Investing in cryptocurrencies can be a great way to diversify your portfolio. But as with any investment decision, there are risks involved that you should consider before buying. By understanding what those risks are and how to avoid them, you can make better decisions when putting money in crypto. Investing in cryptocurrencies requires a lot of research and patience. Investors need to be knowledgeable about the market, the cryptocurrency, and the team behind it.
If one cryptocurrency is capturing the global investor’s attention, it has to be Bitcoin. The creation and transfer of Bitcoins are based on an open-source cryptographic protocol that is independent of any central authority. Dubbed as a decentralized digital currency, this virtual money was created in 2009 by a developer or team of developers going by the pseudonym Satoshi Nakamoto.
Over the past year, cryptocurrency has been a trending topic throughout the world, and many are looking to invest in Bitcoin and other digital coins. This article will define digital assets and provide a full guide to investing in cryptocurrencies.
What is a Cryptocurrency?
Cryptocurrencies are digital currencies that use cryptography for security. We can also refer to cryptocurrencies as digital assets or digital money. They were first introduced in 2009 as an alternative to fiat currencies that can be used without having to go through a financial institution. Bitcoin was the first cryptocurrency, and it is still the most popular one.
Digital assets allow people to make electronic payments, while the transactions are recorded in a public ledger called the blockchain. As a result, no centralized authority can manipulate cryptocurrencies. Meaning they offer a way to keep the economy from being controlled by a single entity.
The formal definition of cryptocurrency
Jan Lansky defined cryptocurrency as a system that should meet six conditions.
- The system doesn’t need a central authority.
- The system overviews the cryptocurrency ownership and units.
- The system determines if cryptocurrency can be created, under which conditions it can be created and who owns it.
- Only with cryptography can we tell who owns the cryptocurrency
- The system allows the ownership of cryptographic units to change during transactions
- If two different instructions are entered in the same cryptographic unit, the system performs at most one of them.
Altcoins and Stablecoins
Altcoins
Altcoins are digital assets and tokens that are not Bitcoin. They are typically referred to as alternative cryptocurrencies. Paul Vigna of Wall Street Journal describes altcoins as the alternative version of Bitcoin. We use ‘altcoin’ or ‘alt coin’ to point out any electronic token created after Bitcoin.
Altcoins have some key differences when compared to Bitcoin. For example, Litecoin has a processing time of 2 – 8 minutes, while Bitcoin’s transactions typically last 10 minutes. Ethereum is another example – with a smart contract that enables decentralized applications to run on its blockchain. In fact, according to Bloomberg News, Ethereum was the most popular blockchain in 2020.
An “altseason” is a term used to describe the significant rallies in altcoin markets.
Stablecoins
Stablecoins are digital currencies tied to an underlying asset, like gold or the US dollar, which is the main difference from cryptos like Ethereum or Bitcoin. Despite the hype around Bitcoin and Ethereum, these cryptocurrencies tend to be volatile at times. On the other hand, stablecoins have become very popular among investors and corporates due to their supposed price stability.
Stablecoins are digital currencies that can be used to buy other cryptocurrencies. They are issued by governments and are used to purchase other cryptocurrencies. For example, Fiat currencies like a British Pound or a US dollar can convert to stable coins in order to buy other cryptos.
Many exchanges don’t charge fees for trading between stablecoins and US dollars. However, they charge fees for trading between cryptocurrencies and US dollars, making them attractive for beginner investors.
The popular stablecoins are:
- USD Coin, or USDC – USD Coin is an open-source project that aims to create a stablecoin backed by various instruments. Its appeal is that it can be used to redeem one US dollar for one USD coin.
- Tether – One of the most widely used stablecoins, Tether is involved in half of the Bitcoin transactions globally.
- Binance USD – The world’s largest crypto exchange, Binance, has issued a stablecoin called Binance USD. It claims to be one on one in US dollars.
Cryptocurrency architecture
Cryptocurrency is created as part of the entire cryptocurrency system. Its creation results from a collective effort from all the participating parties. In addition, its production rate is publicly known.
In a centralized banking system, corporations and governments can control the supply of money. On the other hand, in the world of crypto, companies, and governments can not impact the production of the new digital assets, nor can they provide backing for other firms and institutions that hold assets on their behalf.
Satoshi Nakamoto created the underlying technical system for decentralized cryptocurrencies. Behind the name of Satoshi Nakamoto stands either an individual or a group of developers. However, the world is still not familiar with the exact identity of the cryptocurrency creator.
A community known as miners is responsible for maintaining the safety and integrity of the ledger. Miners use their devices to help validate transactions and keep track of them. Afterward, they add them to the ledger according to a specific timestamping scheme. A proof-of-Stake network is a blockchain that enables transactions to be verified by the holders of the corresponding cryptocurrency.
