Cryptocurrency trading is not easy

Cryptocurrency trading attracts users with its popularity, availability and the possibility of high income in a short period of time. But is it really that simple?

A successful trader analyzes cryptocurrencies, studies their trading volumes, uses charts and coding in their strategies, concludes buy and sell deals, and implements new technologies. It is almost impossible to achieve good results in a short time in this difficult endeavor, but its worth starting. And you need to start by studying the principles of this market.

First, lets figure out what cryptocurrency is and how it works.

What is cryptocurrency?

Cryptocurrency is a digital currency that functions thanks to an asymmetric encryption mechanism. This is a kind of code that is formed as a result of complex computer mathematical calculations.

How is this type of savings different from money or other financial assets? The fact that all operations with currency are performed without the participation of a bank or any permission. The digital currency is stored in a personal electronic wallet.

In recent years, attention to this type of savings has increased significantly, which is explained by the rapid growth in the value of cryptocurrency. If desired, electronic money can be used to pay for any product and service, you just need to find a seller who is ready to accept such payment. Due to its great popularity, cryptocurrency is already being accepted in some retail outlets, restaurants and cafes. But it is absolutely unprofitable to pay for purchases with cryptocurrency now, it is much more profitable to buy digital currency and store it, thereby increasing your income.

Another interesting factor in the turnover of cryptocurrency is taxation, or rather, its absence. At the moment, there is no reason to levy a tax on the sale of digital currency. This is explained by the fact that the final status of the cryptocurrency is not legally determined: either it is assets, or a means of payment, or something else. Japan is the most progressive in this regard, the country has already recognized bitcoin as a legal payment method along with the yen. In some other countries, cryptocurrency is defined as a financial or virtual asset that in most cases is tax-free. For example, in the United States, digital currency is perceived as a financial asset, one of the ways to invest. 

How to choose a cryptocurrency?

Today, there are about 3 thousand varieties of digital currency, some of them were created with the aim of partially replacing the real currency. Some of them can be obtained by mining (mining) on home equipment using video cards or on mining farms, some can only be bought. The rush demand for video cards has decreased significantly over time, but now even the creation of all the necessary conditions does not guarantee a successful result. If all the technical issues are resolved, you can start getting to know the cryptocurrency.

The cryptocurrency market is functioning successfully and allows you to study the processes of formation of value, supply and demand. Against the general background of a variety of virtual currencies, the largest volumes of capitalization are such as bitcoin, Ethereum, Ethereum Classic, Dash, Ripple, Monero, Litecoin, NEM, Augur, MaidSafeCoin and others. Lets consider some of them.

Bitcoin (BTC)

Bitcoin, the first and most popular virtual currency, appeared in 2009. Unlike conventional monetary units, no state has the power to control, additionally create, or devalue bitcoins. The cryptocurrency is protected from counterfeiting, you can pay with it if you have an Internet connection. The transfer takes place privately and without charging a commission by the bank. 

The number of cryptocurrencies is limited: in general, 21 million bitcoins can be issued or mined. It is thanks to the limited nature that the price of cryptocurrency is growing, especially rapid growth took place during 2017. Now the cost of the currency reaches 7.5 thousand USD.

Initially, in 2009, the bitcoin mining reward was equal to 50 bitcoin coins, but it is programmed to decrease by half approximately every 4 years. According to forecasts, by the time we approach the full mining line, the reward will fall to the minimum unit, satoshi, which will make the mining process absolutely unprofitable.

It is this cryptocurrency to mine at home and even on several video cards is irrational, it is very energy-intensive.

Ethereum (ETH)

            This is a system for creating decentralized online services based on Blockchain, a project by Vitaly Buterin, developed in 2013-2015. The creation was funded by the crowdfunding system, i.e. collective investment. Ethereum coin ranks second in the hierarchy of world cryptocurrencies; today its value is about 140 USD.

