Gone are the days of the caveman era when liquid cash was king. With the increasing need for highly secure transactions and anonymity, peer-to-peer personalized transaction platform demand is skyrocketing.
Enter crypto, an asset with enormous applications that solve the problem of privacy and is also an excellent potential investment. In fact, as of March 2022, there are nearly 10,000 cryptocurrencies in existence compared to just a handful in 2013!
Despite major investors and entrepreneurs’ recent developments and marketing efforts, cryptocurrencies remain highly controversial. So how can you make the most of this technological wave? What are the career prospects for this? Should you be investing in it or steer away? How does it work exactly?
We have got all the answers for you!
In this article, you will learn:
- What exactly is cryptocurrency?
- Its working and transaction algorithm
- Wallets and exchanges
- Leading crypto coins
- Investing basics and common analogy
|Cryptocurrency||Fiat Currency (Government Issued Currency)|
|A virtual currency/an encrypted data string||Physical currency|
|Represented by private pieces of code||Denoted by notes and bills|
|Produced by computers.||Issued by government|
|Value depends on supply and ongoing trend||Value is decided by regulations and the market|
|Highly secure. The risk of fraud is relatively low||Risk of fraud is high due to the public entities involved|
|Decentralized, i.e., not controlled by any authority||Centralized, i.e., controlled by the government|
|No cross-border restrictions or transactional limits||International transactions are not only charged heavily but are extremely slow|
What Problem Does It Solve?
Ancient payment systems revolved around something called a barter. In this system, people trade services and products with each other instead of involving money. For instance, imagine a farmer trading ten apples for ten mangoes with a fellow farmer.
But as things grew out of proportion, a new system had to be devised to overcome the failure of the barter system. If one has to execute a trade successfully, the value of two things being exchanged and people’s requirements should coincide. For instance, a living thing cannot be divided into smaller units.
Large-sized goods also had the problem of storage. Thus, in 110 B.C., money came into the picture. It underwent many transitions, from gold-plated florins used in Europe to today’s paper currency. Slowly, digital wallets such as PayPal, Apple Pay, and Amazon Pay started becoming mainstream, along with credit/debit cards.
But who decides how valuable these are? Banks and government institutions vary from country to country but are based on the same guidelines.
A single regulatory body for all the transactions. What could go wrong?
Imagine you want to transfer money to your friend’s account who lives overseas. Here are some implications that might follow:
- The financial institution on your end could have a technical error or poor server connectivity, which could cause delays or payment failure.
- The server could also be hacked, raising the risk of potential identity theft. This takes place on a public server known by everyone with no anonymity.
- Issues can arise with transactional limits, or the bank’s threshold can also expire for a particular day.
- The bank, on the other side, will also take some time to validate and process the transaction, which can sometimes take up to 1 week.
These are some of the problems that Bitcoin and other cryptocurrencies aim to solve. If a similar transaction were to take place using crypto, a message would first prompt users on both ends to verify their identity. If the result is affirmative, the system begins processing the transaction and transfers the money without the involvement of an external agency.
It also eliminates all the issues associated with transitional banking. There are no restrictions on the amount of money you send, and the accounts cannot even be hacked.
Cryptocurrency: Definite Essence
Cryptocurrencies are digital assets that utilize an encryption technique called cryptography (a method of encoding and decoding data via algorithms) for enhanced security. They do not have any intrinsic value since they cannot be exchanged for anything else like gold, silver, etc. Furthermore, since the government does not control them, they are not legal tender.
Key features of cryptocurrencies are:
- Minimal transaction costs
- 24/7 access to your money
- No upper limits on purchases and withdrawals
- Can be used by anyone
- Faster transactions
- Peer-to-peer purchasing
How Does a Transaction Take Place in Blockchain?
Here is an easy explanation that doesn’t require any prior knowledge of Bitcoin or related jargon:
Imagine you bet $100 to someone that a certain event will occur tomorrow. Take the chance of snow, for example. Now there can be two outcomes:
- It snows, and you win $100
- It doesn’t snow, and you have to pay $100
Now you have three ways to settle this transaction:
- Trust: This works well if you have a friend or a known relative on the other side. But if it’s a stranger, they may not pay you the money.
- Imposing a contract: Both parties will have to pay unless they want to face any legal action. But the overhead charge for a court case and other legal expenses will be quite high.
- A neutral third party: Both of you submit $100 to the party, and they give it to whoever wins the bet. But there is a chance that they could also run with the money.
So what is the solution?
Blockchain! This is because it offers us an option that involves no risk. It lets us write a few lines of code on the chain where both parties submit $100. The code will automatically check weather reports, validate the transaction for whoever will win the bet, and transfer the remaining money back to the winner. Once a program starts running on a blockchain with a specific condition applied to it, its execution cannot be stopped if the conditions are met; hence, no one can back down from paying.
Bitcoin transactions are recorded in a ledger—a digital file that anyone with an Internet connection can see. Unlike a bank or a single data center, the ledger file is not kept in one place. It is dispersed globally through a private computer network that stores data and performs calculations.
Nodes in the blockchain network are represented by these computers, which all have a copy of the ledger file. A wallet, a tool that lets you store and trade Bitcoins, is required to execute transactions on the blockchain.
For security reasons, each wallet is secured by a unique cryptographic mechanism that employs two keys: a private and public key, which are linked to each other.
Encrypted communication can only be decrypted and read by the person who has the corresponding key combination.
A communication encrypted with a private key can only be decrypted by a public key with the same private key. Using your wallet’s private key, you generate a digital signature used by blockchain computers to validate the transaction’s origin and legitimacy.
Since it is generated from your transaction request and your private key, the digital signature cannot be utilized in any other transactions. It is useless. No one can edit or alter your transaction requests or the amount of Bitcoin you are transferring if you change a single character in the transaction request message.
