Robert has reported for a variety of international publications including the Associated Press, The Guardian, Vice, and Decrypt. Current areas of interest include the political economy of technology, cryptocurrencies, and privacy. Robert has a Bachelor of Science from UCL, and a Master's degree from the University of Oxford's Internet Institute.
Cryptocurrencies are a new type of internet money, like digital versions of cash. They’re not controlled by a central bank, barely regulated by governments, and often nothing more than a bit of computer code.
That’s not stopped the price of a few cryptocurrency tokens reaching tens of thousands of dollars. Though few of these tokens sustain such high prices, which can fluctuate wildly each day.
With the number of cryptocurrencies ever-expanding, it’s easy to get lost in the hype. In this guide, we’ll arm you with enough knowledge to make your own way in the crypto world and trade with confidence.
What are the top cryptocurrencies?
The first cryptocurrency was Bitcoin. Created in 2008 by a pseudonymous coder named Satoshi Nakamoto, Bitcoin introduced the concept of the blockchain and gave birth to the first cryptocurrency. Bitcoin was worth almost nothing when it launched. Since then, it’s grown to a market cap of over $240 billion USD.
There’s now a near-endless list of cryptocurrencies, but the largest cryptocurrencies by market capitalisation after Bitcoin are Ethereum, Tether, and XRP.
Ethereum is Bitcoin’s main competitor. Its market cap is far smaller, at about $45 billion USD, but it does something that Bitcoin cannot: power decentralized applications. Large companies use the Ethereum blockchain to build applications that rely on decentralized ledger technology. Large banks, such as Santander, have trialled Ethereum-based financial products; French gaming company Ubisoft uses it for virtual trading cards; and Dutch bank ING uses it for a variety of blockchain-based financial products.Buy and sell Bitcoin and Ethereum instantly with Wealthsimple. Sign up to trade here.
Tether is a little different: it’s a so-called “stablecoin,” meaning that its worth (its current market cap is $16 billion) is tied to the US dollar. This is because it is backed by cash reserves of real US dollars. Tether is the most popular US dollar stablecoin. Stablecoins, which are tied to real-world currencies or assets, like gold, and are useful for people who want to engage in decentralized finance without exposing themselves to currency risk.
With a market cap of $11 billion, XRP is the fourth largest cryptocurrency by market cap. There are countless numbers of other cryptocurrencies, each reliant on the same blockchain technology that powers Bitcoin.
Why are cryptocurrencies worth money?
Some of these coins are worth a lot of money. The price of a single YFI token, which powers a crypto robo-advisor app, shot up to highs of about $40,000 in the summer of 2020. That’s double Bitcoin’s all time high.
Stablecoins aside, most of these coins aren’t backed by anything. They’re not legal tender and aren’t controlled by a central bank. So, what gives them their worth? That’s a contentious issue, but there are a few things that people point to:
First, many people think that the worth of a cryptocurrency is purely speculative—people buy these coins on the assumption that other people value them, and the hype alone causes them to shoot up in value. Even if cryptocurrencies are worth something, they mostly ride on value as speculative assets, these people argue.
Others think that cryptocurrencies are valuable because they’re scarce. It’s impossible to mint any more of those YFI tokens, for instance. Only 30,000 were ever created, which explains why the coin hit such high prices. And due to a line of code in the Bitcoin protocol, only 21 million Bitcoins can ever exist—and 18.5 million of those Bitcoins have already been mined.
Third, some people think that these coins derive their worth from the genuinely useful applications they power. Bitcoin is accepted as a means of payments by many merchants, and its provable scarcity makes it a store of value. Ethereum, on the other hand, is valuable because many large institutions rely on the Ethereum blockchain to run their applications—similar to how Windows is valuable because people use it to power applications.
How to trade cryptocurrencies
However they get their value, these coins can be worth a lot of money. For this reason, they’re very popular among investors, who snap them up in the hopes that they’ll one day increase in value. But where do investors buy and sell cryptocurrency?
The first trading venue is called a “brokerage” service. On crypto brokerages, you buy and sell cryptocurrency from an intermediary. Wealthsimple Trade is one of these, as is Coinbase. Revolut runs a crypto brokerage and PayPal’s about to add one.
Some of these brokerages, such as Coinbase, let you take your cryptocurrency off of the platform and move them around the crypto economy, sending them to whomever you please or trading them on other exchanges.
Others, such as Wealthsimple, Revolut, and PayPal, only allow you to buy and sell crypto directly within the app; you can’t take the crypto off the platform.
All this, obviously, is not in the spirit of true decentralization. However, these platforms are useful for traders whose interest in cryptocurrency is solely for investment. They are also very easy to use; crypto can be a difficult space to get to grips with.
Cryptocurrency exchanges account for most of the crypto trading volume. Cryptocurrency exchanges maintain an order book of buyers and sellers; they’re the crypto equivalent of the stock exchange.