Compared to ordinary currencies, cryptocurrencies are more complicated to seize than cash. That is because they are digital tokens that are not backed by tangible assets. Furthermore, cryptocurrency is designed to decrease its production gradually. This method limits the number of coins that can be used in circulation.
Blockchain
A blockchain is a ledger that holds the details of a coin’s validity. Its continuous growth is linked to a network of blocks. Each block is a hash pointer that is a link to a previous block. Its purpose is to prevent the modification of the data in the block.
Nodes
Node is a computer that works seamlessly with a cryptocurrency network. Nodes perform various tasks related to validating transactions and keeping track of the blockchain. In terms of relaying transactions, each computer on the network has a copy of its supporting cryptocurrency blockchain. When a transaction occurs, the transaction details are transmitted to other nodes in the network to know about it.
Node owners are individuals or organizations responsible for developing the blockchain technology or those incentivized to host a node.
Timestamping
Cryptocurrencies use various timestamping schemes to prove the validity of transactions on the blockchain ledger. They aim to accomplish this without the use of a third party. The proof-of-work scheme is the first timestamping scheme that was invented. The most widely used ones are SHA-256 and scrypt. The most commonly used hashing algorithms are CryptoNight, X11, SHA-3, and Blake.
The proof-of-stake is a method of keeping a cryptocurrency network secure. This procedure asks users to prove ownership of a certain amount of coins. Instead of using complex algorithms to verify transactions, proof-of-work systems rely on a simple network structure. As a result, the scheme is mainly dependent on the coin. Currently, there’s no standard form of it.
Mining
Mining is a process used for validating transactions in cryptocurrency networks.
The goal is to reduce transaction fees by creating a reward that incentivizes network users to contribute to the network’s processing power. The rate at which hashes are generated has increased due to specialized machines that run complex hashing algorithms like scrypt and SHA-256. The race for cheap machines has existed since Bitcoin was first introduced in 2009.
Due to the complexity of validating hashes for virtual currencies, miners have had difficulty keeping up. Over the years, many of them have had to spend large sums of money on high-performance ASICs. The cost of running a hash mining machine is usually not justified by the amount of money it takes to find a hash. Also, the electricity needed for mining computers is often not worth the effort.
Best countries for cryptocurrency mining
Favorite regions for mining are those with a cold climate and low electricity prices. As of July 2019, the electricity consumption of Bitcoin has reached 7 gigawatts or 0.2% of the global total. This amount is equivalent to the electricity consumption of Switzerland.
Some miners pool their resources to share them among themselves. A “share” is awarded to those who contribute the most amount of work to the pool’s success. In February 2018, the Chinese government stopped the trading of virtual currencies, banned initial coin offerings, and crypto mining. This act led many miners to move from China to the USA states like Texas or Canada.
Moreover, one company uses data centers for its mining operations at Canadian gas and oil fields due to low gas prices. In 2018, the province of Quebec proposed to allocate 500 MW to crypto mining. In addition, In February 2018, Fortune stated that Iceland had become a center for cryptocurrency mining due to its cheap electricity. However, on the other hand, in 2018, the city of Plattsburgh, New York, imposed a moratorium on cryptocurrency mining. The move was made to preserve the city’s natural resources.
GPU price rise
An increase in the number of miners raised the demand for graphics cards (GPU) in 2017. With more processing power, GPUs are more than capable of generating hashes. Some of the popular cryptocurrency miners’ graphics cards such as the GTX 1060 and 1070 doubled or tripled in price and were at times out of stock.
On top of that, to get more gamers into their stores, Nvidia has told retailers to sell their GPUs exclusively to gamers before miners.
Wallets
There are multiple methods of storing keys or seeds in a wallet, from paper wallets (traditional public, private and secret keys written on paper) and digital wallets to hardware devices. Of course, if none of these options work out, there’s always plaintext that will include all necessary information. Still, plaintext is more vulnerable than other methods since anyone can access it without much decoding.
Bitcoin
Bitcoin is a pseudonymous rather than anonymous currency, meaning that the bitcoins within your wallet aren’t tied to an actual person but instead one or more specific keys. That means you can still use bitcoin as if it was completely anonymous. However, exchanges like Coinbase will always require their users to provide personal information for verification purposes.
History of Cryptocurrencies
Bitcoin, created in 2009, is the first cryptocurrency. Consequently, many consider the year 2009 to be the birth of cryptocurrencies. It all started with an idea about a brand new way of exchanging money that would allow people to control their own funds without trusting third parties. In cryptocurrencies, there is no central authority that governs the rules. On the contrary, everyone can participate, and cryptocurrencies have a decentralized infrastructure.