This means that to transmit Bitcoin, you must show that you have the private key of a particular wallet. You don’t have to provide your private key since you broadcast the message after it has been encrypted.
The applications of this are growing beyond transactions as well. For instance, the Swedish government is using blockchain to record land transactions. Its usage is also tested in education, voting, cybersecurity, and banking.
According to a study by the World Economic Forum, 10% of the global GDP will be stored on blockchain by 2027.
Bitcoin: Blockchain and Mining
One of the most popular cryptocurrencies, Bitcoin, is a decentralized currency. It was invented in 2008 by Satoshi Nakamoto, whose real identity remains unknown.
They were created as rewards for a process known as mining. Nowadays, you can exchange Bitcoins for lots of services and even pay using BTC at supported stores across the globe. There are two codes for Bitcoins: BTC and XBT. Also, there are eight decimal places in a one-bitcoin unit. We also have Satoshi (sat), the lowest feasible division, which is named to honor Bitcoin’s founder and represents 1100000000 (one hundred millionth) Bitcoin.
A public ledger of Bitcoin transactions is known as the blockchain. Each block contains a hash of the preceding block up to the genesis block in the chain. The blockchain is maintained by a network of Bitcoin nodes connected. These coins are registered to Bitcoin addresses on the blockchain. A random valid private key and the accompanying Bitcoin address are needed to generate an address, which can be done in seconds.
Black marketplaces, like Silk Road, were the first to use Bitcoin’s “proof-of-work” transactions. At the beginning of 2011, the price of Bitcoin was $0.30, which rose to $5.27 by the end of 2011. Currently, it is trading at $33,272!
Mining is a mechanism by which we can produce new tokens. Much like other currencies that use proof-of-work, Bitcoin is also generated through mining. This takes place by computing through programs. In simple terms, you need to solve complicated mathematical problems using computational power to mine Bitcoin. The difficulty of each puzzle is known as the ‘hash rate.’
The process of mining cryptocurrencies is arduous, expensive, and only seldom profitable. However, many investors interested in cryptocurrencies find mining attractive since they are rewarded with crypto tokens for their efforts. For the most part, miners are paid to perform the functions of auditors, and verifying Bitcoin transactions is their primary task.
Additionally, mining performs a vital function: It is the sole means for new Bitcoins to be created and released into the Bitcoin ecosystem. In a nutshell, miners are “minting” money.
To mine fresh Bitcoins, you must be the first person to find the correct solution to a mathematical problem. Proof of Work is another name for this procedure.
There isn’t much to it in terms of complex computing or mathematics. While it’s true that miners have to deal with complex mathematical problems, it doesn’t have much to do with individual intellect. Instead of competing for the most hashes, they’re competing against each other to see who can come up with the most hashes that are less than or equal in size to the goal hash.
Guesswork is the only way to solve these issues, yet it’s a hectic task with billions of alternative solutions. Furthermore, the number of feasible solutions (or difficulty level) rises with each new miner in the network. Miners thus require a lot of computational power to tackle an issue. Your “hash rate,” which may be expressed in terms of gigahashes per second (GH/s) or terahashes per second (TH/s), is critical to your success in mining.
When Bitcoin network protocol updates are suggested, coin miners have a “voting” capability to influence how these changes are implemented. In other words, miners can exert some control over the forking process. The more hash power you have, the more votes you may cast for such proposals.
Every four years, the reward for Bitcoin mining is lowered by half. Mining a single block of Bitcoin in 2009 would have earned you 50 BTC, and this was later reduced to 25 BTC in 2012. By 2016, it lowered to 12.5 BTC. As of today, the reward stands at 6.25 BTC.
Tools Used for Mining
- CPU mining: This was the method used by Satoshi Nakamoto to mine the first batch of BTC. He did this using the CPU chip of his personal computer. Interestingly, Sheldon employs the same method to mine Bitcoin in the US TV series, The Big Bang Theory. Back then, this method was good due to the low electricity costs and computational power required.
- GPU mining: When mining became a power-intensive task, CPUs could no longer handle the load and were thus replaced by GPUs. The GPU on a single graphics card has the computing power of hundreds of CPUs in combination. As a result, mining takes place at higher efficiency. Many individuals are turning to GPU mining and building their own mining rigs.
- FPGA and ASIC mining: This originated in China but got phased out of the market due to the high costs involved. ASIC miners had about 200 times more power than conventional GPU miners. These machines keep getting updated as new chips come out.
- Mining pool: Mining pools consist of large systems that use heavy computing power. They also have a high chance of success.
Cryptocurrency mining businesses have started developing big mining operations in nations and areas with cheap power in the last several years. The mining sector is seeing a “battle” in computer power as competition heats up with the emergence of additional operations.
Researchers and academicians have also claimed that Quantum Computers might control the Bitcoin mining business and affect blockchain’s security. Large-scale applications and widespread acceptance of quantum computers have not yet been achieved.
Common Terms You Should Know
Now that you understand how Bitcoin transactions and crypto blockchains work, here are some terms you should know about:
This promise ensures that a specific condition is cleared because the Bitcoin network’s communication protocol allows for the inclusion of extra information to a transaction during the transaction process. This condition is then documented on the blockchain.
These contracts can execute themselves once a condition is met. These are often implemented on the Ethereum network, which also happens to be the industry leader in this aspect.
It works similarly to Bitcoin and is built on blockchain technology, and offers a native crypto asset called Ether. The applications of these contracts range from electronic voting systems and identity management to a wide range of fundraising methods.
This refers to decentralized finance, any financial transactions without a third party involved. Take a bank, government, or a financial institution, for example.
