Over the course of their condensed history, the world of finance has viewed cryptocurrencies through a lense of either intense scrutiny or euphoric optimism. Personal opinions regarding blockchain technology and its potential applications vary wildly from one individual to the next. Nonetheless, there has been an increasing enthusiasm toward the future of the sector, prompting the creation of a brand-new asset class.
This rise in popularity has attracted venture capital and the interest of investors from around the globe. There are more than 10,000 cryptocurrencies. Of these, more than 1,600 have a market capitalisation of £500,000 or greater.
With such an extensive array of options, selecting the most suitable product can be a monumental challenge. However, in the same spirit as blue-chip stocks, there are several cryptocurrencies that serve as the "gold standard" of the industry.
They are as follows:
Dating to Bitcoin's inception in 2009, the concept of an exclusively digital form of money backed solely by sophisticated technology has been an area of contention. Questions surrounding security, regulation and long-term viability have plagued the acceptance of virtual money. However, advantages afforded to the user such as privacy, increased transaction speed and a low fee structure have brought cryptocurrencies into the financial mainstream.
The Cryptocurrency Marketplace
From an active trading perspective, cryptocurrency products offer many attractive attributes. Consistent volatility, availability of leverage and 24/7 market access can make them a viable avenue for short-term traders and long-term investors. There are numerous online financial venues that support a variety of unique methods of engaging cryptocurrencies:
Cryptocurrency exchanges offer the public an opportunity to buy or sell digital currencies at the prevailing market price. Traders may take physical ownership of the product, storing purchases locally or in an e-wallet. The cash markets are the most traditional method of trading cryptocurrencies, featuring participation from individuals around the globe.
Contract For Difference (CFD)
Cryptocurrency CFDs are over-the-counter (OTC) derivative products that give individuals the ability to speculate, hedge or take a position in a specific market. CFDs are available through various online brokerages, offering leverage and an array of trading options to aspiring virtual currency market participants.
Although relatively new, standardised futures contracts based upon the value of Bitcoin are available to the public. Both the Chicago Mercantile Exchange (CME) and Chicago Futures Exchange (CFE) offer Bitcoin futures, with the eventual launch of contracts linked to assorted altcoins expected.
Publicly traded corporations tied to blockchain technology—or the cryptocurrency atmosphere in general—are available for trade on many international equities markets. Companies that integrate the blockchain into day-to-day operations, such as Overstock.com, may exhibit a sensitivity to the pricing of digital currencies. Accordingly, traders and investors may engage the cryptocurrency markets indirectly through the buying or selling of related corporate stocks.
Initial Coin Offerings (ICO)
A fledgling mode of raising capital, an ICO implements a crowdfunding approach to launching a cryptocurrency startup. The regulatory environment of ICOs is fluid, with the potential of achieving extraordinary returns being coupled with a significant risk of falling victim to fraud.
For active traders, the cash and CFD markets are the most opportune venues for conducting operations. High degrees of liquidity, volatility and the availability of leverage make these outlets preferable. Conversely, long-term investors may elect to purchase sector-specific stocks, promising ICOs or hedge cryptocurrency market exposure through strategies involving futures products.
The cryptocurrency marketplace is a fluid environment that faces many challenges, the largest of which are regulatory. Led by economic superpowers China and Russia, virtual currencies are banned or closely monitored in a majority of sovereign nations. Because of the evolving nature of the regulatory environment, many existing products and modes of trade are subject to change.
1. Bitcoin (BTC)
Bitcoin was the first digital currency to scale and gain widespread adoption. It's a decentralised peer-to-peer payment system that interested parties can use to make transactions without going through a third party, for example a financial institution.
This cryptocurrency uses a distributed ledger called the blockchain, which contains a record of all transactions. The blockchain is both decentralised and immutable, which helps improve transparency and safeguard against fraud. Bitcoin is a global payment method that can exist completely independent of financial institutions and governments.