These exchanges often support trading of more complicated financial products, such as futures contracts and leveraged trades. Accordingly, they’re a little more advanced than brokerages, and the learning curve is comparatively steep.
Some of the most popular and well known cryptocurrency exchanges are Binance, Huobi, and Coinbase. Between them, they facilitate billions of dollars worth of cryptocurrency trades each day. Exchanges come with their own fee structure, incentives and insurance policy. Stick to the big ones if you’re unsure.
Decentralized exchanges are similar to the cryptocurrency exchanges, above, but they’re non-custodial. When you trade on exchanges like Binance and Huobi, or through brokerages like WealthSimple and Coinbase, you entrust those companies with your cryptocurrency.
Lots of people don’t want to trust other people with their money—even some of the largest cryptocurrency exchanges have been hacked, or turned out to be run by crooks—so they instead turn to decentralized exchanges.
Decentralized exchanges are non-custodial, meaning that the operators of the protocols can’t access your money. So long as the protocol’s code is bug-free—a big assumption—it’s impossible for the creators of decentralized exchanges to drain all the cryptocurrencies held in the exchange and leave investors empty-handed.
Another advantage: while regular cryptocurrency exchanges and brokerages only list a select number of tokens they believe will not cause reprisal from government agencies, decentralized exchanges can list whatever they want. What’s the government going to do—sue the protocol?
The most popular decentralized exchange is called Uniswap, which like several other leading decentralized exchanges, works a little differently to centralized exchanges. Instead of an orderbook that fulfils trades, the exchange pays other users to provide liquidity to the exchange so that people can trade tokens whenever they want.
Peer-to-peer exchanges, also known as p2p exchanges, function like primitive cryptocurrency exchanges. Instead of a slick matching engine that would give the Toronto Stock Exchange a run for its money, peer-to-peer exchanges contain lists of cryptocurrency traders looking to buy or sell cryptocurrency, often for cash. There are a couple of obvious benefits:
First, traders can operate with a higher degree of anonymity than on regular cryptocurrency exchanges. Regular cryptocurrency exchanges let you buy and sell crypto with fiat currencies—the US dollar, the British pound, and so on—but require you to provide proof of your identity. Some of the peer-to-peer sites ask no questions. Loopholes are being closed, but they are very popular as a way of trading cash for crypto without the government snooping.
Second, P2P exchanges are often cheap. The service of a fancy matching engine, the convenience of crypto brokerages or the self-sovereignty of the decentralized exchange all come at a price. Peer-to-peer exchanges, often little more than dressed up versions of a crypto Craigslist, are far cheaper to run and thus may net you the best deal for one-off trades.
How to select cryptocurrencies, exchanges and wallets
How should you trade cryptocurrency, and how to select a cryptocurrency to trade?
How to select cryptocurrencies
There is no “one-size-fits-all” approach to investing, but there are a few handy tips to keep in mind when selecting your crypto.
Most obvious is that cryptocurrencies are high-risk investments and—stablecoins aside—highly volatile. Pick any of the major coins and you’ll find holders of each that can share a story of wonder and a tale of woe.
Before you invest in any cryptocurrency, it is advisable to research the project. Details about the coin are often described in whitepapers or in blog posts. Investors congregate on social media sites Reddit, Telegram, Twitter, and Discord, and the creators of early-stage crypto projects are often happy to walk you through the project.
The larger cryptocurrencies by market cap have more established communities and a richer history. However, they are not necessarily less volatile. The price of Bitcoin, for instance, was cut in two when markets buckled amid the economic uncertainty caused by the coronavirus in March 2020. By October of the same year, its price had tripled.
How to select a trading venue
Determining the best place to trade cryptocurrency depends on your investment strategy.
If you’d like to buy and sell crypto, but don’t want to bother with any of the more advanced trading strategies, then crypto brokerages are a fine way to go. They’re often integrated with trusted financial products you already use, like challenger banks, robo advisors and (soon!) PayPal.
Buying and selling is usually as easy as clicking a button. Fees are not necessarily that much higher than on cryptocurrency exchanges, and there’s less room for error. However, you might be limited to just a handful of cryptocurrencies, often just Bitcoin and Ethereum. Plus, you usually can’t move your crypto out of your wallet—that limits you from participating in the broader crypto economy.
If you’re interested in trading a greater variety of coins or placing more advanced trades, then regular cryptocurrency exchanges are a good option. Stick to the bigger ones and you’ll usually get a reliable service and can trade without egregiously large fees.
If you’d like access to the broader, more experimental crypto market, and would prefer to trade highly risky, unregulated tokens, try decentralized exchanges.
Remember: If you’re trading on regular exchanges, you’ll need a cryptocurrency wallet, which is like a bank account for your crypto. Although some exchanges have wallets integrated within their systems, it’s a good idea to have your own crypto wallet in case the exchange suddenly collapses. Xapo, Armory and Trust Wallet are reputable solutions.
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