Basics of trading cryptocurrencies and how they work

What are digital currencies really?

Cryptocurrencies are encrypted assets that rely on blockchain technology to enable direct peer-to-peer exchanges across a decentralized network. Unlike traditional money, these assets do not require a central intermediary such as a bank or government entity to complete transactions.

Bitcoin, Ethereum, BNB, USDT, and SOL are among the most prominent examples of cryptocurrencies in terms of market value. To access them, digital wallets or specialized trading platforms are used. It's important to know that balances are actually recorded on the blockchain and not physically stored in the wallets as some may think.

How did the story of cryptocurrencies begin?

Bitcoin was the first digital currency and gained popularity quickly. It was launched by a person or group under the name Satoshi Nakamoto in 2009. Since then, thousands of digital currencies have emerged, each with different characteristics and uses.

Initially, cryptocurrencies were used only as a medium of exchange, but the applications have greatly expanded to include decentralized finance, smart contracts, gaming, healthcare, digital collectibles, and much more.

How Blockchain Works

Most cryptocurrencies are decentralized, using a distributed network of computers (nodes) to manage and record transactions in a public financial ledger called the blockchain. When digital currencies are sent, the network nodes must collectively verify the validity of the transaction.

Each node keeps a local copy of the blockchain and updates it when new data is added. After verification and confirmation, transactions are permanently recorded in the blockchain database. This distributed structure enhances security because there is no single point of failure that can be compromised.

The Role of Encryption in Protecting Transactions

Encryption ensures the security of transactions, the integrity of data, and controls the creation of new units. When making a transaction, you use your private key to create a digital signature that is verified by the network. If successfully verified, the transaction is added to a new block.

Blockchain is a linked series of blocks, each containing a unique list of transactions. This design makes it practically impossible to alter or delete a previous transaction.

What makes cryptocurrencies different?

Decentralization: Provides users with complete control over their assets without the need for a central authority, reducing exposure to manipulation.

Transparency and Permanence: All transactions are recorded in a secure public ledger that is tamper-proof, and once a transaction is added, it cannot be altered.

Programmability: Open-source currencies like Ethereum allow developers to deploy smart contracts and decentralized applications.

Crossing Borders: Currencies can be sent and received from anywhere in the world easily.

Limited Supply: Most currencies have a maximum supply. Bitcoin, for example, is capped at 21 million coins, giving it store of value properties and preventing inflation.

Understanding the Market Value of Cryptocurrencies

Market capitalization is calculated by multiplying the current price of the currency by the number of coins available for trading. This measure is used to rank cryptocurrencies and assess their size.

Typically, a higher market value indicates greater stability and wider acceptance. In contrast, a lower value often points to a currency that is more susceptible to speculation and volatility. However, this is just one factor to consider, as technology, the team, economics, and actual use cases are also of great importance.

Top 5 Cryptocurrencies by Market Capitalization

Bitcoin (BTC)

The first and most famous cryptocurrency, created by Satoshi Nakamoto, is widely used as a store of value. It employs a consensus mechanism called Proof of Work (PoW), where miners compete to validate transactions for rewards. The limited supply of (21 million coins) makes it scarce and gives it the reputation of “digital gold.”

Ethereum (ETH)

The native currency of the Ethereum blockchain, founded by Vitalik Buterin. It supports a decentralized network where developers can build applications using smart contracts. It transitioned from proof of work to proof of stake (PoS) to increase efficiency and reduce energy consumption, allowing users to validate transactions by staking their coins.

BNB

It started as a token on the Ethereum blockchain in 2017, then moved to its own blockchain in 2019. It provides an environment for smart contracts and decentralized applications with low fees and higher processing speed. It has multiple use cases such as storage, participation in sales, and automated burning that limits its supply.

Tether (USDT)

A stablecoin pegged to the US dollar launched in 2014. Each token is linked to an equivalent amount of dollars in the company's reserves. Stablecoins like USDT eliminate the costs and delays associated with converting between digital currencies and local currencies.

Solana (SOL)

The native currency of the third-generation Solana blockchain, launched in 2020. It uses the proof of stake (PoS) and applies unique innovations to provide high throughput and fast transactions with low fees.

Steps for Safe Trading in Cryptocurrencies

1. Do your own research (DYOR)

Before investing, understand the fundamentals of blockchain, the different types of cryptocurrencies, and market dynamics. Study projects, teams, and technology to make informed decisions. Use books, blogs, podcasts, and forums as educational resources.

2. Be sure to avoid scams.

The field of digital currencies contains multiple scams. Do not trust strangers and be wary of pyramid schemes, Ponzi schemes, phishing, multi-signatures, and giveaways. Carefully check social media accounts, use a reliable password manager, and store your private keys and seed phrases offline.

Start with a small capital

The cryptocurrency market is volatile and unpredictable. It is wise to start with small investments that won't impact you much when you incur losses. This allows you to learn and understand market trends without significant risk.

Stay updated constantly

The field is evolving rapidly. Keeping up with the news, technological developments, and regulatory updates is essential. Make sure you have a deep understanding of the projects before risking your money.

5. Choose a reliable trading platform

Choosing a well-known and secure platform is a top priority. Compare the different options in terms of trading volume, fees, support, security features, interface, and available currencies.

6. Apply Risk Management

Only invest what you can afford to lose and set stop-loss orders to limit potential losses. These steps make a significant difference in protecting your capital.

Technical Guide to Digital Currencies

The technical document is a document that explains the details and technical specifications of the blockchain project. It includes the project's objectives, how it works, the underlying technology, the team, the economics, and the roadmap.

It is used by investors and the community as a comprehensive reference to assess the legitimacy and potential of the project. However, there are no standardized regulatory criteria for technical guidelines, and they may be misleading or inaccurate. The responsibility lies with users to verify the accuracy of the information provided.

Summary

Cryptocurrencies have redefined the concept of money and financial transactions. Some believe that they will replace traditional financial systems while others see them as a complement to the current system. What is certain is that their impact on finance and technology is already significant, and this impact will continue to grow and evolve.