Cryptocurrency is a type of digital or virtual currency that uses cryptography for security. Unlike traditional currencies issued by governments (like the USD or EUR), modern cryptocurrencies typically operate on a decentralized network using blockchain technology. This decentralized nature means that it is possible to have a cryptocurrency that does not have any central authority (such as a bank or government) in control of it. Instead, transactions are verified by a network of computers (nodes).

The first and most well-known cryptocurrency is Bitcoin (BTC), created in 2009 by an anonymous entity known as Satoshi Nakamoto. Since then, thousands of other blockchain cryptocurrencies, often referred to as altcoins (alternative coins), have been created, such as Ethereum, Litecoin, and Ripple. In the 21^st century, cryptocurrencies have revolutionized the way we think about money, decentralization, and digital ownership, but their volatility and regulatory uncertainty make them a challenging asset class.

Just like traditional forex trading, cryptocurrencies can be used for speculation. Crypto trading offers both exciting opportunities and significant risks. For anyone interested in crypto trading, it is crucial to stay informed and employ sound risk management strategies to navigate the highly unpredictable market.

The Jan Lansky Definition of Cryptocurrency

Several attempts have been made to define what a cryptocurrency is. One definition that has gained a lot of traction is Dr. Jan Lansky´s six point definition, where a system must meet all six points to be considered a cryptocurrency.

1. The system does not require a central authority; its state is maintained through distributed consensus.
2. The system keeps an overview of cryptocurrency units and their ownership.
3. The system defines whether new cryptocurrency units can be created. If new cryptocurrency units can be created, the system defines the circumstances of their origin and how to determine the ownership of these new units.
4. Ownership of cryptocurrency units can be proved exclusively cryptographically.
5. The system allows transactions to be performed in which ownership of the cryptographic units is changed. A transaction statement can only be issued by an entity proving the current ownership of these units.
6. If two different instructions for changing the ownership of the same cryptographic units are simultaneously entered, the system performs at most one of them.

Blockchain technology

Modern cryptocurrencies are normally based on blockchain technology. A blockchain is essentially a distributed ledger that records all transactions made with a particular cryptocurrency across a network of computers. When a transaction is made, it is grouped into a “block” with other transactions, verified by network participants (miners or validators), and then added to the blockchain.

• Mining
  This is a process where individuals use their computers to solve complex mathematical problems that validate transactions on the blockchain. As a reward for mining, miners are given newly created cryptocurrency tokens.
• WalletsCryptocurrencies are stored in special wallets, which can be either software-based (hot wallets) or hardware-based (cold wallets). Each wallet has a public key (address) for receiving cryptocurrency and a private key for accessing and sending funds.

What is Crypto Trading?

Crypto trading involves buying and selling cryptocurrencies. Today, special platforms are available for cryptocurrency trading online. Crypto currencies can be exchanged for each other, but there is also a lot of speculation going on where a cryptocurrency is traded against a government-issued currency, such as the USD or JPY.

Examples of well-known online platforms where you can carry out cryptocurrency trading are Binance, Coinbase, and Kraken.

Key Concepts in Crypto Trading

If you are familiar with forex trading (foreign exchange trading), you will notice that many of the key concepts of forex trading are key concepts in cryptocurrency trading as well.

For starters, the trading revolves around currency pairs, where one currency is traded for another currency. Examples of heavily traded pairs that involve at least one cryptocurrency are BTC/USD (Bitcoin vs. US Dollar) and ETH/BTC (Ethereum vs. Bitcoin).

Modern cryptocurrency trading platforms will allow you to use order types that you are familiar with from forex trading, such as market orders and limit orders. A market order is an order to buy or sell immediately at the current market price. A limit order allows you to set a specific price at which you are willing to buy or sell.

Just as with forex trading, it is also possible to carry out cryptocurrency trading with leverage. When you use leverage, you borrow money to finance part of the trade. Example: You take $1,000 from your trading acccount and borrow $9,000 to open a $10,000 position. Leverage will increase both profits and losses, and adds a new dimension of risk. You must repay the borrowed money even if the markte goes against you. Leverage is not recommended for novice traders. If you want to use leverage and feel ready, start small with very low leverage.

Currency trading strategies

Some currency trading strategies involve speculating on short price movements, while others are based on investing and keeping cryptocurrency for longer periods of time.

• Just as with traditional forex trading, daytrading is popular among cryptocurrency traders. Daytraders seek to capitalize on short-term price movements and they always close all open positions before the trading day is over.
• Scalping is a subset of daytrading. Scalpers make a huge amount of very small trades in short period of time, aiming to profit from tiny price changes. While profits per trade are small, they accumulate over many trades.

• Swing trading is more long term than daytrading, but is not considered long-term investments either. This strategy focuses on capturing gains from price movements over several days or weeks. Swing traders try to identify medium long trends in the market to enter and exit at the most advantageous points.
• Within the world of cryptocurrency, the strategy of buying and holding cryptocurrency for an extended period, betting on long-term growth, is sometimes referred to as HODLing. It is a term derived from a misspelling of “hold”.
• Arbitrage trading involves buying cryptocurrency on one exchange where the price is low and selling it on another exchange where the price is higher, profiting from the price difference.

Risks and Considerations Regarding Crypto Trading

• Volatility
  The crypto market is highly volatile. Prices can rise or fall by double digits within hours, making trading high-potential but also high-risk. Cryptocurrencies are known for their immense price volatility, which can lead to significant profits but also significant losses. Price changes can be dramatic in a short amount of time due to factors such as market demand, regulatory news, or technology advancements.
• Technical Security
  Since cryptocurrencies are digital assets, they can be vulnerable to hacks and cyberattacks. It is crucial to store funds in secure wallets, preferably hardware wallets, and use strong passwords and two-factor authentication. Of course, storing all your cryptocurrency in hardware wallets will not be feasable if you are doing fast-paced trading with it.
• Exchange Risk If you are keeping assets (traditional currency and/or cryptocurrency
• Regulation
  Cryptocurrency markets are relatively new and can be subject to regulatory changes. Governments may impose regulations or bans, affecting market prices and trading environments.
• Liquidity
  Some lesser-known cryptocurrencies (altcoins) may have lower liquidity, meaning it can be harder to buy or sell large amounts of the asset without affecting the price. Low liquidity increases the risk of slippage.

Speculating on cryptocurrencies without buying and selling cryptocurrencies

It is possible to speculate on cryptocurrency without actually buying, owing and selling cryptocurrency. Many brokers with trading platforms offer derivatives that are based on the exchange rate of currency pairs where one or both of the currencies in the pair are cryptocurrencies.

You can for instance use Contracts for Difference (CFDs) where the underlying is the currency pair you are interested in, e.g. BTC/USD, BTC/ETH, or BTC/GBP.

Brokers that offer CFDs also offer leverage.