            The platform has a reliable program code, information about which is recorded in the Blockchain along with transaction data, which significantly expands the networks functionality. Users not only carry out financial transactions, but, due to the open access to the platform, they also have the ability to create other decentralized programs.

            If you compare Ethereum with Bitcoin, you can notice some significant differences, for example, it takes only 14-15 seconds to generate a new block, while Bitcoin takes about 10 minutes. Another advantage is a fixed amount of remuneration, which does not decrease over a period of time.

            For Ethereum mining, it is not necessary to have expensive equipment with high computing power, a regular video card is enough.

Litecoin

             Litecoin is a fork of Bitcoin, a global decentralized payment network. It differs from Bitcoin in faster confirmation of transactions. Litecoin can be exchanged for both fiat money and Bitcoin, as well as used to pay for goods and services. Moreover, it is a good investment vehicle. Now the cost of Litecoin is about 44 USD. Currency emission is limited - 84 million coins.

            Mining Litecoin with processors and graphics cards currently generates almost no income, as the profit does not compensate for energy costs and equipment wear and tear.  

How to earn?

            Earning cryptocurrency in the traditional sense will only work if you are lucky enough to find an employer willing to pay salaries in digital currency. Perhaps this is most likely only in case of contact with foreign partners in the IT field. In Russia, the official use of cryptocurrency by legal entities as a means of payment is impossible.

            The process of making money on cryptocurrency does not always require huge investments, but investing large sums significantly increases the likelihood of earning income.

Cryptocurrency is sold through special terminals - cryptomats, primarily for bitcoin. The exchange of virtual money for real payment means is also possible, but this is done through specialized services - cryptocurrency exchanges: you need to register, specify the bank card number, start the cryptocurrency that you want to sell, and then withdraw the received money to the card.

Who are miners?

            Receiving digital currency is carried out in a special way - in the process of mining. Mining is the backbone of the networks activities, it is performed using special computer hardware and software. Miners are involved in calculating the components that are included in cryptocurrency transactions, this is the main condition of the process. For their findings, miners receive a reward, as well as a transaction fee, which they credit to the block.

The process of mining digital currency can be compared to mining gold: to increase the value, it was necessary to constantly increase the capacity of the equipment, and one of the features of the search for cryptocurrency is the continuous complication of the calculation algorithm, that is, each subsequent coin is mined with a large investment of time and resources. If an ordinary computer was enough to create the first Bitcoin coins, then in the future the need to increase the technical capacity of the system was constantly growing. That is why the process of earning money was called "mining" (from the English "mining"), and users - "miners".

Approximately 5-6 years ago, mining without specialized processors became unprofitable: the cost of electricity consumed exceeded the average income. Thus, the additional load shifted to GPUs, which, due to the rapid growth in demand, moved to the group of scarce goods. At the same time, information appeared about "cryptocurrency farms" - complexes with expensive powerful equipment that continuously works and brings a monthly income of several million dollars.

More about technology

The system forms a block with built-in cryptographic protection, which can function without a single settlement center and supervisory authority. The basis of the network is an infrastructure of thousands of independent nodes (servers or individual PCs with appropriate software), in which registers of all transactions are collected and stored in a special way. 

The rapid growth of interest in cryptocurrency has led to the spread of the technology on which the digital currency system operates. The method of storing data or a digital register of any operations combined into blocks according to the principle of a chain is called Blockchain (from the English "block" - a block, "chain" - a chain). This concept was introduced by an unknown Satoshi Nakamoto in 2008, and a year later the Bitcoin technology was implemented. If we represent this technology in the form of blocks, then each subsequent block is added exclusively to the end of the chain, which ensures the dependence of new blocks. 

This approach proved to be a successful solution to the problem of ensuring trust in the information received without involving external guarantors (banks, intermediaries, etc.). Simply put, this method can be used by a single group of people to independently manage the virtual "ledger" and build relationships based on mutual trust (for example, access to information about the state of the account). It is the Blockchain method that provides the basic principles of the coin: transparency, confidentiality, decentralization, speed, security, guarantee.