This makes use of a security key, such as a fingerprint. If the fingerprint added is wrong, any effort to manipulate the data will result in deletion. Any modification from the original conditions will lead to a new hash value.
It is worth noting that despite having options like these, undoing a transaction after it has taken effect is very difficult in the crypto-world.
If multiple groups in a transaction cannot agree upon a modification, the blockchain splits. A persistent split is known as a ‘fork.’ Ethereum & Ethereum Classic and Bitcoin & Bitcoin Cash are some examples of this.
Remember how you used to collect baseball cards in your childhood? NFT (non-fungible tokens) are similar to this but digital and irreplaceable.
This includes artworks, songs, text logos, GIFs, etc. This has been a popular form of investment lately. You can buy an NFT by using a crypto coin, and they typically sell them on auction platforms and in secondary marketplaces.
Any digital currency which is not Bitcoin or a layer 1 coin is known as an altcoin. The prices of these coins are often dependent on how Bitcoin moves in the market. Tether, Solana, and Binance coin are a few good examples.
This is a famous acronym in the crypto-world and stands for ‘Hold on for dear life.’ Another similar one is FOMO, which stands for ‘fear of missing out.’
All consensus mechanism algorithms work on unique principles. You might have heard of terms like Proof of Stake, Proof of Work, etc. Algorithms for consensus mechanisms may be classified according to their principles.
The most widely used cryptocurrency networks, such as Bitcoin and Litecoin, rely on the Proof of Work (PoW)consensus mechanism. Adding new transactions to the blockchain needs a participating node to verify that the work they have done and submitted qualifies them for this privilege. However, the whole Bitcoin mining process requires significant power and processing time.
PoS is a low-cost, low-energy alternative to the more traditional Proof of Work (PoW) consensus mechanism. A participant node is responsible for maintaining the public ledger in proportion to the number of virtual currency tokens it holds. However, this has the side effect of encouraging cryptocurrency hoarding rather than consumption.
Proof of Capacity (PoC) is a consensus technique that allows nodes on the blockchain network to share memory space. PoW and PoS are the two most used consensus algorithms in the blockchain sector.
The more RAM or hard drive space a node has to maintain the public ledger, the more privileges it has. For a certain proof, the Proof of Burn (PoB) needs users to “burn” money by sending it to unreachable wallet addresses.
It was created by the Solana Project and is similar to Proof of Elapsed Time (PoET), which encodes the passage of time itself cryptographically to reach consensus without using a lot of energy.
A monetary policy represents the regulation of money in an economy. A central authority manages the money supply and affects inflation, economic growth, and overall liquidity.
In the case of crypto, however, since there is no central authority, the system is calibrated so that a block candidate having the correct hash value is found every ten minutes. The winner then receives Bitcoins as a reward.
No matter how many people mine Bitcoin, the final number will converge to 21 million units. The limit is halved for every 210,000 blocks or every four years. Many also believe that limited supply could result in deflation, but the case does not seem likely as we continue to see the price hikes.
Crypto Wallets and Exchanges
|Crypto wallet||Crypto Exchange|
|This is where an investor can store personal cryptocurrency.||Multiple people can simultaneously use a place, app, or website to convert/exchange fiat currency for crypto-based assets.|
|You have full security and a unique personal key.||Any personal key is not given.|
|Options to buy, trade, or sell are usually not present.||Options to buy, sell, and execute trades, in general, are present.|
- Like you need a wallet to store fiat currency, a crypto wallet allows you to send and receive tokens while bound in a secured network. You can have two kinds of wallets: Hardware and software.
The first one is usually more secure since it is not uploaded on an online server. You can store your crypto even in a USB thumb drive and attach it to your computer. You will also need a private key to log into your wallet, which records all the transactions and balances. When your computer requests the wallet to sign a new transaction, it broadcasts the transaction to the blockchain. Even if your computer is compromised, your Bitcoins are secure since the private key never leaves the hardware wallet. If the wallet is lost or stolen, the owner will have lost all their money.
- Cryptocurrency exchanges are websites where individuals can trade currencies for any digital form of payment. Most common exchanges like CoinBase, Bitfinex, Kraken, or Binance accept government-approved currencies and allow you to convert one coin into another & carry out trade orders.
However, these days, all exchanges are subject to certain regulations to keep issues like money laundering at bay.
Advantages and Disadvantages of Cryptocurrency
Knowing and checking the astronomical price hike in these coins is not enough reason for someone to blindly invest in them. While many of these coins have positive effects on our community, anonymity can be used to foster criminal activity. In what ways does cryptocurrency excel, and where does it fall short? Let’s find out!
Over the years, inflation has eroded the value of numerous currencies. At its creation, almost every cryptocurrency had a fixed supply. Only 21 million Bitcoins have been released into circulation, as specified in the original code. As a result, its value will rise in tandem with increasing demand, keeping pace with the market, and preventing inflation over the long term.
Autonomous Management and Self-governance
A currency’s governance and upkeep are critical to its growth. The benefits of this are twofold:
- Transaction fees are paid to developers/miners that keep Bitcoin transactions on their hardware.
- They get the fee as compensation for doing so. The integrity of cryptocurrency and decentralization of the records are maintained by the miners, who are rewarded for their work.
Safe and Private
Keeping one’s personal and financial information secure has always been a top priority for anybody using cryptocurrency. The blockchain ledger relies on a series of complex mathematical challenges. This means that Bitcoin transactions are more secure than those made through traditional electronic means. Also, the pseudonyms used by cryptocurrencies provide more security and privacy since they are not associated with a specific user or account information.