Miners solve complex problems with specialized computers to create new blocks and add transactions to the public ledger of every cryptocurrency.
Even though October 31st, 2008 is when bitcoin was first mentioned by its founder Satoshi Nakamoto, the first cryptocurrencies were made by David Chaum, the founder of Digicash and a company Centranet. Diigicash used cryptography to provide secure transactions, and the first electronic money was known as ecash. However, this endeavor failed because it relied on a trusted third party to prevent double-spending.
Historical overview
- The idea of cryptocurrencies was first thought up in 1982 by Wei Dai, but the first cryptocurrency still really successful today would be Bitcoin.
- 2014 Ethereum was founded and became the 2nd most successful cryptocurrency. 2014 also marks the beginning of the Bitcoin halving, which reduces the mining reward for a block by half every four years.
- Mt.Gox: In 2014, the Tokyo-based Bitcoin exchange got hacked, and around 850,000 bitcoins were stolen. That caused a massive price drop and forced many exchanges to shut down. However, the market recovered the following year.
- 2017 is known as the ICO Year, where startups raised millions by issuing tokens on Ethereum. One of those was Tezos which managed to raise $230 million.
- In 2021 El Salvador and Cuba accepted Bitcoin as a legal tender.
- In September 2021, China declared all cryptocurrency transactions illegal.
Key factors to consider before investing in Cryptocurrencies
Cryptocurrencies offer a unique way to invest and purchase goods and services. This type of currency uses cryptography to secure and make sure that all transactions are made anonymously. Unfortunately, most people who don’t understand cryptocurrencies tend to shy away from them because they think the concept is too complicated to understand. On the contrary, investing in cryptocurrency is easy! However, before buying digital assets, you must understand the risks involved to make an informed decision.
Steps To Take Before Investing In Cryptocurrency
1. Decide and be confident of why you wish to invest in cryptocurrencies. Investors should only buy crypto if they believe it is here to stay and will continue growing rather than investing on a whim.
2. Research the markets and potential coins that are predicted to succeed long-term. Like investing in stocks, it is essential to research the company you are investing in before putting any money. Suppose there’s no information about the coin or no prediction for its future success. In that case, it might be a good idea to avoid buying that particular cryptocurrency until more information becomes available.
3. Never invest more than what you can afford to lose. Of course, there is a risk of losing money with almost any investment. However, investing in cryptocurrency has proven more volatile than investing in stocks and other securities. Therefore, you should only invest the money you are willing to lose without having to rely on your investments for future income or support.
4. Never invest so much you can’t afford your living expenses.
Additional steps to take
5. Stay updated on cryptocurrencies and never rely solely on information from one source. Investors should constantly stay updated on the latest happenings within the crypto market, including news and possible scams or fraudulent practices. It is also important to learn about different investing strategies and stay updated on the overall market to understand how investing in cryptocurrencies works fully.
6. Watch out for scams, fake coins, Ponzi schemes, and pump and dump schemes. Many cryptocurrencies are created to scam investors. It is important to never invest in coins marketed as “sure things” and never trust a guarantee or scheme that promises returns much higher than investing in some other digital assets. Also, it is vital to be aware of pump and dump schemes as top-pumped coins will likely crash back down soon afterward.
7. When investing long-term, many consider putting money in ICOs. While investing in an already established cryptocurrency might seem like a safe strategy, investing in the initial coin offering (ICO) may be something to think about. However, ICOs can be risky due to bankruptcy or lack of progress by developers, especially if they are anonymous or unknown.
8. Keep track of your money and never invest based on emotions. Investing in cryptocurrency should not be looked at as a means to obtain quick cash. Rather, it should be treated as investing for the future, and all decisions should be made with careful consideration rather than with impulse or emotion.
How to buy cryptocurrencies safely?
Bear in mind that the market’s volatility makes it possible to gain or lose money quickly (due to price fluctuations within a day). Therefore, it is necessary to be very careful when investing in cryptocurrency markets since not all trading platforms are reliable. In addition, there are several steps to take to protect yourself from scams and other dangers when investing in cryptocurrency.
How to avoid scams?
- Never send cryptocurrency to an address given to you by an unknown source or which you received through social media unless you are 100% sure it is the legitimate recipient.
- Do not purchase digital coins advertised on social media, no matter how promising they sound.
- Always check what you’re investing into before sending any money – read reviews and reports about a specific platform that you’re planning to use for trading or investing purposes. Read customer testimonials; Are there any complaints? Do people like using this service? Did anyone report fraudulent activities from the website management? Are their services reliable? Is there enough information available about the company? These are just some important questions that you should ask yourself before buying.
- Always use secure wallets to store your cryptocurrencies – do not leave them on unsecured platforms, meaning exchanges or any other online services that offer cryptocurrency storage.