BTC, which came into existence in 2009 and was developed by a person or group that went by the pseudonym )shi Nakamoto, has grown from being a fringe concept to a highly visible digital currency.
Tesla, PayPal and Microsoft are some examples of major companies that have opted to accept BTC. In addition, banking monoliths Citibank, United Bank of Switzerland (UBS) and Barclays have expressed interest in integrating BTC and blockchain technology into their operations.
2017 was a monumental year for BTC, as valuations and consumer acceptance skyrocketed. From 1 January 2017 to 1 January 2018, the price of BTC rose from £708 to £13,733—a 19-fold gain in value. An established market capitalisation of £0.12 trillion with a circulating supply of greater than 16 million units illustrated the enormity of the BTC market as a whole during this period.
Following this impressive rally, the digital currency faced some turbulence, losing most of the gains it generated in 2017 and reaching roughly £2,600 on 6 December 2018. At this point, it was down close to 80% from its previous all-time high.
The next year, BTC bounced back, rising to more than approximately £10,200 on 26 June 2019. The digital currency experienced even more impressive gains in the next few years, hitting fresh, all-time highs in 2021. In November of that year, the cryptocurrency climbed to £51,400.
Since rising to that peak level, bitcoin has fallen back, losing more than 50% of its value to trade at roughly £25,400 at the time of this writing on 31 May 2022.
BTC exhibits consistent volatility, which makes it a prime target for active trade on both the cash and CFD markets. Short-term trading opportunities come frequently, with daily volatility regularly eclipsing 6.5%. With such large trading ranges and sudden swings in pricing, BTC is a premier destination for traders that practice scalp, position or swing methodologies.
2. Ethereum (ETH)
Ethereum is a blockchain-based platform that interested parties can use to develop decentralized applications (DApps) and send value to one another. The platform's applications use the native digital currency Ether (ETH). In contrast to BTC, the purpose behind ETH is not to revolutionise the transfer of money between parties, but to truly decentralise the internet. Through using the blockchain to replace third-party data storage vendors, ETH aims to revolutionise the current client-server model and create a "world computer."
As of this writing in May 2022, ETH is the second-largest digital currency by market capitalisation. With a total market value of roughly £190 million and a circulating supply of nearly 121 million units, this cryptocurrency lags only BTC in terms of market cap.
The ETH digital currency has experienced some sharp volatility during its history, rising from approximately £0.56 in August 2015 to more than £1,100 in January 2018. Like BTC, ETH suffered significant losses after rising, falling to £67.50 in December 2018.
Following this decline, the digital asset rose to almost £3,900 in November 2021, setting a fresh, all-time high. At the time of this writing, ETH had dropped significantly from its all-time high, trading near £1,560.
ETH's potential for upside has attracted the interest of many market participants. At the time of this writing in May 2022, over 150 exchanges offer ETH trading. Further, an individual unit of ETH is far less expensive than a unit of BTC, as its price is less than one-tenth that of the world's most prominent digital currency.
3. Solana (SOL)
Solana's SOL token is the native digital asset of a high-performance blockchain, which is also named Solana. This digital token plays a key role in the platform's consensus through its use in staking, a process that helps confirm transactions. Further, interested parties can use SOL as a utility token, harnessing it to pay transaction fees for working with smart contracts or transferring value.
The Solana platform was designed to offer both higher throughput and lower fees than more established blockchains like Bitcoin and Ethereum. At the time of this writing, the platform had an average cost of $0.00025 per transaction, according to the Solana website. This is equivalent to £0.00020.
The SOL token has experienced some very impressive returns, rising from close to £0.70 in April 2020 to nearly £200.00 in November 2021, a more than 28,000 increase. However, in subsequent months, the cryptocurrency faced substantial losses, falling to roughly £36 at the time of this writing in May 2022. At this point, the digital asset had declined more than 80% from its all-time high.