Being decentralized is a big advantage of cryptocurrencies. Several cryptocurrencies are controlled before they are put into the market by developers who use them and those who hold a large quantity of the currency. Unlike fiat currencies, which the government controls, decentralization ensures that a singular entity cannot control the flow and price, ensuring that the money remains stable and safe.
Sending money across borders is a common use for cryptocurrencies. Transaction costs may be lowered to almost nothing or even null using Bitcoin. This is accomplished by removing the requirement for third-party verification services like VISA or PayPal. This eliminates the need for additional transaction fees. Transactions involving cryptocurrency, whether local or foreign, are swift. Since there are a few hurdles to pass, the verification procedure takes just a few minutes.
Let us now have a look at the pitfalls of this technology:
Lost Data Cannot Be Retrieved
With anonymity and hard to penetrate lines of code comes the additional risk of non-retrievable data. If a user loses their wallet’s private key, there is no way to get it back. No one will be able to see how many coins are in the wallet since it is secured. The user will also suffer a financial loss as a consequence of this.
Cryptocurrencies are famed for decentralization, yet a single body still administers them. However, a few currencies remain under the jurisdiction of their designers and other organizations. The currency’s price may be manipulated by these holders, resulting in considerable fluctuations in its value. Bitcoin, which saw its value soar in 2017, is just one example of a currency vulnerable to similar manipulations.
Illegal Use Cases
Criminals often take advantage of the secure nature of transactions. While tracing down a wallet or hacking is extremely difficult, rules are being made to prohibit wrongful transactions. Since its inception, Bitcoin has been used for unlawful transactions, including drug purchases on the dark web. Some people conceal the source of their illegally acquired funds by converting them using cryptocurrencies.
Yes! You heard it right. Despite the high amount of privacy shutters, there is plenty of fraudulent activity in the market daily. While half of this is due to a lack of knowledge on people’s part, some exchanges store the wallet info of their users for proper functioning. If this wallet is hacked, all the accounts will be put at risk simultaneously.
Hackers have previously targeted exchanges like Bitfinex and Mt. Gox in recent years, stealing tens of millions of dollars. There is always the possibility of another hack, although most exchanges are now relatively safe.
No Option to Reverse Payments
If you transfer some money into another wallet by mistake, there is no way to get it back. Many individuals may take advantage of this to defraud others of their money. Because refunds are not available, a transaction for which the buyer never got the goods or services may simply be carried out without any consequence.
You cannot directly convert your assets into Fiat currency when you earn a profit by selling your assets. Users have to pay a transaction fee, resulting in a higher overall cost.
In other cases, cryptocurrencies are only exchangeable in one or a few fiat currencies. Because of this, users do not get the option of converting money directly into their native currency.
Mining: An Adversity for the Environment
Crypto-mining is very energy-intensive, requiring large amounts of computing power and electricity. Since ordinary computers cannot carry out complex transactions, you must purchase dedicated graphic cards and construct a mining rig. In many cases, the profits of this process were outweighed by the energy costs.
Price Fluctuations: Factors Involved
While many argue that the price of any currency cannot be altered, some veteran investors believe that monitoring past trends and tracking the project-based developments of the company you put your money in gives a good measure of price alterations. But is there more to it? Let us look at some of the factors that are at play:
If any commodity is limited, acquiring it becomes problematic. This also applies to crypto tokens that show a positive slope in their price chart. Take a look at Bitcoin, the most popular cryptocurrency of all time. It is well established that there are only 21 million Bitcoins in existence.
There is an ever-growing demand for Bitcoins as more are produced and added to the blockchain. As a result, their value keeps rising. Some currencies include a mechanism that burns a portion of the coin supply. As a result, the value of the coins rises due to this.
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Cost of Production
Another element that affects the value of a cryptocurrency is its production cost. Miners employ specialized gear or servers to create and validate new network transactions. Virtual tokens and a network fee are given to miners for their efforts.
The network activity of the miner ensures that decentralized cryptocurrencies keep operating. This means that the cryptocurrency’s value might grow as mining expenses rise. Unless the rewards are large enough to cover the costs and generate profit, mining new cryptocurrency tokens may not always be a good deal for miners.
Existing cryptocurrencies continue to grow in number as new tokens are introduced daily. Meme coins, soccer team coins, celebrity coins, and many others are all readily available in the crypto market. Some of these emerging cryptocurrencies have the potential to overcome a present problem and create a big user base.
Social Media Sites
The value of cryptocurrencies fluctuates due to social media hype. Furthermore, it works both ways since news may drop or boost prices. There is also the effect of prominent members of the crypto community, like Elon Musk, who has affected the value of the Doge currency on many occasions, intentionally or unintentionally.
A node count indicates the number of wallets currently operational in a network. This reflects the strength of a particular community in a given area. Consequently, a high node count implies a robust community, whereas a low node count indicates the inverse.
The Law of Supply & Demand
This is one of the most important elements determining the price of cryptocurrencies. Prices rise when there is a greater demand for a product than the available supply, and vice versa.
In contrast to conventional currencies, the supply of cryptocurrencies is restricted in nature. Furthermore, mining begins to slow down progressively as time passes. As a result, it is only possible that the demand for assets will outstrip the supply of accessible assets.
Initial Coin Offerings (ICOs)
Like companies offer a particular amount of their stocks to the public to raise money (also known as IPO), crypto organizations do this to raise awareness and funds. If you are an investor looking to buy some stock or shares of a particular company, participating in their ICOs will give you access to a specific token that may have some value or just be used to represent a stake in that project.
This may not always be a good idea because while most of the ICOs by reputed and peer-reviewed projects yielded good returns, fraudulent companies have robbed people. Thus, we strongly advise you to do due diligence and exercise a high degree of caution before investing in ICOs.