Cryptocurrency trading platforms – popular exchanges:
- Coinbase – one of the world’s most trusted and biggest cryptocurrency exchanges. In 2020 the company published its first transparency report. One can find more about their business on their website.
- Kraken – an exchange based in the US, operating since 2011 and trusted by thousands of traders worldwide.
- Binance – claims to become “the world’s largest crypto exchange” in terms of the daily trading volume of cryptocurrencies. It was founded in 2017 and is registered in the Cayman Islands.
Where to store your cryptocurrencies safely?
You may have invested a decent chunk of change into cryptocurrency and now want to know how to keep your coins safe.
So what are the safest ways to store crypto? Where to keep cryptocurrencies safely? How to protect your crypto? These are all excellent questions that need answers.
One of the ways to store coins is on an exchange.
If your coins are stored on an exchange, technically, the exchange is responsible for hosting and securing them properly. But there have been many instances of hacked exchanges, resulting in substantial monetary losses, so it might not be the wisest place to store your investments.
It’s up to you to keep your crypto investment safe. It is wrong to assume that investing in cryptocurrency is automatically safe and secure because it is digital-based. There are precautions that all investors must take into account.
Let’s assume you don’t want to store your crypto on an exchange. Where else can you keep it?
Moving on from using online exchanges, another way to store cryptocurrency is cold storage methods. Cold storage — which refers to any type of wallet where the private key has never touched the Internet — can also be used for storing cryptocurrencies.
These are wallets that are not connected to the internet or any other device, making them virtually hackproof.
Cold storage
- Paper wallet
- Hardware wallet
- Offline software wallets
Paper wallets are one example of cold storage, where you print out your public and private keys on a piece of paper. Unfortunately, this method requires much more meticulousness than other options since it’s easy to lose a piece of paper.
Hardware wallets are dedicated devices that store users’ private keys in offline hardware. The device functions and looks like a USB. Like a paper wallet, keeping the hardware wallet safe is vital. Popular choices for a hardware wallet are KepKey and TREZOR.
Offline software wallets are similar to hardware wallets. However, using them can be more complicated for a less technical user. They work by splitting a wallet into two platforms, an online wallet that contains a public key and an offline wallet that contains a private key. Considering the offline wallet never connected to the Internet – the private key remains private.
Additionally, there are also brain wallets. Brain wallets are cold crypto storages that are used to store a private key or passphrase. They can be stored as a string of 12-24 words.
There’s no single best crypto storage method that will work for everyone. The best thing to do is to weigh your options and choose the one you feel comfortable with.
Investing in Cryptocurrencies: How it works!
The first step to investing in cryptocurrency is opening up a cryptocurrency exchange account. This can be done by creating an account on any of the many cryptocurrency exchanges.
All exchanges follow the same basic steps for setting up an account, but some provide more advanced features than others. Once you have created your wallet and verified your email address, you are free to transfer money into it via bank transfer or credit/debit card (depending on which payment method the Exchange accepts).
Note that not all Exchanges accept the same forms of payment.
Each exchange has a different way of displaying what cryptocurrencies are available, how much they cost, and where to purchase them. Generally speaking, most exchanges require you to make an order through the Trading section of the platform. When buying digital currencies on any exchange, there are two types of orders: limit and market. Limit orders offer more control over prices. You set a limit for how much you want to pay, and the order gets filled at that price. Market orders do not guarantee the price at which the transaction will occur but guarantee the execution. The price is usually similar to the current bid or ask price.
Bear in mind…
In some cases, exchanges will have different limits depending on whether you are using a credit card or bank transfer as your payment method. Therefore, you should check each exchange’s FAQ page or support documentation to determine what deposit limits exist for each payment method before investing large sums of money.
It’s also essential to take security measures like 2FA seriously.
The next step of investing in cryptocurrency is deciding which coin to purchase (for example, BTC or ETH). That is another topic that differs from exchange to exchange, but there are usually links on the homepage for each currency that can be used as a reference point. Focusing on the big currencies is a good strategy for beginners as those will likely be the easiest to track and trade with (although investing in any cryptocurrency adds risk because their prices can vary dramatically).
The final step of investing in digital assets is selling off your digital currency at a higher price to receive a profit.
The process is the same as above, but now you are looking for “Sell” instead of “Buy.” You might have to wait a few days or weeks before your investment reaches its peak value. Keep in mind that investing in any type of asset involves risks, and there is always the chance that you will lose money instead of gaining it.
How to choose a Cryptocurrency to invest in?
Investing in cryptocurrency can be a good option. There are hundreds of different cryptocurrencies out there that range from really cheap ones but have the potential to grow to expensive ones.
But how do you choose which crypto is the right one?
