Bitcoin Ethereum Cryptocurrency trading

Cryptocurrencies are systems that allow for the secure payments of online transactions that are denominated in terms of a virtual “token,” representing ledger entries internal to the system itself. “Crypto” refers to the fact that various encryption algorithms and cryptographic techniques, such as elliptical curve encryption, public-private key pairs, and hashing functions, are employed.

The first cryptocurrency to capture the public imagination was Bitcoin, which was launched in 2009 by an individual or group known under the pseudonym, Satoshi Nakamoto. As of February 2019, there were over 17.53 million bitcoins in circulation with a total market value of around $63 billion (although the market price of bitcoin can fluctuate quite a bit). Bitcoin’s success has spawned a number of competing cryptocurrencies, known as “altcoins” such as Litecoin, Namecoin and Peercoin, as well as Ethereum, EOS, and Cardano. Today, there are literally thousands of cryptocurrencies in existence, with an aggregate market value of over $120 billion. (Bitcoin currently represents more than 50% of the total value.)

Cryptocurrencies hold the promise of making it easier to transfer funds directly between two parties in a transaction, without the need for a trusted third party such as a bank or credit card company, these transfers are facilitated through the use of public keys and private keys for security purposes. In modern cryptocurrency systems, a user’s “wallet” or account address, has the public key, and the private key is used to sign transactions. Fund transfers are done with minimal processing fees, allowing users to avoid the steep fees charged by most banks and financial institutions for wire transfers.

Central to the appeal and function of Bitcoin is the blockchain technology it uses to store an online ledger of all the transactions that have ever been conducted using bitcoins, providing a data structure for this ledger that is exposed to a limited threat from hackers and can be copied across all computers running Bitcoin software. Every new block generated must be verified by the ledgers of each user on the market, making it almost impossible to forge transaction histories. Many experts see this blockchain as having important uses in technologies such as online voting and crowdfunding, and major financial institutions such as JPMorgan Chase see potential in cryptocurrencies to lower transaction costs by making payment processing more efficient.

Volatility in the price of cryptocurrencies such as bitcoin and ethereum frequently makes the news, with rises and falls of 40pc or more in a matter of days not uncommon. But what is actually causing the rollercoaster ride? Here are some of the top culprits.

Regulation

As with any new type of investment, the law is racing to keep up with the development and use of cryptocurrencies. Questions are being asked in different countries and jurisdictions over whether they should be recognized as units of currency, tightly regulated or even made illegal, and new decisions are being made and changed all the time. Prices tend to react quickly to any decisions regarding cryptocurrency regulation. For example, when Japan announced that it was legalizing bitcoin in April 2017, the price hit $1,130, rising nearly 3pc in a day. But when regulators crack down, this also hits cryptocurrencies hard. A particular culprit has been the Chinese market, mainly because it is so large. China has repeatedly cracked down on cryptocurrencies, with a market crash following most announcements. For example, in February this year, China blocked all websites relating to trading in the currencies, prompting an immediate 15pc fall in bitcoin and 20pc drop in ethereum. Earlier bans of initial coin offerings (ICOs) in the country had a similar negative impact on their value.

Current affairs

As well as regulation, current affairs that seem to have nothing to do with cryptocurrency can have an effect on the share price. Cryptocurrency is often seen as an alternative to what is known as “fiat” currency – that is, currency where the value is backed by the government that issued it. So when investors lose their confidence in a fiat currency because of economic or political events, they can turn to bitcoin or its rivals, pushing up the price.

Speculation

Cryptocurrency investors who lived through the dotcom boom will know all about how speculation can push up the price of an asset or deflate it just as quickly. Speculative investors hope to make money out of cryptocurrencies, but may buy and sell quickly, adversely affecting the market or causing short-term swings. Investors talk particularly about “whales” – investors with very large amounts of a given currency, whose speculative trades can have a huge impact on the market.

Hacking

From Bitcoin’s beginning to the proliferation of new currencies today, hacking has remained a problem for cryptocurrency investors. Every major hack into the system, or into cryptocurrency exchanges or wallets, has provoked a price crash. Recently, an attack on the cryptocurrency exchange Binance caused a 10.8pc crash in a matter of minutes. While cryptocurrency technology gets ever more sophisticated, the hackers do as well, so these adverse events seem likely to continue.