Here are a few tactics people use to structure ICOs for maximum profit:
|Static supply and dynamic price||Static supply and static price||Dynamic supply and static price|
|● Dynamic price||● Pre-set price||● Pre-set price|
|● Limited number of tokens||● Limited number of tokens||● Dynamic number of tokens|
- Static supply and dynamic price: The overall price per token is not revealed unless the organization gets an idea of the total funds received. The supply of tokens is static, but the total amount raised determines the price per token.
- Static supply and static price: As the name suggests, the company sets an upper limit to the token price and the amount to regulate the supply in the future.
- Dynamic supply and static price: The amount of funding determines the number of coins sent out for circulation.
Another common thing that project owners do is create white paper. You can think of this as a brochure outlining all the company’s goals and future development strategies. This is typically done using a token-specific website. Here is what to look for when shortlisting ICOs:
- Project details and use cases
- Funding needed for the project
- The estimated time it will take for the product to be launched and reach the post-development stage
- What all currencies are accepted
- Campaign length
- The ratio of tokens kept by the founders
The white paper is part of the project’s ICO campaign, which aims to entice project fans and backers to purchase some of the project’s tokens. Bitcoin and Ethereum are two of the most popular kinds of cryptocurrencies that investors use to acquire tokens. Investors can further sell these freshly issued tokens like shares in an IPO.
All funds invested in a project are refunded to investors if an ICO raises less money than the minimum amount needed per the ICO’s criteria. As a result, the ICO would be declared static and deemed a failure. Investing the funds obtained to achieve the project’s objectives is only possible if the financial needs are met on time.
Can I Launch an ICO?
An ICO may be launched by anybody who meets the eligibility requirements. They are highly unregulated, so anybody with access to the necessary technology may launch and start gathering funds for a new coin.
However, this lack of regulation also means that someone might trick you into believing that they have a valid ICO and then flee with your cash. An ICO is one of the easiest ways to defraud investors. One of the most important things to check for is the history of the product’s leads in crypto or blockchain. If it seems that no one with relevant, readily verifiable experience is involved in the project, it’s usually not worth investing.
It’s important to complete your due diligence before investing in an ICO that you’ve just heard about. Always verify that the people behind the ICO are reputed and deserving of your trust.
10 Most Popular Cryptocurrencies 2022
If you ask a boomer about Web 3.0, they will most likely associate it with Bitcoin. It was the first token to become popular, and its huge investment potential explains why this coin is so popular and mainstream.
The world of crypto is home to thousands of coins, each with a different growth prospect and project ideology. Here are the 10 most popular tokens you should know about:
Ethereum was created in 2015 by some blockchain enthusiasts. Vitalik Buterin was the one who coined the idea and is known to be the co-founder and CEO of the platform.
It is a decentralized blockchain platform that provides a peer-to-peer network for executing and verifying smart contracts. Participants may interact with each other via smart contracts without involving a third party. Thanks to immutable, verifiable, and securely distributed transaction records, they have complete ownership and insight of transaction data.
Unlike Bitcoin, which is only a currency, Ethereum is a software platform that uses blockchain technology to verify and validate every transaction.
It is subdivided into three main components: EVM (Ethereum Virtual Machine), Ether, and gas. EVM is the platform on which decentralized applications (DAOs) and smart contracts can be built. As of this writing, the current trading price of Ethereum is $3057.
This currency garnered various highlights when it shot up by more than 400% in the summer of 2021. Another dominant name in the DeFi race, Solana, has a massive user network, making it the fourth-most valuable cryptocurrency.
In January 2021, its price was around $1-2 and later shot up to $250 in November! This Ethereum rival is an open-source project that the Geneva foundation heads.
It is like Ethereum but pulls ahead in terms of transaction fees. Since the ETH network is quite busy, it is often plagued by high fees due to network congestion. On the other hand, Solana is designed to handle a heavier load and cost you a fraction of ETH fees.
The only issue with this token is unreliability since they have had plenty of network failures in the past, leading to intermittent instability. This coin is currently valued at $104 per unit.
Using Chain Link, Ethereum-based blockchains can respond to real-world events using smart contracts. LINK is a token that represents this platform and was founded by a startup named Smart Contract in 2014. Like Bitcoin, Chainlink started with a white paper published by Ari Juels, Sergey Nazarov, and Steve Ellis.
It is impossible to mine LINK the same way as ETH or BTC. Instead, LINK is earned by both node operators (those in charge of operating the oracles) and data suppliers (those that offer the data).
Out of 1 billion total supply, nearly 450 million* has already been mined.
But what problem does this coin solve? Aren’t smart contracts supposed to be self-sufficient? Yes, but users found certain loopholes in the system as time progressed. For instance, if you feed false data to the computer, the smart contract will automatically rule in favor of the value instead of checking for piracy.
Chainlink thus created something called an ‘Oracle service,’ which lowers the risk of error-prone information. This coin is trading at 14.14 currently.
Dubbed to be the Ethereum killer by many, this coin has a prospering ecosystem due to its DeFi innovations and contract-driven use cases. Avalanche aims to address two of Ethereum’s most vexing issues: High transaction fees and slow performance.
Emin Gün Sirer, the head of New York-based Ava Labs, is behind this blockchain, which claims to scale while maintaining speedy output times.
AVAX is the symbol for its cryptocurrency, currently trading at $77.45 per token. A few of the coin’s most notable characteristics include:
- When a transaction is finished on the Avalanche blockchain, a unique consensus process ensures that the transaction has been validated by a random fraction of the network’s members. If a network member has a high uptime and a quick reaction time, they may earn more AVAX awards by handling transactions.
- Although there is a ceiling of 720 million tokens, AVAX users may control the pace at which new currencies are created. Holders of AVAX may vote to change the amount of AVAX given out as a reward for adding a new block to the Avalanche blockchain, therefore influencing the pace at which new coins are created.