There is no simple answer to that question because investing is more of an art than a science, and it’s impossible to predict what will happen tomorrow, let alone next year. However, here are some factors investors use when choosing cryptocurrencies:
Market Capitalization
Market capitalization or market cap is one of the most important factors when investing in any cryptocurrency. The market cap simply means this: “Market cap is the total value of all coins in circulation multiplied by the cryptocurrency’s price”
So why is market cap a factor? It is simply because sometimes investing in something with low market caps means investing in something that can potentially grow a lot in value.
The risks of investing in low market cap projects are that these coins tend to have less userbase, less mature code, are newer, are more volatile, and are much easier to take over because the market is not as crowded. The upside is that they can literally go up 100x or even 1000x if you get into the right ones.
Before investing any money into cryptos, make sure you research them, find out their current prices, look at their market caps (but don’t forget about circulating and total supply), and look at where they are being traded. Also, look into the team behind the project because investing in a scam or poor developers can be highly disadvantageous.
News/media coverage & community interest
When investing in cryptocurrencies, it is generally suggested to invest in coins that are not getting too much media coverage simply because that means that the market cap is low enough to go up significantly still. Why? Because investing in cryptocurrencies whose prices have already gone way up after huge amounts of media hype usually means investing at their peak value. Even though this might seem like a good idea, it will rarely end well since people tend to sell off once things become less exciting because they have already made all the gains.
So investing in coins that are not highly hyped up might give you a higher chance of buying at lower rates which means if the coin succeeds, it will go way higher than its current market cap. However, on the flip side, the coin may never succeed.
Wallet support & Roadmap
When investing in digital assets a piece of general advice is to look for those that have working products/services and check whether the team has released any information regarding what updates/improvements they will make in terms of features and which ones they will move on to next.
If the team provides little to no information regarding future development, investing in that coin can be risky. Even though cryptos seem more independent than traditional FIAT currencies, buying them requires proper research and analysis of the team behind them.
To sum up, the best way to determine whether a certain cryptocurrency is worth investing in or not is by looking up its features, wallet support, market cap, coverage, and looking upon the long-term outlook of cryptos.
Investing in ICO’s
ICO stands for Initial Coin Offering and is similar to an IPO (Initial Public Offering). The main difference between these two is that ICO’s don’t give investors a stake in the company, but rather a company coins or tokens which could have trading value on cryptocurrency exchanges or utility in using the service or product the company is offering. To understand what an ICO means for an investor, imagine buying stocks at their initial price on the stock market. Any subsequent rise in the stock’s future price would mean potential returns for you. That is pretty much how it works with ICO’s. As well as holding no ownership over the companies issuing coins or tokens, investors are also not guaranteed any dividends or interests either. They are just hoping the demand for these tokens will be high enough for them to be sold with profit.
How to invest in Initial Coin Offerings?
ICO’s are open to everybody. The general structure goes something like this: the company issues a whitepaper providing all the details regarding a project and funding. Then, these tokens can be bought with any cryptocurrency (Bitcoin, Ethereum, etc.) or fiat money during an initial coin offering period.
Bear in mind, not all ICO’s have been successful. Some have sunk without a trace, but some turned out profitable. The successful ones include NXT, Ethereum, Stratis, and NEO. There is currently no simple answer to the question “what returns can I expect, if any?” as it greatly depends on how successful an ICO turns out to be.
Are there risks when investing in ICO’s?
Risk is inevitable when it comes to any form of investment, and therefore investing in Initial Coin Offerings is no exception. While some ICO’s turn out very profitable, some turn into complete loss-making ventures. The big risk with ICO’s is that the token/coin you buy during its initial offering might immediately crash in value after. This crash can be brought about by several reasons such as; lack of demand, company not hitting its milestones, and so on. Also, even if an Initial Coin Offering turns out to be successful, their tokens could still crash sharply in value, meaning enormous losses for investors.
What are the advantages of investing in ICO’s?
The main advantage for people who invest in initial coin offerings is that no complicated paperwork, such as with stock market trading, is required. Investing in Initial Coin Offerings is much easier than other forms of investment, and it can be done anonymously. Anyone can invest, no matter the continent or the country of residence.
What are the disadvantages of investing in ICO’s?
Many Initial Coin Offerings flop, so if you invest in one and it fails, it would mean a complete loss. Another significant disadvantage of investing in initial coin offerings is regulation. Most countries have no laws regarding such offerings, which means there is a high chance that the tokens could be stolen if left under the control of an unknown party. The lack of regulation means the market is very chaotic and unclear. There are no official channels to turn to when something goes wrong.
The top 12 cryptocurrencies
There are many cryptocurrencies on the market today. Unfortunately, understanding which ones to trust can be confusing for first-time traders. To stay afloat in the cryptocurrency world, a general bit of advice is to stick with a few tried and tested ones before exploring the ones relatively unknown.
