FAQ about сryptocurrencies

By Aleksei Lossan

Frequently Asked Questions about cryptocurrency and what you should know about crypto.

                                

FAQ about crypto

Once a novice investor decides to invest in the crypto market, he faces a lot of questions. We have collected answers to the most popular questions on the crypto market: how cryptocurrency differs from fiat money, what is a trading platform, how to secure transactions on the crypto market and protect yourself from scammers, and much more.

What is a Cryptocurrency and its market?

Cryptocurrency is a cryptographically secure type of digital assets that is often perceived as a means of payment and store of value (even though not considered as a legal tender by the majority of countries around the world), powered by a blockchain system and can only be stored, transferred or exchanged electronically. Operations with cryptocurrencies are very popular, because transactions are anonymous and they usually don’t require any confirmations from external parties. The crypto market is not administered by any external regulators and financial institutions like banks. Unlike fiat money, in the world of crypto there is no single centre that issues the coins.

Cryptocurrencies are produced in two ways. Firstly, it is Proof-of-Work, when the user receives coins for solving a complex mathematical problem. This is how, for example, Bitcoin works. Secondly, this is Proof-of-Stake, when a user provides part of his coins for staking, that is, in fact, he gives it as a deposit. Since September 2022, the second crypto in the world, Ethereum, has been operating. However, no institution can directly influence the crypto market.

Where to buy cryptocurrency?

The most popular way is to buy coins on a Trading Platform that allows users to buy and sell cryptocurrencies for fiat, as well as exchange one currency for another, usually at the market rate. To start trading on a Trading Platform, an investor must register on it and go through the verification procedure - provide copies of documents and take a picture.

Cryptocurrency exchange meaning

After the verification is passed, the investor can buy crypto for fiat, having previously replenished his crypto wallet - most often, from a bank card or through a crypto ATM. Basically, the exchanges work with the largest payment systems Visa and MasterCard, as well as with financial service providers such as Revolut.

Is it possible to get cryptocurrency for free?

Yes, but mostly in small quantities. One of the most popular ways is an airdrop, which is the distribution of coins as part of a marketing campaign for a new cryptocurrency. Social networks traditionally limit the advertising of crypto projects, so their creators began to distribute coins to the first users for free. In fact, it resembles a test drive, only on the crypto market. This method has two significant disadvantages. Firstly, this way one can only get new cryptocurrencies, he won’t be able to earn Bitcoin or Ethereum using this method. Secondly, to participate in the campaign, one must be a popular user of social networks.

Another way to get crypto for free is to participate in games where, upon reaching a certain level, the user is given coins in the form of a bonus. Most often, though, we are talking about a relatively small amount of Satoshi (a hundred millionth of a bitcoin), and in order to withdraw funds, one needs to accumulate a serious amount of premiums. Satoshis are also paid for completing tasks on the so-called Bitcoin faucets, for example, for completing a survey, checking captchas, or watching ads.

Finally, the last way is mining, solving complex mathematical problems on computing power. However, as of today, more than 91% of all Bitcoins have already been mined, and for efficient mining, one needs to create a full-fledged farm of thousands of devices and get access to cheap electricity.

How to choose a cryptocurrency for investment?

A novice investor is faced with the task of which Cryptocurrency to choose for investments. Traditionally, Bitcoin is considered the most popular Cryptocurrency, which still accounts for about 40% of the crypto market capitalization. All other coins are called altcoins, and the most famous of them is Ethereum. In order to understand which cryptocurrency to invest in, experienced traders advise using fundamental analysis. First of all, this is an analysis of the objective reasons where the course can go.

The very first stage is the study of the coin itself, in this sense it will be useful to read the White Paper - a detailed story about the Cryptocurrency, written by its creators. Usually, this document explains why a new coin was needed, how its blockchain works. The presence of a strong community in a coin is a key factor in its future success.

Finally, you should study the main factors that can affect the rate - the supply and demand balance, halving, as well as various blockchain updates. All this will help to avoid the acquisition of the so-called shitcoins - coins that have no real value, capable of collapsing at any moment.

What is diversification and why is it important?

The crypto market is extremely volatile - the cost of Bitcoin and Altcoins can change rapidly within one trading day. To protect themselves from rate fluctuations, experienced traders advise to diversify an investment portfolio.

