|Recommended Broker 🇳🇬||
|🌐 Official website:||Go to website|
What is Polkadot?
Polkadot is a platform developed by Gavin Wood (co-founder of Ethereum) whose purpose is to allow the transfer of information between different blockchains and solve the scalability problems of these, which also has its own token: the DOT.
Each blockchain, along with its ecosystem, is a totally isolated entity from the rest, so they cannot communicate with each other. Thus, although we can exchange Bitcoin for Ethereum and vice versa, we cannot transfer data from one network to the other.
Added to this are the limitations of each network which, with the progressive increase in their use, end up congested and increasingly slower. In the case of Bitcoin, the network can only process on average 3 transactions per second, which is a very low limit.
On the other hand, Ethereum has even processed 19 transactions per second which may fall short given the large number of decentralized applications operating over the Ethereum network.
These limitations make it highly unlikely that these two cryptocurrencies (and the vast majority) will become a mainstream payment method. To understand this, let's compare with traditional means of payment such as Visa.
According to its official website, Visa can process 65 thousand transactions per second in 160 different currencies, although supposedly on average it only processes a maximum of 20 thousand transactions per second. Whatever the figure, the difference is abysmal.
Add to this the ability of the Visa platform to connect to other platforms such as Paypal, in addition to any bank's own platforms. Knowing the magnitude of the problem, we can now understand more clearly the breakthrough that Polkadot represents for the crypto world.
How much is the difference between Polkadot and other cryptocurrency networks?
Polkadot's complex infrastructure seeks to solve the problems described with a multi-chain platform where different blockchains can be connected, that's right, it connects Bitcoin with Ethereum and many others.
In addition, the platform allows individual chains to exchange information with each other also making it possible to process multiple transactions in parallel which greatly increases the amount of processing.
According to tests conducted in 2020, Polkadot is capable of processing more than 1,000 transactions per second. Although this amount is still far from what Visa processes, the best thing is that this amount can be increased very easily as the number of users and transactions grows.
But like all of them, it works with its own token, the DOT, which is used to pay fees for each transaction made using the Polkadot network. Therefore, as the use of Polkadot is expected to increase, the price of its token, the DOT, is also expected to grow steadily over time.
What kinds of instruments can you trade?
What is an ETF?
ETFs or Exchange-Traded Funds are a kind of passively managed fund, similar to index funds. We can say that ETFs are somewhere between stocks and funds: they are traded in the market like stocks, during the day. However, their main benefit is that they are more diversified compared to stocks, and the rates are much lower than those of an actively managed fund.
If a long-term investment sounds like something you would do, and you won't need to take back your money in at least five years, index funds can be the best alternative. This type of investment is also suitable for beginners since it is more secure. Besides, they offer more diversity.
Perhaps you have a different idea, but it is not easy to beat the market (yes, you have probably heard of managers who obtain huge returns).
But putting aside some exceptional cases, all that glitters is not gold: if you hear of someone who has beaten the market, it was probably for a short time, or their charges are really high. Also, if something happened in the past it doesn't necessarily represent a regular behavior.
Index funds offer solutions to both concerns: their fees are insignificant and they often beat active managers, but in the long term.
Stocks or equities are the most popular securities. Some publicly traded corporations decide to split into fractions and have many shareholders. By investing money in them, you can own a fraction of a company and obtain returns.
We can categorize stocks into two main types: the ones that payout at the end of every fiscal year to the shareholders, and those that don't. The former ones are great, obviously, but investing in the latter can be a good idea too since the profit you can make by selling the shares can be even larger.
If you invest in equities that pay out dividends, you will receive them into your account on this broker. Therefore, you can collect that money or you can choose to reinvest it. However, you can take advantage of compound interest, so our suggestion is that you reinvest.
If you invest in stocks on this broker, you can use leverage to “dope” your trades. But it is not advisable, since it would be a CFD and you would not receive dividends. Besides, as equities tend to be long-term investments, you will have to pay commissions while your position is open.
