rather learn how to gather some data about the crypto we are willing to acquire.
First thing to do is to check the coin’s project. A project is the usability or the long term goal of the cryptocurrency. Ethereum’s project, for example, is the creation of smart contracts and decentralized applications. Second thing will be to check the white paper. A white paper involves technical guide about the coin. Some scam coin will tend to copy paste content from other resources just to look legit so you should pay attention to the details as well. We would then need to know more about the team that is supporting this idea and their future strategies. Best scenario is that they will be listing their linkedin profiles on the website. Now, as you are checking the details above you need to check as well the exchanges that are supporting the coin and if there are any new ones willing to include it in the future. You need to join the telegram channel, reddit and twitter. You stay up to date and follow the news. In there, people will discuss their strategies and the upcoming events. As you are verifying those information, you need to check the explorer and find out how much do the top owners have in their supply. A blockchain explorer is a browser for the blockchain and gives you an overall idea about holders and transactions. If the 40% or more of the supply goes to the first 3 holders then you need to be careful trading with this coin. Why? Because simply those holders will have the biggest influence on that coin’s movements.
If the coin seems promising, you can apply some simple analysis like support and resistance or identifying chart patterns to know on which direction the market will be probably moving. However, bear in mind that the crypto market is highly volatile and mostly unpredictable unlike other markets. We will include all the necessary information about analysis in the next article so make sure to subscribe to our newsletter to receive our latest updates.
4- Your Very First Trade
To keep this article short, we will limit this section to the basic steps you will need to perform your first trade.
4.1 Create an account on an exchange platform:
I personally use the crypto.com app as I find it very flexible and has low fees. However, you are free to choose whatever suits you! After you have chosen your exchange platform, you sign up with your email address and correct information. Notice here I used correct information since in most of cases they will be asking you to verify your account, and you won’t enjoy being banned because you used a fake name!
4.2 Deposit Money:
Exchange platforms allow you to deposit fiat money via credit card, bank transfers and you can also deposit crypto funds. Using the credit card option, you will have to pay fees according to your country and the amount you are sending. By using the bank transfer, you are expecting the money to arrive in 2–3 working days but with no fees included. As for crypto deposit, this is done using the wallets we discussed above.
4.3 Decide which coin to buy
That’s the hardest part! You need to spend some time familiarizing yourself with the charts and keep yourself updated about the crypto news. Elon Musk tweets have been playing a major role in deciding the market’s movement so always stay prepared to buy or sell some of your funds. I can not give you any financial advice concerning which crypto to buy but the best thing I will be saying is: “Do not put all your eggs in one basket”. If you have 100$ to invest, split it over 4 or 5 different coins. Therefore, you minimize your trading risks and increase your chances of making more profits.
4.4 open a position:
Depends whether you are a day or long term trader, but opening a position can be done with performing a market order or a limit order.
4.5 Follow the price fluctuations:
Coinmarketcap, coingecko and other price tracking platforms allow you to always stay up to date with price changes. Install one of those apps on your mobile and keep the notifications on! You won’t be willing to miss a profit of 60% or more!
Guide for Tunisian Traders:
If you live in Tunisia you will mostly face problems when you are trying to deposit money into your account since the government is not supporting any online payment services and thus you might be wondering how to buy crypto. Every problem has a solution and the way to get over this illogical decision of excluding paypal and other methods in the tunisian ecosystem is to use this awesome facebook group to buy and sell USDT or BTC balance.
The process is very simple, you reach a trusted seller, he gives you the exchange rate(an exchange rate is how much the seller is asking you for one dollar) and if everything goes fine, you will end up with the amount on your account’s balance. From there, you can follow all the steps mentioned above. AND HAPPY TRADING!
Conclusion:
As this article comes to an end, I hope that you now have an overall idea about the cryptocurrency market. I advise you to always stay up to date and follow the latest news about it. I also recommend to invest carefully: Only invest what you can afford to lose. The market is very volatile and you can start small, gain experience and then make huge profits! In the next article, we will be talking about different analysis so stay tuned. HAPPY TRADING!