But such a flawless system has a significant drawback, the so-called 51% attack. This can happen if the majority of users agree to change the data and build a large parallel circuit, the new entries of which will be automatically recognized as correct. In this scenario, the protocol will intentionally stop working, since the system is built on the idea of mining coins by the majority of participants in fair competition.

How to start mining?

Previously, the entire mining procedure was entirely dependent on the processor power of a personal computer. For the process to be successful, it was necessary to install software and issue an electronic wallet to accept cryptocurrency. To avoid interruptions in work, it was necessary to organize an Internet connection and ensure that the PC was always working.

The first software to use the power of a video card for mining appeared in 2010. Since the GPU in a video card includes hundreds of graphics cores, the GPU mining procedure yielded better results than the earlier approach.

Assuming that several video cards can be connected to one motherboard, it would be correct to expect an increase in mining performance. For the normal functioning of several video cards, a standard PC case is clearly not enough, and, as an alternative, whole racks with video cards have appeared, which are connected to the motherboard using special loops - risers.

Later, they began to use the so-called "ASIC" (Application-specific Integrated Circuit) - expensive multifunctional options for mining. Their specificity lies in the ability to process huge amounts of information for cryptocurrency mining. Such a system is designed for a specific cryptocurrency, while any digital currency can be mined on video cards, but there are also disadvantages: noise during operation and almost complete impossibility of repair.

So, to start the process you need a corpus. When it comes to connecting a large number of video cards, then a typical custom case will not work, you will need a special place to store the equipment. The processor, as a rule, does not play a big role in mining, its main function is to serve as a guarantee for the operation of the operating system and the miner program, which will perform all the calculations.

Motherboard - you need to choose one that can work continuously and can create conditions for the maximum number of video cards. The elementary base of such boards should consist of solid-state capacitors and a large number of PCI-E x16 and PCI-E x1 slots.

The video card is the main component of the whole process. The more powerful and larger, the more productive mining will be, which will have a positive effect on income. As a rule, even the most expensive equipment pays for itself in a period from several months to a year, depending on the efficiency of its work.

In addition, you need RAM (4 GB will be enough), and a hard drive of any size. It is worth studying the market for SSD-drives, they are more durable and less likely to fail when working with high temperatures, it is recommended to use coolers for them.

Power supply - when choosing this component, it is worth calculating the power of all equipment, but in mining it is also practiced to use several power supplies.

When the equipment is ready for operation, you need to install the operating system and register the wallet of the cryptocurrency that you plan to mine. A cryptocurrency wallet is special software that is installed on a smartphone or PC. The program allows you to save keys to gain access to the cryptocurrency, the storage of the digital currency itself is impossible there.

Cryptocurrency exchange

As mentioned earlier, the process of selling and buying cryptocurrency takes place on exchanges. The search for an exchange should be approached as responsibly as with the choice of the digital currency itself, the following parameters must be taken into account when choosing:

• capitalization - the cost of an object, calculated on the basis of the current exchange price, the higher the value of this indicator - the more confidence the exchange evokes in users
• quantitative indicator of the presented currencies - this parameter is worth paying attention to those who have chosen something less common for trading than, for example, Bitcoin or Ethereum;
• methods of replenishment of the deposit - this is especially important for beginners at the initial stage of the trading process, when the user does not yet have a cryptocurrency that could be directly sent to the exchanges trading deposit.

You can consider other factors that are important when choosing a service: security, liquidity, the availability and amount of commission, history, reviews. One of the easiest ways to choose a secure exchange is to read expert reviews. Lets consider these factors in more detail.