Below, we have compiled a list of the currently popular cryptos on the market.
Bitcoin
Bitcoin is a decentralized digital currency sent from user to user without intermediaries. Transactions are verified through cryptography and are recorded in a public ledger known as a blockchain. In 2008, a group of people claiming to be Satoshi Nakamoto created the cryptocurrency. Its first implementation was in 2009 by the Open Source software project.
Bitcoin is often under the attack of critics for the enormous energy consumption required for mining the coin. Additionally, many disapprove of Bitcoin due to price volatility and thefts from exchanges
Generally, Bitcoin has been surrounded by various labels. Some refer to it as a speculative bubble, while others believe it’s an investment in the future.
Bitcoin was defined in a white paper released on October 31, 2008. It is a compound of the terms bit and coin. Although Bitcoin is often capitalized, it is not a uniform term. Some sources use bitcoin lowercase, while others use capitalized terms.
The Blockchain
Bitcoin is a network that uses a cryptographic protocol known as the blockchain. Blockchain is a distributed ledger technology that consists of a single chain of informational blocks arranged chronologically. This information can be any string of 0s and 1s, and it could include information such as emails, land titles, contracts, and bond trades. In theory, any type of contract can be created on a blockchain if both parties agree to the contract. As a result, no central authority can keep track of all Bitcoin transactions. Instead, the participants do it by creating and verifying blocks of transaction data.
This technology opens up a world of possibilities for financial products, such as loans and decentralized savings accounts. For example, self-driving taxis and ride-sharing vehicles could have their own blockchain wallet in the future. The passenger would simply send cryptocurrency to the car, and it would not move until it is received. These systems would allow the vehicle to keep track of its fuel needs and provide a way to recharge.
Bitcoin mining
Mining is a process of maintaining the public ledger. Miners use their devices (computers) to record transactions. Recording transactions is relatively easy for a modern computer, but Bitcoin mining is time and energy-consuming.
However, people would easily carry out fraud acts to get rich or bankrupt others without the added difficulty. They could log hundreds of transactions on top of each other to make it harder to detect fraud. For this reason, Bitcoin’s algorithm has been developed using a combination of proof of work and other cryptographic techniques.
Miners do not work on the distributed ledger purely to verify transactions and keep the Bitcoin network running. In fact, they receive compensation for their work.
Bitcoin transactions
Outside of the mining community, most Bitcoin owners purchase their supply through a Bitcoin exchange. Bitcoin exchanges are marketplaces where users can buy and sell cryptocurrencies. However, they are often subject to various regulatory and security challenges. That is because there are varying levels of regulation in different countries.
Even though the Bitcoin network is mainly secure, many thieves have targeted high-profile exchanges to steal tokens. The most notable Bitcoin theft was probably from Mt. Gox, the former leading exchange platform. It was revealed in 2014 that around 850,000 BTC worth $450 million at the time was stolen from the platform.
Mt. Gox filed for bankruptcy in 2014. Most of the stolen bounty was not recovered.
Wallets and keys
To protect their assets, Bitcoin owners use keys and wallets.
A wallet is a set of keys that allow users to access Bitcoin. It can be used in various forms, from web applications to QR codes printed on paper.
There are two main types of wallets: hot wallets connected to the Internet and are vulnerable to hacking, and cold wallets not connected to the Internet.
In the Mt. Gox case, most of the BTC that was stolen was taken from a hot wallet.
Website: https://bitcoin.org/en/
Ethereum
Ethereum is a blockchain platform that uses its own cryptocurrency, Ether (ETH), and its own programming language, Solidity.
Ethereum is a blockchain network that enables people to perform decentralized transactions. The platform enables users to create, publish, and use applications. Its users can also pay with Ether cryptocurrency. As of May 20121, Ethereum is the second most valuable cryptocurrency globally, after Bitcoin. Its decentralized applications are referred to as dApps.
Furthermore, Ethereum enables developers to create and publish smart contracts and dApps with a minimized risk of downtime, fraud, and interference.
Ethereum was launched in 2015. It was created by a group of developers led by Joe Lubin. Currently, Vitalik Buterin is the CEO and public face of Ethereum. He is referred to as the world’s youngest cryptocurrency billionaire. Even though Ether was created as a payment method designed to work seamlessly within the Ethereum network, its acceptance is now widespread across various online platforms.
Partnerships
According to Ethereum, we can use its platform to decentralize and secure anything. In fact, there are several projects testing this concept. Moreover, Microsoft and ConsenSys have partnered to provide Ethereum Blockchain as a Service on the MicrosoftAzure cloud. This service is intended to allow developers to create and manage blockchain applications easily.
