By Sergei Grigoriev, Executive Director, Eurotrader
With the popularity of cryptocurrency reaching a fever pitch, its development has also attracted new contenders within the trading sphere.
Virtual payments have made numerous impressions on global headlines. News networks were set ablaze following triggers such as Elon Musk’s influence on the market and reports of an investor losing millions in Bitcoin, to name a few. It therefore comes as no surprise that attention is focused heavily on the commodity.
However, despite Bitcoin being the most popular name in the crypto sphere – and having the highest valuation – there is a range of lucrative currencies existing in a growing market, each with its own benefits and downsides.
This article explores some of the benefits of emerging cryptocurrencies and the key considerations for finding the right investment.
The attraction of cryptocurrency
Much like its blockchain host, cryptocurrency boasts cybersecurity credentials that make it an attractive investment.
This ‘trustless’ style of investment reduces risk, as no bank, building society or financial adviser holds the stock for you. And despite stories of people throwing away their crypto fortunes, there isn’t any physical currency to be concerned about – significantly reducing the risk of theft or fraud that comes with traditional currencies.
Cryptocurrencies also offer another significant pull for investors: they require no middleman. While trading platforms charge fees to trade, withdraw and settle money, these are minimal compared with the hefty fees charged by other investments, like currency conversion costs.
The speed of cryptocurrency trading is also a selling point. Transactions are seamless, instant and secure, with blockchains also lessening the need for a paper trail and helping to guard you against fraud.
Delving deeper into the market
Bitcoin leads the cryptocurrency market in almost every department. Its popularity and value are currently unrivalled, with a market cap hovering around the $1 trillion mark.
With that said, Ethereum’s sudden surge to prominence shouldn’t be taken lightly, showing that even newcomers can quickly make waves in the market. With a market cap of $500 billion, Ethereum isn’t showing signs of slowing down.
Since Bitcoin’s launch in 2009, the creation of competing digital currencies has been steadily increasing, with a sudden boom in recent years. In terms of their functionality and operation, most alternative currencies differ wildly from Bitcoin. However, some have similar qualities to the current main player.
For example, Ethereum uses the same blockchain ledger as Bitcoin, with similar benefits. However, the system itself is geared to prioritise speed of transfer, with a different operating system that sets it apart from Bitcoin.
On the other hand, Litecoin is far more similar to Bitcoin. As its name implies, it’s a ‘lighter’ version of the reigning crypto king, however, it also offers more impressive transfer speeds.
Some cryptocurrencies run on independent, alternative systems. For example, Ripple is a centralised crypto platform, notably used for global monetary exchange, intending to make these transactions cheaper and faster than traditional international bank transfers.
Cryptocurrencies typically aim to remove themselves from the moderation of centralised governments and geopolitical market fluctuations – however, Ripple is an exception, as its most common use is by banks and other intermediaries.
The cons of engaging with smaller currencies
Bitcoin is the most established market player by almost every available metric. This can make it difficult for even innovative new cryptocurrencies, offering unique benefits, to break into the market.
This is helped by the fact that it was the first successful and widespread digital currency. Because of its unprecedented growth – and an established blockchain ledger, accessible to all – Bitcoin boasts the largest user base and offers the highest potential prices and rewards on investment.
It’s because of this dominance in the market that alternative currencies struggle to match Bitcoin in size or surpass it in growth.
Importance of diversification
With Bitcoin pricing many budding traders out of the market, there are plenty of attractive alternative investments available. It’s simply about identifying the right investment. However, this is more challenging than ever, for both experienced investors and first-time traders alike.
It’s important to understand the unique benefits offered by each currency. For example, those opting for advanced scalability and an intensively secure network will likely turn their attention to Ethereum.
Ethereum’s decentralised ledger is valued for its impressive security, relying on two separate verification processes, Smart Contracts and ‘dApps’.
Smart Contracts are functions that support safe and secure transactions on the Ethereum blockchain. Their specific code and data functions mean payments can only be processed when certain criteria are met.
It’s often said that Smart Contracts behave like vending machines. A combination of money and an inputted code allows users to access the digital currency, without the need for third-party intervention or transaction management.
Similarly, decentralised applications, or ‘dApps’, are also at the heart of Ethereum’s operation. These are ordinary applications that operate on a decentralised server, like the blockchain, and are defined by smart contracts. Importantly, they allow users to engage with the front-end interface in a way that is intuitive, secure and user-friendly.
Other Bitcoin alternatives offer further unique benefits. Litecoin, for example, is incredibly scalable and efficient. It boasts impressive speeds, with transactions up to four times faster than Bitcoin.
Litecoin is also growing in popularity, as well as being cheaper than Bitcoin – appealing to particular sectors of the trading market that are geared for small, plentiful and rapid trades.
Knowing what is right for you
To find the right investment, it’s advised to produce a checklist of what you want to achieve from your investment, as well as defining how much risk you’re willing to incur.
It’s impossible to simply declare a single cryptocurrency as ‘the best investment’. Defining your ambitions and goals as a trader first helps narrow your potential investments into a viable portfolio of assets.
Over the last decade, the range of accessible cryptocurrencies has boomed, giving traders more autonomy in their choices.
That being said, an alternative to directly investing in a single cryptocurrency is to trade CFDs. Instead of owning an asset, you speculate on market movements. If you correctly predict a market rise or fall, you may be able to earn money.
The growing number of crypto contenders, combined with the growing interest in cryptocurrencies, makes crypto CFD trading a suitable alternative to those who are following the market and are interested by different crypto currencies.
This heightened interest has led to more CFD trading platforms and retail brokers offering cryptocurrency trading pairs. Traders can trade crypto-fiat pairings, such as Bitcoin Cash USD (BCHUSD) without the need for a crypto wallet or ownership of cryptos themselves.
However, no matter your experience level or route you decide to take, research is key. In addition to analysing the fundamental nature of each currency, it’s important to understand how to build and manage a portfolio. Cryptos with different growth triggers can help diversify your portfolio and hedge against crashes, giving you peace of mind over your finances.
If you’re unsure, working with a professional can help you better understand the market, putting your mind at ease over the risks and rewards of your investments.