1. Security: an important component of system relevance; if the exchange is unsafe, you can face theft of funds, which makes any other advantages of the chosen exchange absolutely meaningless.
2. Technology: Continuing the topic of security, the technical side of the process should be mentioned:

• choose exchanges with addresses starting with https, beware of http connections;
• for a secure login process, use two-step authentication (includes username, password, some confidential personal information);
• keep deposits offline;
• audit software that records the activity on the exchange, sending by SMS and e-mail, provides additional security guarantees;
• on the crypto exchange, it is possible to whitelist your IP address or wallet address to withdraw savings for increased security.

1. Legal aspects:

• it is recommended to choose the exchange of the same state on the territory of which you are located, this simplifies the process of following regulatory changes;
• some exchanges insure their funds, so if you lose your savings, you can receive compensation for damage.

1. Transparency: reputable services host their cold storage addresses or provide support if their funds need to be verified by other means, such as auditing.
2. Liquidity: The ability of a digital currency to be traded quickly. With a large volume of trading, liquidity for a particular exchange increases, which allows transactions in a simplified form, without price monitoring. You also need to understand if there are “locked” prices on the exchange that guarantee you a price during a transaction, even if it is not calculated immediately. Liquidity may vary for different trading pairs.
3. Cost: check the commissions (more often they amount to no more than 1% per transaction and fall when the volume of trading increases), check the amount of interest for withdrawing money (some crypto-exchanges ask for high commissions for withdrawing money from certain altcoins).

In any case, experts do not recommend keeping your savings on any exchange longer than necessary, leave only funds for transactions. This is due to the fact that due to the accumulation of a large number of digital assets in one place, the server becomes vulnerable, and this increases the chances of theft. Therefore, it is better to keep the remainder of the cryptocurrency in your personal wallets.

Among the most popular exchanges, we note Binance, eToro, Bitfinex, Kraken, HitBTC, Bitstamp, Bittrex, Poloniex, Coinbase, Coinbase Pro.

The system of work on such servers is simple, the whole process can be divided into 3 stages:

1. Registration is usually no different from registration in other cases.
2. Replenishment of money for the implementation of buy and sell actions - in most cases, the fee is not charged for the receipt of virtual coins, and most often you have to pay for investing money. Usually, the amount is 1-5% of the total, but it can increase up to 8% depending on the method of replenishment (exchanges do not undertake to pay commissions of payment systems and add their interest to their amount).
3. Registration of an order for currency trading - here the principle is simple: the user sets a price and activates trading by publishing his order in the general list.

Some crypto exchanges also offer a number of additional services for users, for example, crediting parts of the amount to deposits, affiliate programs, a mobile application, detailed charts with the construction of Fibonacci levels and other trading tools, the possibility of credit trading.

Back to trading

When you understand all the intricacies of the process and, perhaps, even tried mining, you can start trading.

At first glance, this procedure will seem much easier than trying to understand the equipment and delve into some codes, but in reality it is not. Indeed, trading is less costly in terms of resources, you only need an exchange on which you can make transactions, but you also need to choose the right strategy.

When choosing, you should rely on the following parameters:

1. Market state: pay attention to the market state, whether it is falling, growing, or uncertain, your further actions directly depend on this; some strategies focus on selling during a prolonged rise or fall of the market, others - on a frequent trend change.
2. Cryptocurrency volatility: some digital currencies require longer strategies, while others, on the contrary, are prone to frequent fluctuations, which, with the right strategy, can lead to more transactions.
3. Time costs: the choice of methods and the result depends on the time spent on trading, here you can choose between scalping, swing trading and other methods that rely on different time costs.
4. Base capital: here we are talking about the discrepancy between your opportunities (investment size) and risky strategies, in this case the cost of a mistake will be high. Do not rush, with an increase in the volume of capital, the opportunity will grow and the opportunity to test any strategies without a win-win and painlessly, without fear of being left with nothing.
5. Purpose: the choice of a strategy also depends on the goals, trading can act as a constant source of profit - and here it will be necessary to study all the nuances of the system, and as a means of earning money for beginners - in this case, it is worth choosing a strategy with minimal risks.
6. Analysis: the choice of strategy directly depends on the ability to quickly assess the current situation and assume further movement in several ways. If the user needs more time to study the situation, the strategy should take this into account.