In addition, in 2020, AMD and ConsenSys announced a joint venture to build a network of data centers powered by Ethereum.
Unlike Bitcoin, Ethereum was not created to support cryptocurrency. In reality, Ethereum has bigger ambitions. Its goal is to become a platform that enables applications to store and manage information safely.
How does Ethereum make money? Users pay fees to use decentralized apps (dApps) on Ethereum. These fees are called gas fees. They vary depending on the computational power used. The median fee for gas was over $10 per transaction in early 2021.
Website: https://ethereum.org/en/
Solana
Solana is a blockchain platform that enables decentralized applications to run. It is similar to other leading dApp blockchains like Ethereum. Solana is an open-source project run by the Solana Foundation. The blockchain was developed by developers at San Francisco’s Solana Labs.
Solana has gained attention by offering faster and cheaper transactions. That is something that Ethereum has been unable to deliver. Solana is a PoS (Proof Of Stake) blockchain that is more eco-friendly than traditional PoW (Proof of Work) networks. Its coin, Solana, has a ticker symbol SOL.
Solana’s proof of stake protocol is the preferred method of validating transactions in cryptocurrency. Unlike the proof of work method, it makes the validator nodes on the network stake something. In Solana, the validators stake the SOL tokens. As a result, they consume less power than the proof of work miners.
Programmable blockchain
Solana is a programmable blockchain. It is a major contender in the cryptocurrency space and a competitor to Ethereum and Cardano. Programmable blockchains are becoming more prevalent within the cryptocurrency space. Their perceived potential has made them very popular.
The reason for this admiration is that they can store smart contracts. Smart contracts are small pieces of code that can be stored in a blockchain system. They can be programmed to perform certain actions once the contract conditions have been met.
Ethereum was the world’s first programmable blockchain. However, the Ethereum network grows short in certain aspects, such as its scalability. Consequently, network congestion can lead to huge fees. The developers of Ethereum are currently working on the upgrade to version 2.0, which they expect to reduce the carbon footprint and solve the scalability issue. Due to Ethereum’s shortcomings, new decentralized networks have emerged and are taking over some of Ethereum’s market share. Solana, Tezos, and Cardano, to name a few.
However, Ethereum is still the leader in total supply, with over 70,000 nodes. Nevertheless, Solana is gaining momentum, and many consider it a killer due to its innovative approach. Solana uses a proof of history protocol that simplifies the transaction verification process.
Website: https://solana.com/
Bitcoin Cash
Bitcoin Cash is a cryptocurrency that was created in August 2017. It increased the number of blocks allowed for processing transactions. Bitcoin Cash is a digital currency that uses the Bitcoin name and the BCH currency code.
On March 26, 2018, all Bitcoin Cash trading pairs were removed from OkEx (except for BCH/BTC, BCH/ETH, and BCH/USDT) due to insufficient liquidity.
Bitcoin Cash’s daily transaction numbers are about one-tenth that of Bitcoin.
In December 2017, Coinbase listed Bitcoin Cash.
As of August 2018, Bitcoin Cash transactions can be made through various payment platforms. Some of these include GoCoin, BitPay, and Coinify.
Bitcoin Cash algorithm
Both Bitcoin and Bitcoin Cash use the same proof-of-work algorithm. This algorithm is used to timestamp every new block. Both Bitcoin and Bitcoin Cash aim to generate a new block every ten minutes. The time required to calculate a new block is typically determined by a parameter known as the mining difficulty. To maintain the block generation time consistent, both Bitcoin Cash and Bitcoin use an algorithm that adjusts the difficulty parameter.
The difficulty adjustment algorithm (DAA)
The difficulty adjustment algorithm (DAA) is a cryptocurrency algorithm that was used to adjust the difficulty parameter of mining. In August 2017, Bitcoin Cash added an emergency difficulty adjustment algorithm (EDA) to its DAA. It was designed to reduce the difficulty of mining Bitcoin Cash by 20%. Due to the EDA adjustments, the Bitcoin Cash system experienced difficulty in mining, which caused it to be thousands of blocks ahead of Bitcoin. To address the issue of stability, a change of the DAA was implemented for Bitcoin Cash. The EDA was canceled on November 13, 2017. The Bitcoin Cash DAA adjusts the difficulty of mining after each block. It uses a moving window of at least 144 blocks to calculate the difficulty of a new block.
Researchers have demonstrated that Bitcoin DAA doesn’t generate new blocks at a consistent rate as long as the supply of hash power is elastic. They also stated that Bitcoin Cash is stable even when the price is volatile.
Website: https://bitcoincash.org/
Binance Coin
Binance Coin is an ERC20 token that is issued on the Ethereum blockchain. It is a cryptocurrency that traders can use to pay for transactions on the Binance exchange.