- Avalanche’s network congestion and the ‘transaction fee structure’ determine how much each transaction will cost. To make AVAX scarcer over time, all fees are burned-removed from circulation.
Cardano (ADA) is an open-source project deemed to be the only currency that has a “peer-reviewed network and research-driven methodology,” according to ADA’s website. ADA claims to be the first 3rd generation cryptocurrency and attempts to address the scalability and infrastructure issues that originally appeared in Bitcoin.
After its launch in September 2017, the price of this token has gone up 1520%, grabbing the attention of investors worldwide. Co-founder of Ethereum, Charles Hoskinson, established the Cardano blockchain project to “offer a more balanced and sustainable environment” for the cryptocurrency market.
This token uses an Ouroboros protocol, which utilizes a proof-of-stake mechanism to validate the production of blocks. Rather than relying on miners to solve complex problems, Cardano produces new blocks depending on the stake members have in the Cardano network.
There are big goals for the future of Cardano, and one of them is the creation of what it calls a “trusted computation framework” for complex systems like those in the gambling and gaming industries. The current price of this token is $0.96.
Known as the brainchild of Gavin wood, who invented solidarity smart contract languages and is also the co-founder of Ethereum, this blockchain is designed to support multiple inter-linked application-specific para-chains. In simple terms, it connects blockchains and allows data to be sent across gen-one networks, such as Ethereum and Bitcoin.
This is a governance token that allows the holders to weigh in on any important decisions taken in the future. This token also finds applications in staking.
This network can process about 1000 transactions per second, more than 30 for Ethereum and 7 for Bitcoin. When it comes to network security, transaction verification, and the creation and distribution of new DOT, Polkadot employs a proof-of-stake consensus process (as opposed to the proof-of-work technique used by Bitcoin).
Regular investors might indirectly engage in staking via the use of nominees. You may outsource part of your DOT to a validator in whom you have faith that they will follow the rules. You get a portion of the DOT earned by the validators you choose.
This token was introduced by Do Kwan and Daniel Shin (Terraform Labs) in 2018. This system underpins the DeFi system and creates algorithmic stable coins. For DeFi applications like lending and borrowing, stable coins are popular.
Since Luna is a native token, its owners access the protocol’s governance and voting mechanisms.
Using Terra’s proof of stake methodology, validations validate transactions based on the number of coins they currently own. Proof of Stake (POS) supporters claim that it is substantially less energy-intensive and environmentally friendly. Some benefits of this project are:
- Interoperability: This means this network can run multiple interlinked chains using Cosmos IBC. It is currently live on Ethereum and Solana. This protocol will be further rolled out on other top-performing blockchains.
- Programmable: Terra’s goals are firmly rooted in code-based progress. Using this network, programmers can create smart contracts in Rust, Go, or AssemblyScript. You may also utilize the network’s oracles to extend the capabilities of your DApp via oracles, which can help you send data from the blockchain.
- Simple hierarchy: This system was designed from the bottom up to replace the complex value chain of additional payments. With Terra’s single blockchain layer, payment gateways, credit cards, and banks may be reduced or eliminated.
This coin is currently trading at $85.71.
Ripple (XRP) started in 2004 when Ryan Fugger, a Canadian programmer, created RipplePay, a secure payment network used to send money to a global community.
Six years later, the fintech company ‘Ripple’ came into the picture. Developers Jed McCaleb, David Schwartz, and Arthur Britto created a public blockchain to counter the disadvantages of cross-border remittance and high fees in traditional banking.
Ripple’s token XRP deploys a fragmented traditional banking system with a pre-determined protocol, aiding in low-cost payments that can be made instantly.
It is also worth noting that no new XRP tokens can be mined since the organization has already released 100 billion XRP tokens, out of which 20 billion tokens are allocated to the founders. Some advantages of this currency are:
- Fast payments, which are energy efficient and transparent
- Faster speeds in contrast to the likes of ETH or BTC
- Can handle up to 1500 transactions per second
- Dedicated liquidity tool which helps simplify settlements
With XRP, the only disadvantage is the lack of decentralization. Since its owners hold 20% of the total stake, its price can easily be manipulated whenever they like.
XRP’s current value lies at $0.71 per token.
This currency is a native coin of the Binance platform, which happens to be one of the largest cryptocurrency exchanges. It trades with the symbol ‘BNB.’
To decrease the supply regularly, Binance uses 1/5th of its profits to repurchase and burn the tokens stored in its treasury.
You may also use BNB to invest in ICOs and other coins listed on the Binance platform. The best use case of these coins lies around credit card payments, process payments, loads, and donations.
This currency was founded by Changpeng Zahoor, who previously used to build high-frequency trading systems on Wall Street.
By using Binance coin, users can also get a discount on transaction fees on their exchange. Furthermore, you can also trade this coin for others like ETH, SOL, or BTC on the exchange.
This coin is valued at $415.63 as of April 2022.
Uniswap is a new exchange that employs an automatic liquidity mechanism and is decentralized. This means that no one (single entity) is allowed to own and administrate the company.
They also allow you to list tokens on the exchange without extra cost. Contrary to profit-centric exchanges that charge a high fee for carrying out simple trades, this is a good advantage.
Executing orders on a blockchain using Uniswap is also better. Conventional exchanges compel traders to give up ownership of their private keys for the sake of logging orders in an internal database. On the other hand, UNI is a decentralized exchange (DEX) that grants complete control over funds.
This also reduces the danger of losing assets if the exchange is hacked. People that trade on this exchange are encouraged to become liquidity providers (LPs) using an automated protocol.
To sum up, Uniswap works for public welfare and lets you exchange tokens without paying an intermediary.