Of course, when choosing a method, you need to try to use all the advantages of the selected systems, which will significantly reduce the risks, but by choosing one or several strategies, you will not get a guarantee of their flawless operation. To avoid unforeseen situations and failures, you need to try to avoid mistakes. The most common ones are as follows:

1. Departure from strategy: this often happens at the beginning, when in a difficult situation it seems that the decision will not be correct according to the chosen algorithm. An incorrect assessment of the situation can lead to losses and loss of earning opportunities, so that this does not happen - try to stick to the chosen strategy.
2. Working with one strategy: it is advisable to be prepared for a quick response to market situations and, if necessary, change the chosen strategy. To do this safely, study several strategies in parallel, use them carefully and track the conversion.
3. Disregard for danger: here we are talking about being involved in an unforeseen and uncontrollable situation, which can lead to overestimation of ones strength, incorrect predictions and, as a result, to losses. It is better to wait out some moments, since it is very difficult to guess the forecast.
4. The desire to "win back": in case of failure, many beginners have a gambling desire to return the loss by investing even more, which in a risky situation can lead to large losses. You need to learn to look sensibly at the result, and in case of failure, analyze what happened and learn a lesson.

First investment

After you have decided on the choice of cryptocurrency and exchange, you need to replenish your account on the server, but in some cases this can be difficult. On some major exchanges, if you start trading with 25 thousand USD, you will need to go through the identity verification procedure, and only then you will be able to deposit funds. The confirmation procedure usually takes about two weeks.

If the initial investment does not reach this amount, then you will have to turn to the services of cryptocurrency exchangers. To make a purchase, you will need a cryptocurrency account address (you can use the address obtained on the selected cryptoexchange, or a cryptocurrency wallet on one of the digital currency storage services). After that, it will be possible to independently transfer the purchased coins to the trading account of the exchange platform, and from the moment the currency enters the account, the user becomes a cryptocurrency investor.

What are the risks?

The system of circulation of the price of a cryptocurrency is very simple: if there are more people who want to buy than sell, the price rises, and vice versa. It is on these price fluctuations that traders make money. Of course, when buying a cryptocurrency at one price, you cannot be sure of its stability and, moreover, growth, you need to be prepared for the price to fall, so you should not invest more than you are afraid of losing.

Now the cryptocurrency has been assigned the status of "money of the future", but this does not deny the virtuality and unreliability of an uncontrolled means. In the same way, this cannot be spelled out in lawsuits: the chances of meeting a scammer when buying or selling cryptocurrency are not higher than in real life.

Digital currency is often perceived as a kind of pyramid scheme, but this exchange is organized according to completely different principles. One of the main features of the pyramid scheme is that some people use money to pay to others, but cryptocurrency is a limited asset, the price of which rises or falls only due to demand.

The question of the durability of digital currency arises from many. Bitcoin, for example, is unlikely to lose its relevance in the coming decades, but you should only agree to buy other coins after a thorough study of the market. 

Another concern is the absence of any guarantors as with the usual money. In comparison with the gold and foreign exchange reserves of states, first of all, the cryptocurrency is provided with all the capacities used to receive it, as well as other infrastructure created to service transactions of virtual currencies. Unlike the state treasury, cryptocurrencies are decentralized, there is no single source that would be engaged in their production.

Cryptocurrency trading is a complex and lengthy process that requires detailed study, large investments, time expenditures and constant monitoring. The expected result may not come very soon. You should carefully choose trading tools that will allow you to maintain control over the situation. We strongly advise not to neglect the theoretical side of the issue: to many from the outside, some strategies may seem too complicated, and they decide to act intuitively, which in most cases only leads to huge losses and disappointment.

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