A virtual or digital currency that is used as a secure medium of exchange is known as cryptocurrency (or crypto currency). Cryptocurrencies are connected to cryptography (or encryption), that is the process of converting electronic information into unreadable code protecting purchase and transfer information from public records. Cryptocurrency and cryptocurrency transactions are considered secret (anonymous), secure and difficult to counterfeit.show more
Created through a process known as ‘mining’ (record keeping services) whereby computer power is required to solve increasingly complex ‘proof of work’ mathematical problems to generate ‘coins’, cryptocurrencies are saved (or stored) and spent from a cryptographic wallet. Transferable and tradeable, cryptocurrency transactions and account balances are stored on a ‘public ledger’ or ‘blockchain’ which records all cryptocurrency trades but importantly through encryption, entirely protects the identity of coin owners.
Often identified as a currency associated with the internet, cryptocurrency facilitates secure payments as well as currency storage without the requirement of personal details. Often associated with illegal or dark web uses, cryptocurrency traders should understand the price volatility and risk associated with digital currency trading before entering the market.
The evolution of cryptocurrencies dates back to the early 1980s and the early algorithmic work of American cryptographer David Chaum who initiated the concept of secure, unalterable information exchanges and electronic currency transfer. This was known as ‘blinded money’ and remains fundamental to modern internet based encryption and digital currency transactions.
In 1990, Chaum relocated to the Netherlands and founded DigiCash; a for-profit cryptocurrency network based on his development of blinded money. Founded with the intent of peer-to-peer trading and monopolising supply, DigiCash garnered hostility from the Netherlands Government who imposed strict trading conditions curtailing development, market potential and profits ultimately lead to bankruptcy in in 1998.
In 1998 Nick Szabo created the cryptocurrency Bit Gold which is credited with the development of the ‘block chain’ system and ‘proof of work’ algorithms. Central to modern cryptocurrencies, a block chain is a digitally distributed ledger of cryptocurrency transactions. Bit Gold itself never gain popularity.
Throughout the 1990s and early 2000s there were a number of attempts to main stream digital currencies; e-Gold, Beenz, Flooz, Hashcash – all of which although ultimately failed however features of each are evident in modern cryptocurrency protocols.
Bitcoin is widely acknowledged as the first recognised cryptocurrency. Created in 2007 and first traded in 2009, Satoshi Nakamoto (a name widely speculated to be a pseudonym for a collective group of people) developed Bitcoin for use as an electronic payment system based on mathematical proof. With the aim of independence from a central authority, digital transferability, record keeping using block chains in a secure and anonymous environment, Bitcoin revolutionised digital currency exchange.
As of 2017, there are more than 900 different cryptocurrencies – or altcoins (cryptocurrencies other than Bitcoin) – in circulation including Bitcoin, Ethereum, Ripple, Litecoin, Monero, Dash etc which hold a combined market capitalization of over $60 billion.
Cryptocurrencies are gaining in popularity and are fast becoming one of the most popular assets to trade. Because just like physical currencies, digital currencies can also be traded by retail traders as well as speculators.
While there is a large number of cryptocurrencies available to trade, the most popular is Bitcoin and Ethereum.
A digital currency exchange such as Bitfinex, Coinbase or Cryptsy, is a website that facilitates the exchange of digital currencies for other assets such as fiat currencies (Government issued legal tender) or other digital currencies. Trader hold (and exchange) the digital currency from a secure ‘hot’ or ‘hardware’ digital wallet with transactions recorded on a public ledger or block chain. Typically traded 24-hours a day, 365 days a year, there are a three of types of digital exchanges: trading platforms (connects buyer and sellers for a fee), direct trading (peer-to-peer trading) or broker (cryptocurrency price is set by the broker).
Used primarily by speculators, a cryptocurrency Contract for Difference (CFD) is a derivative account. That is, the digital currency (such as Bitcoin or Ethereum) is quoted against a major currency (such as the USD or AUD) and using leverage, traders speculate on the digital currency’s value (either rising or falling) for profit. Physical ownership of the digital asset itself is not traded. A cryptocurrency CFD account offers traders the possibility of trading cryptocurrency markets without the requirement (or knowledge) of a digital wallet. Because a CFD account is leveraged product, traders can take a cryptocurrency position on a margin amount offering traders greater exposure to the market and control of a larger position with only a small amount of capital and without owning the physical asset itself.
Cryptocurrency trading hours are listed with the broker.
With a market capitalisation of more than $65 billion (2017) and current share price trading above $4,000 (USD), Bitcoin is the world’s most recognised cryptocurrency and digital payment system. First traded in 2009 and with 16.1 million bitcoins in circulation, it is estimated there are between 2.8 and 5.9 million unique digital currency wallet holders (the majority of them bitcoin holders) and more than 100,000 merchants and vendors accepting bitcoin as payment. With price volatility 7-times greater than gold and using the stock symbol BTC or XBT, Bitcoin units of account are bitcoin (1 unit), millibitcoin (0.001 or one thousandth of a bitcoin) and microbitcoin (0. 000001 or one millionth of a bitcoin). The smallest unit of measurement is a satoshi – service to the Bitcoin’s creator – which is 0.00000001 or one hundred millionth of a bitcoin. Trading at a low in 2011 of just $0.30 USD and a high in 2017 at $4,491 USD (August 2017), Bitcoin is a peer-to-peer network, that is – all transactions directly take place between users without an intermediary or dealer. Bitcoin transactions from a digital wallet are recorded on a public ledger or block chain and users are pseudonymous. Popular for trade in exchange for mining (record keeping services) and on black markets or dark web activities, Bitcoin can transferred for other currencies (digital or fiat), products or investment purposes.
Ethereum is the world’s second largest cryptocurrency. Using blockchain technology like Bitcoin, Ethereum is a smart contract platform. Mining for cryptocurrency tokens called Ether and designed to be used for making payments for hosting and accessing applications on the blockchain, Ethereum uses ‘smart contract’ accounts to hold applications and transactions on the Ethereum blockchain. Ether as a cryptocurrency, can be traded for an equivalent value of other cryptocurrencies or fiat currency and is available for trade on cryptocurrency exchanges. With 94.1 million Ether coins in circulation and a market capitalization of approx. $28 billion, Ethereum (stock symbol: ETH) token price traded as low as $0.10 USD to a current trading price above $290 USD (August 2017).
Founded in 2012, Ripple is the world’s third largest cryptocurrency and accounts for approx. 9-percent of the cryptocurrency market. Using a stock symbol XRP and a digital currency called Ripples, Ripple is a decentralised solution favoured by banks and financial institutions for instant exchange and trade of fiat currency, cryptocurrency, commodities or any other unit of value. With a fixed number of ripples available aimed to create scarcity – 100 billion – ripples are currently divisible to 6 decimal places, and the smallest unit is called a ‘drop’ with 1 million drops equaling 1 XRP. Ripple has a market capitalisation of almost $6 billion and a current trading price above $0.15 USD (August 2017).