An investment portfolio usually means a list of assets that belong to a particular investor. This list includes stocks, bonds, precious metals, commodity futures, real estate, and cryptocurrencies. Diversification is an investment in various assets with the aim of compensating for the fall of others due to the growing cost of some goods or currencies.

Diversification meaning

Diversification can be of different types, but most often based on investments in different types of assets. Each type of asset carries a different degree of risk. For example, bonds and stocks of the largest companies are considered as stable as possible, while cryptocurrencies, on the contrary, can change their course dramatically. Therefore, it is better to combine different assets in an investment portfolio.

In addition, diversification by country is possible - a trader can invest not only in shares within their country, but also in the blue chips in the US market. In the latter case, the trader will invest, for example, in different cryptocurrencies: Bitcoin, Ethereum, and less popular Altcoins.

How to choose a safe Trading Platform?

Trading platforms are either centralised or decentralised. All the largest sites are centralised, that is, they have a completely understandable manual, methods for verifying operations. Before registering on the platform, one should make sure that he has entered the address of the Exchange correctly, and that the Exchange itself is loaded via the secure https protocol.

One of the most popular types of fraud is the creation of phishing mirrors of the popular Exchanges, where the user does not suspect that he has landed on a fake site. Experienced traders also insist on using the applications of popular Exchanges. Separately, pay attention that the selected Exchange works exactly with the fiat currency, this will allow to conveniently deposit and withdraw funds, as well as save on commissions.

However, in any case, experienced investors do not recommend holding a large amount of crypto on the Exchange. It is better to withdraw assets to a secure crypto wallet, preferably not having constant access to the Internet.

What investment strategy to choose?

First of all, investment strategies differ in how long the investor plans to keep a particular cryptocurrency in his portfolio. All strategies are divided into long-term (from a year), medium-term (from a month to a year) and short-term (up to a month).

In the case of long-term investment, the traders consider investing in crypto as a promising tool for saving capital. This strategy is very similar to the so-called hodling - when an investor believes in the future of the crypto market and keeps coins in the hope of fabulous profits. Most often, such expectations are fueled by analysts' forecasts that BTC will reach $100,000 or even $1 million in the future. However, no proofs for such forecasts are provided.

The medium-term strategy involves mainly trading with the trend - the trader tries to guess where the rate of a particular coin will move in the future and makes a decision in accordance with these expectations and the opinion of the majority of the market participants. Such a strategy requires knowledge of fundamental analysis, that is, the ability to determine the objective reasons for the dynamics of the crypto market in the future, and it is also worth constantly monitoring the news that may affect the rates of the specific coins.

Finally, short-term trading means investments up to a month, and sometimes transactions are concluded within one trading day. A separate strategy is scalping - trading literally at minute intervals, when the investor earns on minimal exchange rate fluctuations. For such trading, one needs to master the skills of technical analysis - to be able to predict where the course will go based on the various figures that form on the chart.

How to read the cryptocurrency exchange rate chart?

If fundamental analysis tries to answer the question - what are the objective reasons for changing the cryptocurrency rate in one direction or another, then technical analysis is aimed solely at analysing the chart itself on the basis of purely formal indicators.

It is assumed that patterns can form on the daily or weekly charts that accurately indicate the future movement of the asset. So, perhaps the most famous figure is the Head and Shoulders Pattern, which speaks of a future fall in the course. Support and resistance lines are essential for a technical analysis. The first term means some virtual line or price corridor, below which the rate cannot fall for some time. The second term indicates a mark above which the rate cannot rise.

For the convenience of investors, the so-called Japanese candlestick is used for technical analysis - this is a histogram, originally invented for trading rice. The bars resemble candles in appearance, and the tail at the edges of the bar is a shadow. The length of the candle shows the difference between the opening and closing prices, in its wick - the maximum and minimum that the price reached during the auction.

The material provided on this website is for information purposes only and should not be regarded as investment research or investment advice. Any opinion that may be provided on this page is a subjective point of view of the author and does not constitute a recommendation by Currency Com or its partners. We do not make any endorsements or warranty on the accuracy or completeness of the information that is provided on this page. By relying on the information on this page, you acknowledge that you are acting knowingly and independently and that you accept all the risks involved.
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