This token is currently priced at $9.48.
What You Should Know Before Investing in Crypto
Cryptocurrency, as opposed to the traditional currency, is decentralized and not supported by any government. Despite this fact, the whole ecosystem has sprung up around the use of cryptocurrencies for commerce, trading, and investment in a short period.
Investing in cryptocurrencies might be a difficult concept to understand. Therefore, potential cryptocurrency investors have to know a few things to make an informed investment decision. Read below to find out about them!
Have a Set Limit
If you plan to invest in cryptocurrency, you should ask yourself the most important question: Why? Because there are many different ways to invest, and many of them are more stable and less risky than digital currencies. Thus, it is crucial to have an investment goal before putting your money in cryptocurrency.
There is no such thing as a perfect investor. Ideally, investments should be based on a variety of factors, such as the risk appetite of the investor, the projected return, the time horizon, and other considerations that we are going to discuss in a bit. Based on these considerations, investors must choose if a particular instrument is appropriate for their asset allocation or not.
Create an Investment Plan
It is vital to have a strategy in place for Bitcoin investment. For example, setting a limit order, which means that your crypto coin will be sold automatically when its price reaches a certain level or by following the investment moves of professional traders in the crypto world. You can also start a systematic investment plan that will automate the purchases every week/month, increasing your average returns.
Join Crypto Communities
The crypto industry is such a hot topic that things here change and evolve rapidly. Therefore, a vibrant and active community of digital currency investors and fans interacting is crucial.
Make yourself a part of such communities to keep yourself updated on crypto investment tips, new coins, the latest crypto news, etc.
Reddit has become a go-to destination for anyone interested in digital currencies. You can also join paid verified spaces on apps like Twitter to get market predictions and signals.
Returns Will Not Always Be Positive
Due to cryptocurrency’s speculative character and its relatively new investment option for investors, it is difficult to predict what kind of returns it may offer.
For example, investors do not have decades of stock performance data to look back on or quarterly earnings reports to dig through, as they do with other financial avenues. Therefore, while investing in cryptocurrency, it’s wise to keep your expectations in check. Profits may be made, but catastrophic losses are also possible.
While there are plenty of Bitcoin billionaires out there, there are also cases of people coming from riches to rags due to impulsive investment. The fact that you are considering investing in this area implies that you are taking a risk. You may increase your chances of success by completing your research before making a financial commitment.
Timing is Essential
Once you have researched the crypto market and decided which projects to invest in, another essential step to take is to time your investment. In the world of digital currency, things are unstable and change quickly. Thus, keeping an eye on the market before making a move can significantly increase your chances of success.
In general, the prices of cryptocurrencies tend to follow certain price patterns. Bitcoin is often seen as the leader among digital currencies, with the rest of the market following its general direction.
The news of a cryptocurrency exchange breach, fraud, or price manipulation may send shockwaves across the community, so it’s crucial to keep an eye on the entire community.
Don’t Run Behind Quick Profits
Cryptocurrency is a very volatile asset, and since the coins are exchanged 24 hours a day, the value of the coins fluctuates fast. According to statistics from Coinbase (December 2021), an average crypto investor holds on to their crypto assets for little more than three months, as opposed to stock investments held for years.
Compared to other asset classes, cryptocurrency assets are newer and come with a significant element of volatility risk. In other words, it isn’t a scheme to make easy money. When it comes to investing in crypto assets, it is important not to lose sight of the fundamentals.
Diversify Your Investments
Investors must understand the importance of diversifying their investment portfolios. This means, rather than investing primarily in a single cryptocurrency, an investor’s money is distributed among various coins or other investments like stocks, bonds, etc., to maximize overall returns and minimize risk.
Many kinds of cryptocurrencies are available for investment; sticking with just one, like Bitcoin, could be riskier than diversifying your portfolio.
When selecting how to invest in the cryptocurrency market, liquidity is a crucial measure to consider. Because the cryptocurrency market changes swiftly, crypto traders must be flexible in their entry and exit of holdings. When assessing liquidity in a crypto asset, it could be beneficial to look at the recent trading volume of the asset. The amount of cryptocurrency that has been purchased and sold demonstrates the general level of interest in the asset, which is measured in trading volume.
The dollar-cost averaging method, often known as DCA, is an investment strategy that includes investing a certain amount of money constantly rather than in one lump sum at the beginning of a financial year. As a result, investors can keep an eye on market swings by also taking frequent profits to balance out their price risk.
When using a DCA technique, you invest a fixed amount of money throughout bull and bear markets. Investing while the cryptocurrency market is down enables investors to purchase assets at a lower cost to resell them for a profit in the future. DCA also helps to eliminate emotion from your new positions in the market and to overlook the short term for longer profits from your cryptocurrency over some time.
Legality and Regulation
We know we previously stated that a central authority could not control these currencies, but governments still try to regulate this domain by introducing tax implications. In most countries, this subject remains unsettled.
As for the United States, the IRS asks everyone to count crypto as their property instead of a currency. This implies that they are liable to pay capital tax on their gains. On the flip side, there are countries like Portugal where crypto taxation is nil.
Many people thus take this opportunity and send their gains to wallets registered in countries like these. Another tip for investors is to use private wallets like Metamask if their primary focus is long-term gains.
This is due to the additional layer of privacy these wallets provide. As per many government agencies, the decentralized status that crypto is known for can also be one of its biggest disadvantages. This is because these currencies have no physical presence and central backing.
How Do I Benefit From All These?
Everyone enters the cryptocurrency business to gain money, but not everyone succeeds. Many individuals either abandon up along the road or lose money due to their lack of understanding of how to earn money using cryptocurrency. There are several possibilities for making money using cryptocurrencies. Read below to learn about them in detail.
