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Cryptocurrency on Forex market

By now it is quite impossible to imagine today's financial system without cryptocurrency. Cryptocurrency has firmly established itself as an important item in the financial news environment. Not a day goes by without relevant financial and economic news related to cryptocurrencies. An increasing number of people are adding terms like mining, blockchain and crypto exchange to their vocabularies. What should one know about this financial staple?

Cryptocurrency on Forex market

What are cryptocurrencies?

Cryptocurrency is a digital currency that uses a decentralized payment system for the calculation and issue of new units. The currency itself does not have a physical representation. This is just a record indicating the number of units of account. Units of account can be transferred from one person to another without a third party involved. Cryptocurrency transactions occur automatically and are protected by encryption. The issue of cryptocurrency is not regulated by any financial body.

Cryptocurrency is created through mining, which uses computing powers to solve mathematical problems. People doing the mining are called miners. The mining process is necessary to build the blockchain. For their work, miners receive a part of the newly generated (issued) cryptocurrency. Mining has become very popular because of the high cost of some cryptocurrencies and free access to their mining.

The term “cryptocurrency” derives from digital encryption or cryptography used to store and transfer data between digital wallets.

The first and most popular currency today – Bitcoin – was created in 2009.

How do cryptocurrency transactions take place?

Cryptocurrency transactions take place exclusively in electronic format, using digital protocols prescribed in specialized software. Information is processed and stored using a technology called blockchain. Blockchain is a kind of library that stores confirmations of the record of information and the history of operations with it. Information about these records is simultaneously stored by many participants in the blockchain. Even if several computers are damaged, the information will be saved on others.

The term blockchain derives from two English words - block and chain - and denotes a continuous chain of blocks. Each block contains a record of transactions. Entries can only be added, but not edited or deleted.

Each block in the chain represents an individual digital code. Each subsequent block contains information from all previous blocks. When transferring cryptocurrency, a large number of miners' computers will save all the information about the transaction. This ensures that the information is encrypted. Encryption, in turn, ensures that transaction information remains correct and confidential.

Miners perform several functions in the blockchain. They store copies of the blockchain and thus protect information from loss or forgery, as well as confirm transactions by including it in a new block. Transaction confirmation is necessary to prevent repeated spending of the same money. Transactions in the blockchain are almost instantaneous, but they do take some time to be confirmed.

How to buy cryptocurrency?

The process of buying cryptocurrency contains several steps.

Choose a cryptocurrency exchange

Cryptocurrency exchanges are the main way to buy cryptocurrencies. There are many cryptocurrency exchanges offering different trading conditions, available cryptocurrencies and various additional services.

The choice of the exchange is very important. Unfortunately, the more popular the cryptocurrency becomes, the more trading in these instruments attracts various types of fraud. Scammers sometimes create fake cryptocurrency trading platforms or fake versions of official crypto wallets in order to trick unsuspecting users.

What you should pay attention to before registering a profile:

  • Available trading conditions, list of trading instruments, available deposit and withdrawal methods.
  • Available trading platforms and mobile apps.
  • Supported languages of the website and trading terminal.
  • Profile verification rules. Documents required for verification.
  • Feedback from other customers of this platform. If there are complaints from customers, notice what exactly they are not satisfied with.

The largest and most famous exchanges at the moment are Binance and Coinbase.

Make a deposit

The next step after selecting the crypto exchange and creating a profile, is to deposit funds to your personal account. Most cryptocurrency exchanges support buying cryptocurrencies with the countries' official currencies.

You can deposit by debit and credit bank cards, bank transfers, as well as various electronic payment systems. Acceptable deposit and withdrawal methods mainly depend on the level of profile verification.

Important factors to pay attention to are transfer duration, as well as the commissions charged by the system for depositing and withdrawing. Commissions vary for different payment methods and platforms.

After depositing funds to your personal account, you can finally buy cryptocurrency. Buy orders are placed on a special page of the website or through a mobile app. To do this, select the “Buy” option next to the cryptocurrency of your choice and follow the instructions below. Sell orders are usually placed in a similar way.

The bought cryptocurrency is stored in your crypto wallet. Most exchanges provide wallet services, so the funds are stored directly on the platform itself.

Wallets can also be created through third-party providers. There are two types of wallets:

  • A hot wallet is a cryptographic vault that uses online programs to protect private keys.
  • Cold wallet, or hardware wallet, uses external electronic devices to securely store private keys.

Cryptocurrency trading

Today, cryptocurrencies are available on the platforms of brokerage companies as an alternative trading tool via CFDs. On Forex, it is impossible to buy the cryptocurrency itself, but you can make profit on fluctuations in cryptocurrency quotes by opening relevant positions.

Cryptocurrencies are quite a popular trading instrument. Unlike currency pairs or metals traded at different times on the respective exchanges, cryptocurrency trading is available 24 hours 7 days a week, which allows transactions to be made at any convenient time, and low liquidity often leads to high volatility.

At the same time, keep in mind that the cryptocurrency market is extremely unstable. The price of a cryptocurrency is very difficult to predict because one cannot use technical and fundamental analysis to build a trading strategy. Due to the unpredictability of cryptocurrencies, an inexperienced trader could lose everything in one trade.

Cryptocurrency is a promising investment and trading instrument. In fact, it is the easiest asset to trade on Forex, since you can earn with the same success on the ups and downs of the rate. However, cryptocurrency trading is fraught with high risks, as it is difficult to analyze all the factors influencing changes in the digital currency exchange rate.

Article last updated: 2022-10-28

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