Crypto Explained: How Does the Cryptocurrency Market Work?
Cryptocurrencies have grown incredibly popular in recent years.
Considered by some as the future of global finances, they have drawn in an ever-increasing number of adepts. Naturally, it also means that investors and traders have taken notice of this trend, and want to learn more about how the cryptocurrency market works.
So, how does the crypto market work?
If you are new to cryptocurrencies and want to learn more about them, this guide will go into more detail regarding how the cryptocurrency market works.
You will learn more about cryptocurrencies, their market and cryptocurrency trading. Join us for a comprehensive introduction to the theme.
Table of Contents
How Does the Crypto Market Work? An Introduction
Thanks to the increased popularity it has enjoyed in recent years, cryptocurrency has also become a possible trading and investment option for the general public.
The cryptocurrency market does not have a central authority - after all, decentralization has always been its core idea. Cryptocurrencies have their value determined entirely by supply and demand.
Since the cryptocurrency market is still taking its first steps, it is also extremely volatile. There are sudden rises in supply and demand, and assets’ prices do fluctuate quite often.
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What is Cryptocurrency?
Cryptocurrency is, in its essence, a virtual asset that can be used for transactions.
Created as a payment method with ease of use and privacy as core principles, cryptocurrency presented itself as an alternative to fiat currency.
Cryptocurrency has no physical counterpart, which is one of its significant differences compared to traditional currency.
It all started back in 2009, when the mysterious Satoshi Nakamoto released Bitcoin’s 0.1 version. The first-ever cryptocurrency, Bitcoin paved the way for the cryptocurrency market.
As its name suggests, cryptocurrency is simply a payment method that relies on cryptography to validate transactions.
In cryptography, a computer generates two keys (a combination of numbers and letters, similar to an ultra-secure password): one of them is a private key which, exactly as its name suggests, is only known by its owner.
The other is a public key, which must be known by all parties involved. The two keys work as a pair since the private key is the only one that can access the information contained in the public key.
Here is a simple example of how a crypto transaction works
- A creates a public key and shares it with B
- B uses the public key and sends some cryptocurrency to A as a payment. B then confirms the transaction using their own private key.
- A receives the transaction and uses their own private key to access the payment contained in the public key.
There is no third party, like a bank, involved in crypto transactions. Everything is completed peer-to-peer.
But if there is no central authority, then how can a cryptocurrency transaction be validated?
Cryptocurrencies are part of a blockchain - multiple virtual blocks of information “chained” together. Each block contains multiple crypto transactions.
A network of computers - called nodes - validates each block individually.
Once this process is done, the transactions inside that block are made “official”, and the block itself is then added to the blockchain.
Nodes that validate a transaction receive cryptocurrency as a “payment”, which is how new units are added to the market.
How Does Cryptocurrency Trading Work?
While cryptocurrencies were originally developed as an alternative payment method, the market was quick to notice their potential as a financial asset.
As mentioned earlier, since there is no government regulation to determine the cryptocurrencies’ value, their price is driven exclusively by supply and demand. Cryptocurrencies have extremely high volatility.
There are essentially two ways to trade cryptocurrency. The first one is owning the underlying asset itself.
Cryptocurrencies can be acquired using two different methods:
Mining: Using a computer to validate transactions in the blockchain. Depending on the cryptocurrency, this will require a dedicated machine with high specs, which also means high energy consumption.
Buying Cryptocurrencies: Buying cryptocurrencies from brokers is also an option for those without the necessary resources for mining. Not all credit card operators allow transactions involving cryptocurrencies. Brokers usually accept wire transfers as the most common payment method.
In order to own cryptocurrencies, the trader must also have a wallet. This is actually a storage for the assets, and it can be either virtual or physical.
A virtual wallet (known as “hot”) can be a reliable online operator that offers the service. A physical wallet (known as “cold”) is a special piece of hardware used as a storage system for one’s crypto assets.
In this case, aside from their unusually high volatility, cryptocurrencies work like any other trading asset. Traders can either buy or sell their cryptocurrency based on the asset’s price.
The other option is to trade crypto CFDs.
In a CFD, which is short for Contract for Difference, the buyer does not own the underlying asset itself. Instead, they will be paid the difference in the asset’s price at the start and at the end of the contract.
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What are the Most Popular Cryptocurrencies?
As mentioned earlier, there are tens of thousands of cryptocurrencies available. However, the vast majority can barely make it out of the gate.
Over the years, some cryptocurrencies have set themselves apart from the rest, becoming more popular. Here are some of them:
Bitcoin (BTC): The first cryptocurrency created. Bitcoin has been around since 2009. Still holds the first-mover privilege within the market and remains the most popular cryptocurrency.
Ethereum (ETH): Originally created as a separate blockchain, Ethereum also added its own currency, Ether, to be used within the platform. It is currently the second most popular cryptocurrency.
Litecoin (LTC): The “lighter” cryptocurrency, Litecoin uses a faster verification method in its blockchain, allowing it to verify transactions in around 2.5 minutes.
Polkadot (DOT): The native currency of the Polkadot blockchain. Polkadot also uses a faster verification method, taking less time to process transactions.
Cardano (ADA): Created in 2017 following a split between Ethereum’s co-founders, Cardano also relies on faster verification methods to speed up transactions.
Dogecoin (DOGE): Created as a joke in 2013, Dogecoin has since grown to become one of the most popular cryptocurrencies.
What are Altcoins?
Altcoin is simply a short form of alternate coins - a generic term used to refer to the majority of cryptocurrencies other than Bitcoin or other stablecoins.
As mentioned above, different blockchains have their own native cryptocurrencies, which can also be referred to as altcoins. The cryptocurrencies listed above, besides BTC, are all considered altcoins.
How Does the Crypto Market Work? Conclusion
The cryptocurrency market is growing in popularity, leading to the market taking notice of their value as financial assets.
Cryptocurrency trading has also gained a lot of traction in recent years.
Other than being highly volatile, cryptocurrencies aren’t any different from other assets.
Traders will likely see frequent price fluctuations, allowing them to either buy or sell. Crypto CFDs are also an alternative that doesn’t require owning the asset itself.
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How does crypto go up and down?
As with any asset, crypto fluctuates in price based on supply and demand. Most cryptocurrencies have a finite supply and given ongoing trends in the crypto market, the supply and demand can be heavily volatile hence the price reacts to this.
How does crypto make someone money?
There are various processes by which crypto can make an individual money. Mining, yield-farming, staking, deFi commissions and trading either crypto CFDs or the crypto asset are all valid ways someone can make money with cryptocurrency.
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