In spite of this, the SOL token is still up quite a bit from where it was when it first became available for trading in 2020.
The digital currency's robust gains, along with the significant visibility the Solana platform has generated through its ability to handle large numbers of transactions, have combined to draw the interest of many investors.
4. Binance Coin (BNB)
Binance Coin (BNB) is the utility token of major cryptocurrency exchange Binance. Interested parties can use the digital currency to pay fees on the exchange and do so at a discount relative to other digital currencies. They can also be used for a range of other purposes, for example purchasing virtual land and gifts, booking hotels and also acquiring plane tickets.
The BNB token first went live in 2017, when Binance held an Initial Coin Offering (ICO) that took place between 26 June and 3 July of that year. At the time, investors had the ability to purchase 100 million units of the digital token.
When BNB first came into existence, its total supply was 200 million units. However, the aggregate supply has been decreasing over time due to an autoburn system, with these tokens being eliminated at a rate that is a function of gas fees.
The BNB token has experienced some notable appreciation over the years, climbing from roughly £31.75 at the start of 2021 to approximately £546.00 in May of that year. This represents a more than 1,600% increase.
This particular digital currency has caught the interest of investors by being the native digital asset of Binance, one of the world's largest and most visible cryptocurrency exchanges. The token's supply is declining over time, so if demand stays equal, the price should increase. However, if demand for the digital token increases over time, it could easily provide upward price pressure.
5. Ripple (XRP)
Ripple (XRP) is a cryptocurrency platform that facilitates exchange between participants via the online space. However, instead of the primary objective being the creation of a decentralised and anonymous peer-to-peer mode of transfer, the target audiences for XRP are traditional banking institutions.
The appeal of XRP to the banking industry is its speed as a payment protocol. XRP moves very quickly, with transactions being settled in as little as 3.6 seconds. With such robust capabilities, more than 100 banks have adopted the XRP version of the blockchain. The list includes some of the biggest names in the commercial banking industry such as UBS, American Express and Westpac.
In contrast to the other leading cryptocurrencies, XRP has a huge circulating supply. Due to the large float of slightly more than 39 billion, the per unit pricing is modest. From January 2017 to January 2018, values rose from under £0.01 per XRP to a high of £2.59. The run up in price fostered a maximum gain in market capitalisation of more than 7,700% for the year.
The digital currency continued to climb in early 2018, reaching a price of £3.05 on 4 January. It then proceeded to plummet, falling to £0.21 later that year. Since that time, XRP has climbed, but it has never been able to reach the all-time high it attained at the start of 2018.
The cryptocurrency's price increased significantly in 2021, for example, rising from £0.18 at the start of the year to £1.46 in April. Following this sharp increase, XRP was once again unable to keep its gains, and the digital token was trading at £0.33 at the time of this writing in May 2022.
XRP's potential use by financial institutions and banks has attracted the attention of traders and investors worldwide. Coupled with moderate pricing, XRP is an ideal avenue for many to engage the cryptocurrency environment.
The cryptocurrency asset class is still very much in its infancy. Uncertainty is present in the market on a near-daily basis, producing wild volatility and stimulating even greater levels of liquidity. While these attributes are attractive to active traders, an additional degree of risk is associated with the rapid moves.
Unlike the conventional markets of currency, commodity and equity products, cryptocurrencies are not subject to traditional financial influences. Economic growth, official monetary policies or even the weather have no bearing on their premium. Values are determined by the process of price discovery on the open market, which in itself is highly speculative. The current news cycle or the evolving regulatory environment often surprise market participants and shock pricing.
Despite the periodic turbulence present in the markets of virtual currencies, they represent a formidable presence in global finance. As of 31 May 2022, the market capitalisation of all cryptocurrencies stood at £1.03 trillion. While this value is certain to fluctuate over time, its magnitude illustrates the degree of interest from traders and investors alike.
FXCM Research Team
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