The Rise of Cryptocurrencies

August 20, 2014

Photo Credit: zcopley cc

As the world has become increasingly virtual, all kinds of new possibilities have been opened up in the world of finance and trading. For example, there’s been a huge rise in retail trading numbers thanks to technology like MetaTrader 4 which essentially lets anyone with a computer or mobile device connect to global markets. And just as there have been changes to how we’re able to trade, there have also been changes to what we’re able to trade. One of the more recent and notable examples is the rise of what are known as ‘cryptocurrencies’.

What exactly are Cryptocurrencies?

Cryptocurrencies are virtual currencies and the most prominent of these include Bitcoin, Dogecoin and Reddcoin. How these differ from a currency managed by a traditional central bank (aside from there being no tangible product like a note or coin) is that cryptocurrencies are decentralised and managed through peer-to-peer networks. Rather than depend on regulated systems, cryptocurrencies and their transactions are secured online by encrypted passwords. Users store a virtual wallet on their computer which they then use to buy, sell or invest – just the same as with any other currency.

But, because of the way this system works, crypto-currency transactions are, for most intents and purposes, anonymous and each one has its own digital fingerprint. It’s this element – the lack of traceability – that has seen the system criticised for security after some high profile hacks seemingly undermined the system.

Forex trading and Cryptocurrencies?

So what might it all mean for Forex traders considering moving into cryptocurrencies?

The principle of trading something like Bitcoin, for example, is the same as any other form of currency trade; you pair the Bitcoin with another established currency, like the US dollar, and buy or sell as the value of the Bitcoin increases or decreases relative to the dollar.

But, partly because it’s still new and not yet fully understood, most brokers don’t offer cryptocurrencies as a direct trading option. Consequently, analysts remain divided on whether they will ever truly take hold and become a viable and widely-accepted form of currency. Ironically, that very uncertainty makes it a more attractive prospect to some traders. Uncertainty in trading tends to mean volatility, which can mean greater profits if you’re able to pick the fluctuations. However, as with any other highly speculative investment, there’s also a great element of risk involved.

The Future of Cryptocurrencies?

While there are still plenty of barriers to crypto-currencies becoming more widely accepted, the infrastructure is already established, it’s proven to be faster and more efficient than traditional forms of currency and security concerns will undoubtedly be addressed. And from a user perspective, early adopters have taken to them and thousands of merchants already accept them as an alternative form of currency.

They may only be young but crypto-currencies have made enough of an impact to suggest that they’ll be around for a while.

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