What are Contracts for Difference?
If you already accessed this broker, you probably noticed that the acronym CFD appears all the time. We will come back to it, but first, you should know that CFDs on this broker are only possible when you short sell.
We will also refer to terms such as going short and leverage, in case you are considering day trading cryptocurrency or other more advanced operations.
Even if you don't have a positive balance, you can still operate on this broker with CFDs. For instance, you have the certitude that the Polkadot will go down, so probably you consider that it is better to refrain from getting in until it does. But if it really goes down, it is possible to earn some money out of that.
You can accomplish that by “going short”. Here's how it works ,roughly:
- You ask someone to lend you, for instance, 100 units of Polkadot, which total value at that moment is $ 5,000 (obviously, these figures aren't real)
- Next, you make $ 5,000 by offering them at the market price
- As you supposed, it depreciates, and the unit of Polkadot goes from $ 50 to $ 30
- You purchase all 100 units once again, but now they are worth $ 3,000
- You return the 100 units
- There: the $ 2000 difference is yours
It is far more simple than it may seem. Just bear in mind that by trading in Polkadot on this broker, you can earn money if you foretell downs in the price.
How does leverage work
If you still don't know what “leverage” is, we'll describe it briefly: it is the ability to invest a higher amount than you actually have. For example, you can enter with $ 100, but if you use x2 leverage, you will be investing $ 200.
About leverage, Take Profit and Stop Loss
Let's say that you are confident that Polkadot will raise its price, and you want to “go long”, but you only have $ 1,000 available. However, it is possible to put more money and earn higher profits.
You could go to your bank, ask for a loan, put something as collateral, wait for it to be accepted, wait for the money, send the money to your broker, confirm that it arrived, and then buy Polkadot… However, when you finish doing all that, probably Polkadot would be already much higher (if your prediction got confirmed), and investing wouldn't be a good idea anymore.
Thanks to leverage, you can get that amount really easily. It's exactly like a loan, but much easier and quicker, and with the benefit that you will be getting it directly from the broker which will let you invest much more than you have on the platform. You will simply see the different options as in the image below:
With other assets, you can use more leverage. The reason: cryptocurrencies are usually medium-long term investments. However, leverage is used primarily for day trading or short-term trading. But let's see how this works in the practice.
You enter with $ 1,000 and pick leverage x2, then you would have $ 2,000 to invest, since your broker would put the other $ 1,000 (which is double your initial amount).
A few days later, as you predicted, Polkadot has risen by 20% and the value of your investment is now $ 2,400. Ok, don't be greedy, it's time to sell.
You will have to give back the $ 1,000 of leverage and you will have made $ 400 (since the other $ 1,000 was your initial investment).
In conclusion, by investing $ 1000 and obtaining $ 400, your net profit would be 40%. That is pretty decent.
But there's always a drawback. If everything goes ok and the asset increases, you will make profits. Nevertheless, if the price falls, you will also lose more money than you invested.
For example: if instead of increasing by 20%, the price falls by 10%, you won't lose $ 10, but twice (the leverage) that figure, that would be $ 20. That is why to operate with leverage it is crucial to take into account Take Profit and Stop Loss.
Take Profit is a limit you can set when trading: you set the platform to sell your assets once they get to a point above the entry price. For instance, you can buy Polkadot at $ 100 and request that your position is closed automatically when it goes up to $ 120. It is very useful to avoid being blinded by enthusiasm: a 20% profit is usually very good, but once you see it goes up, you might think you can earn even more, which is not always the case. As a result, you might lose money if you don't close on time. So, Take Profit helps you to trade more safely.
Also, if you use leverage you absolutely need to place a Stop Loss order (take into account that any small loss is greater with leverage). Take into account that the broker will recommend a limit for Stop Loss, but it is better to set it lower than that.