Investing is a long-term strategy that involves buying and holding crypto assets for an extended period. According to the experts, cryptocurrency assets are typically well suited to a buy-and-hold investment strategy. Although they are quite volatile in the near term, they offer fantastic long-term development potential.
To implement the investment plan, you must find more reliable tokens that will be there for the long haul.
The buy-and-hold strategy is used for long-term investments, but trading is for short-term gains. Many things can happen in the crypto market at any given time. This means that the prices of assets can go up and down a lot in the short term.
If you want to be a good trader, you must be able to think analytically and use technical skills. You’ll need to look at the market charts to see how the assets on the list are doing so that you can make accurate predictions about how much their rate will rise or fall.
When you trade, you can either take a long or short position, depending on whether you think the price of an asset will go up or down. Even if the crypto market is going up or down, you can still make money.
Yield farming is the technique of maximizing returns via decentralized finance (DeFi). Users can lend or borrow Bitcoin on a DeFi platform, and in exchange for their services, they can earn cryptocurrency.
Farmers that desire to boost their yield production might use more complicated strategies to achieve their goals. Users might continually transfer their cryptos between several lending platforms to maximize their profits.
Staking is the simplest method to earn money through cryptocurrency. Holding Bitcoin in an account and allowing it to generate interest and fees while the funds are committed to blockchain validators is the most common way to go about this process. Stakeholders get a portion of the gas fees produced when blockchain validators assist transactions.
Frequently Asked Questions
Now that you know all there is to this story, here are some common questions debunked for you:
How Long Should I Hold my Tokens for a Good Profit?
The answer to this question is not the same for every individual. There are multiple factors at play here. Take the example of an AltCoin that is relatively new in the market. If people like their ICO, it may become an instant hit leading to a sudden price hike.
In this case, you can cash out your crypto in just a matter of days after buying it. Another situation applies to tier 1 coins that show slow but steady growth prospects. You may not earn a huge profit overnight but will amass considerable wealth.
Ideally, you should separate your investments into two categories: short-term funds and long-term funds. Long-term funds should be held for at least 1-5 years regardless of market fluctuations, whereas short-term funds can be sold as soon as you notice a profit.
With recent advancements, many platforms even give you interest on the amount of crypto you hold, just like a savings bank account.
How Much Crypto Do You Have to Report on Taxes?
If you have made more than 200 transactions and earned more than $20,000 during a particular trading year, you will have to fill out a 1099-K form. You will also have to track the kind of transactions you made to see if your income is taxable or not.
|Non-Taxable Events||Taxable events (capital gains)||Taxable as income|
|Purchasing crypto and holding it.||Selling crypto for cash income||Mining crypto|
|Making donations to a non-profit.||Exchanging one coin for another||Staking rewards|
|Sending crypto to yourself or getting a gift.||Using crypto to pay for goods and services||Getting an airdrop|
Both the federal and state governments impose capital gains taxes. The amount of time you’ve held your crypto impacts the amount of tax you’ll owe.
Holding onto your cryptocurrency for more than a year will often result in cheaper fees than selling immediately. The capital gains tax rate is lesser for long-term profits. These rates (0 percent, 15%, or 20% at the federal level) might change depending on your income. It’s possible that the 3.8 percent ‘net investment income tax’ may also be applied to higher-income taxpayers’ gains or income.
As for short-term profits, a person’s regular income tax rate is applied to them.
What are Some of the Best Crypto Exchanges that I Can Use?
|Best-overall||Binance||● Low costs
● Wide range of tokens available
● High security and timely updates
|● Not available in all US states
● Lacks educational tutorials
|Best for beginners||Coinbase||● Easy-to-use interface
● Good reviews and strong ratings.
● Simple purchase process
|● High fee|
|Runner Up||Kraken||● All the full-scale trading features such as margin, order limits etc.
● high cybersecurity ratings
|● Complex UI|
|Honourable Mention #1||Gemini||● Easy-to-use
● Available globally*
|● High and convoluted fee|
|Honourable Mention #2||Bittrex||● Instant buy/sell platform
● Good array of tokens for buying
|● Poor security
● High fees for low volume traders
What are Transaction Fees in Cryptocurrency?
When a particular quantity of Bitcoin is moved from one wallet to another, a transaction fee must be paid. According to how active the blockchain is, transaction costs might fluctuate.
A user might pay a greater transaction fee to speed up a transaction. The transaction will then be prioritized by “miners,” or those paid to verify transactions. These charges are fixed on most crypto trading platforms. You might be able to get some discount if you use a native wallet.
As an incentive for criminal behavior on the Bitcoin network, transaction fees were first introduced in 2013. The idea behind charging fees was to keep the Bitcoin network from being overburdened or jammed.
After being influenced by Adam Back’s hash algorithm, Bitcoin’s creator, Satoshi Nakamoto, invented transaction fees. Similar fees have also been imposed on other blockchains to keep the mining process running smoothly.
The memory pool, commonly known as the mempool, is where all Bitcoin transactions are queued up. When the mempool is full, the miners will first prioritize which transactions to verify. Priority is given to transactions with greater fees.
If the transaction is time-sensitive or urgent, many Bitcoin users may want to raise costs. A tiny percentage of ETH may represent Ethereum gas fees, for example.
There you have it; all you need to know about crypto. This new era is unknown to most people, and it’s okay to feel misguided at times, as long as you learn a lesson and become a better investor.
With cryptocurrency, the only way to not be scammed and invest in the right opportunities is to be connected with a community network. Another key takeaway should be taking controlled risks and avoiding impulsive purchases at all costs.
With all the steps and tips we stated above, we hope that you got what you came looking for. Thanks for reading.