This article will discuss what cryptocurrency trading is all about and why Bitcoin and Ethereum have emerged as the most tradable crypto coins in the world.
What is Cryptocurrency Trading?
Cryptocurrency trading is the buying and selling of cryptocurrencies in an attempt to profit from the price differentials that occur in the exchange rates of either a cryptocurrency to a fiat currency, or a cryptocurrency to another cryptocurrency.
What this means in essence is that cryptocurrency trading can be done between one cryptocurrency and another (LTC/BTC), or between a cryptocurrency and a fiat currency (e.g. BTC/USD). Cryptocurrency trading is done in two forms:
a) Buying and selling cryptocurrencies for profit
This is done on exchanges and involves actual purchase and ownership of the cryptocurrency being traded. For instance, if a trader feels that Litecoin will gain in value over Bitcoin, the trader will purchase Bitcoin with Litecoin, allow the price to move in the expected direction, and then resell the Bitcoin for a greater quantity of Litecoin than was first sold, resulting in a profit. It can also be done between a cryptocurrency and fiat currency on selected exchanges. For instance, if a trader feels that the price of Bitcoin would rise from $3,800 to $4,200, the trader could use $3,800 to purchase 1 BTC. If the price rises as expected, the trader will resell the BTC to the market and get back $4,200, resulting in a $400 profit. This form of cryptocurrency trading is not leveraged, meaning that the trader has to come up with the full cost of trading each contract.
b) Trading cryptocurrencies as CFDs
This form of crypto trading does not involve ownership of the cryptocurrency itself. What happens here is that the trader is merely speculating on the price movements of the underlying cryptocurrency, and usually involves trading them as contracts-for-difference (CFDs) assets. The advantage here is that it is possible to trade in both directions: buying to profit from rising prices, and selling to profit from falling prices.
This form of cryptocurrency trading is also leveraged, meaning that the trader only needs to come up with a fraction of the cost of the contract, yet getting either the full value of profit or loss on the trade.
Most trading of cryptos involves the use of Bitcoin and Ethereum, making these two cryptocurrencies the most tradable cryptos in the world.
Why Bitcoin and Ethereum are the Most Tradable Coins
The most tradable coins in the cryptocurrency market are Bitcoin and Ethereum. There are a number of reasons why these two have emerged as the coins of choice for cryptocurrency trading. These reasons are stated below.
a) Liquidity
Perhaps the biggest factor that has pushed these two cryptos into the number 1 and number 2 positions as far as the most traded cryptocurrencies are concerned has to do with liquidity. There is virtually no country in the earth where Bitcoin and Ethereum are not traded (legally or illegally) or at the very least, recognized. Ownership of Bitcoin and Ethereum has a near-global spread, and a lot of the holdings of Ethereum and Bitcoin eventually find their way to the exchanges. Without much regulation, exchanges where Bitcoin and Ethereum are either exchanged for fiat currency or traded with other cryptos have mushroomed all over the place. With such a large volume of trades coming from sheer numerical strength of diversified ownership, liquidity in Bitcoin and Ethereum is higher than any of the existing 1,800 crypto coins. Therefore it is only natural that Bitcoin and Ethereum will occupy the top positions among traded cryptocurrencies.
Liquidity means that it is very easy to find a buyer or seller for Bitcoin and Ethereum holdings. This factor works in a positive cycle: as more traders enter the market, they will gravitate towards Bitcoin and Ethereum as crypto assets to trade.
b) Exchange currencies of choice
Many cryptocurrency exchanges and platforms have been blocked by financial regulators from operating bank accounts that can receive deposits from clients. To bypass these restrictions, exchanges and brokerage platforms have opted to accept deposits in cryptos, and to pay out withdrawal requests made clients in cryptos. More than 95% of exchanges have opted to use Bitcoin and Ethereum as the preferred transaction “currencies”, as it were. What this means for traders is that if they want to trade cryptocurrencies on exchanges, they would first have to buy Bitcoin or Ethereum, then send these to their exchange wallets, before using this to purchase and trade other cryptocurrencies.
A look at some of the major exchanges such as BitMEX will reveal that Bitcoin serves as the exchange currency of choice. To trade on BitMEX, you would need to deposit funds in Bitcoin, and withdraw your holdings in Bitcoin.
c) Preference in ICO transactions
Hundreds of Initial Coin Offerings (ICOs) have been launched in the last one year. One thing they have in common is that the participating currencies of choice are Bitcoin and Ethereum. Investors need to acquire Bitcoin or Ethereum and then use these to purchase tokens in the ICOs. The Bitcoin and Ethereum used by investors in ICO investments have to be obtained from others or mined. So naturally, such activity will sustain these two cryptos and make them the most traded cryptos in the world.
ICO project teams definitely prefer to use Bitcoin and Ethereum as the currencies of transaction, as it is easier for them to convert these to cash for use in developing their projects.
d) Convertibility
Bitcoin and Ethereum can easily be converted into fiat currency. So let us say that a trader has just made some money on an exchange and withdrawn his holdings. These can easily be converted into Bitcoin or Ethereum because of the wide usage and acceptability that Bitcoin and Ethereum now have among people of the world. These are some of the reasons why Bitcoin and Ethereum are the most tradable cryptocurrencies in the world.