What Is Cryptocurrency? A Basic Guide and Trading Cryptocurrency on Pocket Option

Cryptocurrency Definition: A Simple Explanation

A cryptocurrency can be described as a digital currency that utilises cryptography in order to facilitate secure transactions and regulate the generation of additional units. As opposed to fiat currencies, which are controlled by central banks, cryptocurrencies function in a decentralised manner, without any controlling body.

The log containing all transactions is known as a blockchain – it’s a distributed ledger running on multiple computers at once. Once the transaction has been verified and recorded into the blockchain, it becomes immutable and open for verification. That is precisely why the transparency and immutability of transactions make cryptocurrencies different from any other payment system.

In plain terms, cryptocurrency digital currency is money which only exists online, protected with math instead of institutions, and can be sent between individuals without the involvement of any bank or financial organization.

Creation of Cryptocurrency

Understanding how cryptocurrency is created requires knowledge about two processes, namely, mining and staking.

Mining (Proof of Work): coins are created through solving complicated math problems by computers in order to create blocks of transactions and confirm their validity. The process is extremely resource-demanding and competitive. Bitcoin is an example of the currency created through mining.

Staking (Proof of Stake): instead of working on puzzles, validators lock their existing coins as security to validate transactions. They are chosen according to the amount of stake along with other considerations. Ethereum moved from Proof of Work to Proof of Stake in 2022. It involves less energy consumption than mining and also needs the locking of funds.

Both of these systems imply that new tokens will be issued according to the protocols rules rather than by any central body. The number of coins to be issued, the rate, and the process of issuance are all predetermined in the protocol.

How Does Cryptocurrency Investment Works?

There are two answers to the question of "how does investing in cryptocurrency work?" due to two methods.

Ownership and holding entails buying the real cryptocurrency via an exchange or wallet, taking possession of the coins and keeping them for some time under the assumption that the price will appreciate. The person becomes the owner of the asset, has the ability to transfer it and faces all the potential risks involved. Capital gains on the sale of the asset are usually taxable in most countries.

Speculation on the price movements involves speculation whether the price goes up or down but not buying the underlying assets. This is how trading works on Pocket Option. The investor enters into a trade in either of two directions, puts a stop-loss & take-profit, and the result depends on the price movement during the time of the trade. No cryptocurrency is bought, sent, or held. The capital gains implications may differ from outright ownership depending on the trader's jurisdiction.

Cryptocurrency vs Digital Currency: What Is the Difference?

Terms cryptocurrency digital currency are often considered synonyms, although they are not the same. Digital currency refers to any currency that has an electronic representation. Thus, it covers balances in your bank accounts, balances in PayPal, and central bank digital currencies (CBDC). All of them are governed by a central entity.

On the other hand, a cryptocurrency refers to a particular type of digital currency which is decentralised, based on cryptography and uses blockchain technology. An example of such a currency is Bitcoin. Your balance in dollars in the banking application is a digital currency.

Explanation of Market Capitalization and Why It Is Important

The formula for market capitalization (or market cap) is the product of the price of the cryptocurrency and the total number of coins that exist. If a coin is priced at $50 and there are 20 million coins, the market cap will be $1 billion.

Market cap is applied in classifying the size of cryptocurrency coins:

• Large cap (>10B): BTC, ETH. More liquid, covered by more sources, and volatile compared to small coins.

• Mid cap (1B-10B): SOL, AVAX, DOT. More volatile but sufficiently liquid to be actively traded.

• Small cap (<1B): more volatile, less liquid, more spreads. More risks of drawdowns.

It is important to understand that market capitalization is not value. Market cap says nothing about whether a coin will be good for an investment or a good trade. It is only a measure of size, not quality.

Popular Cryptocurrencies You Can Trade: BTC, ETH, SOL, and Others

Some other cryptocurrencies along with these ones can be found in the Cryptocurrencies tab of Pocket Option. The range of available assets could change; hence, it would be wise to check them out prior to trading.

How to Trade Cryptocurrency on Pocket Option

1. Create an account at Pocket Option or access your existing one

2. Navigate to the Cryptocurrencies tab using the assets' drop-down list.

3. Pick up the crypto you want to trade (BTC, ETH, SOL, and more options are available).

4. Choose between Quick Trading (expiring contracts) and MT format trading (positions with manually defined stop loss and take profit).

5. Add technical indicators to the price chart. For crypto, it is popular to use RSI, MACD, and Bollinger Bands because of the volatility of this asset class.

6. Set the trading parameters – direction, entry, stop loss, take profit. Trade only when all parameters are set.

Practice on the Pocket Option Demo Account

Notoriously, markets in cryptocurrencies are volatile. It is not surprising when 5% to 10% movements occur in a single trading session. This is especially true for mid and small-cap cryptocurrencies. The demo account is where you learn how to cope with this volatility before exposing any money.

All the currencies listed on this platform are available for trading on demo. You should make at least 30 demo trades with all details noted down.

Crypto Trading: Basic Risk Management

• Never risk more than 1-2% of your account balance on each trade. Volatility of cryptocurrencies leads to stops being triggered fast. Small trade sizes help withstand losing streaks.

• Each trade must be closed with a stop loss. "I'll monitor it myself and get out later" is not a risk management strategy, especially for a market which operates 24/7 and which may gap during low liquidity time periods.

• Do not accumulate several positions in one currency. High correlation in the cryptocurrency market: when BTC drops, other altcoins drop even harder.

• Exercise caution near large events. Market moves triggered by protocols, regulations or exchanges themselves can be extremely violent and without any warning.

• Since the cryptocurrency market operates 24/7, there is no natural "end of session" moment to think over what has been done today. Define your own end point. As soon as the daily loss level is exceeded, shut down the platform regardless of market situation.

Conclusion

So, what is cryptocurrency in practice? Cryptocurrency is a virtual currency protected through cryptography and kept on a decentralized blockchain that can be traded on any platform, such as Pocket Option, 24/7. The asset type is relatively young, highly volatile, and different from conventional assets structurally, yet the rules of successful trading (clear trading rules, risk management, trading in demo, honest journaling) remain equally valid.

First of all, you should use a demo account. Find out how BTC, ETH, and SOL move on the chart. Develop a strategy. Test it. And then switch to real trades when your journal proves it's the right time to do so.

Disclaimer: Information provided in this article is not intended as an offer or solicitation for the purchase or sale of any investment product, nor as a recommendation, offer or solicitation by the author to buy, sell or trade any investment or security. Trading cryptocurrencies is associated with a significant level of risk, including the complete loss of your initial deposit. Cryptocurrency markets are very volatile and trade non-stop, leading to unpredictable price fluctuations. Taxation on cryptocurrencies depends on the jurisdiction.