The token has a total supply of 200 million. Furthermore, this coin gives users discounts on the services of Binance, a cryptocurrency exchange. Binance will become a decentralized exchange powered by blockchain technology in the future.
The BNB token serves as the underlying gas that powers the decentralized ecosystem of Binance. Considering this digital token was made by Binance and provides a discount to users of the Binance exchange – traders can buy it only on the Binance exchange. Due to the rise in the number of traders on the platform, the cost of Binance transactions might rise. To promote the growth of tokens, the company will buy and burn them.
Website: https://www.binance.com/en
Cardano
Cardano is a decentralized and open-source blockchain platform, and it uses proof of stake protocol. Charles Hoskinson founded Cardano in 2015. Cardano Foundation oversees its development. This cryptocurrency is the largest to use a Proof-of-Stake blockchain. It is believed to be a greener alternative to traditional proof-of-work blockchain. The platform is named after Gerolamo Cardano and the cryptocurrency after Ada Lovelace. One Ada = 1,000,000 Lovelaces.
Unlike other cryptocurrencies, Cardano doesn’t have a white paper. Rather, it uses a set of design principles to overcome the various issues faced by other blockchains. In May 2021, Cardano reached a total market cap of $77 billion, becoming the biggest proof-of-Stake cryptocurrency.
The Cardano platform has two layers: the settlement and computation layers. The latter enables decentralized applications and smart contracts. On September 12, 2021, Cardano launched decentralized finance (Defi) services. That includes an upgraded version of its smart contracts. Other notable entries include Plutus, a complete smart contract language written in Haskell; and Marlowe, a smart contract language designed for the non-programmer financial sector.
Furthermore, smart contract languages from Cardano allow developers to create end-to-end tests without leaving the integrated development environment. In fact, according to Cardano, Ethereum is not safe and stable enough, and Bitcoin is not as fast and is inflexible.
Website: https://cardano.org/
Polkadot
Polkadot is a blockchain-based platform that enables decentralized networks to execute atomic transactions. Hence, making an interconnected internet of blockchains. The network uses a proof of stake consensus algorithm. It was created by Ethereum co-founder Gavin Wood.
Coinbase added Polkadot to its platform.
Website: https://polkadot.network/
Chainlink
The Chainlink LINK token is an ERC677 token that acts as a data payload. It is used to feed data to smart contracts. According to Chainlink, the trade value of these tokens pay network operators for retrieving data from public smart contracts.
Chainlink is a decentralized network that came to life in 2017. Its creators are Steve Ellis and Sergey Nazarov. Chainlink is a blockchain-based bridge between off-chain and blockchain environments. It was officially launched in 2019. In 2018, the chainlink integration of Town Crier allowed users to connect to the Ethereum blockchain. In 2020, DECO was integrated with Chainlink. The protocol is a proof of information system that uses zero-knowledge proofs.
In April 2021, the company released a second white paper, which focused on the evolution of decentralized oracle networks. The paper provided a vision of how these networks can be used to provide hybrid smart contracts.
More than 650 entities have integrated with Chainlink since July 2021.
Website: https://chain.link/
Uniswap
Uniswap is a decentralized digital finance protocol that enables users to exchange cryptocurrencies. It was built by a company of the same name. The protocol allows for automated transactions between tokens on the Ethereum network through smart contracts. In March 2021, Uniswap had been generating US$2-3 million daily in fees for the providers that facilitate liquid markets for cryptocurrencies.
Hayden Adams, an engineer and a former employee at Siemens is the founder of Uniswap. Adams established the company on November 2, 2018. Uniswap received investments from several venture capital firms. The investors include Union Square Ventures LLC, Andreessen Horowitz, ParaFi, and Paradigm Venture Capital. In October 2020, the average daily trading volume of Uniswap was US$220 million. Its decentralized finance platform has become widely used by traders and investors.
The first version of the Uniswap protocol was released in November 2018 for Automated Market Makers. The second version was launched in May 2020. While the third one came out in May 2021. It added new options to allocate liquidity in a certain price range. In April 2020, the website of Uniswap was temporarily taken offline after hackers unsuccessfully tried to gain control of the exchange.
Early users of the Uniswap protocol were able to receive 400 UNI tokens. As a result, the token’s market capitalization has reached over $500 million. Unlike its centralized counterparts, Uniswap uses liquidity pools to make markets more efficient.
Website: https://uniswap.org/
Dogecoin
Billy Markus and Jackson Palmer created Dogecoin to make fun of the wild speculations surrounding cryptocurrencies. However, some people consider Dogecoin a legitimate investment prospect despite its satirical nature. It was introduced in December 2013 and has quickly developed its own community, reaching a market cap of more than $85 billion in May 2021.
It is a fun and friendly Internet currency that has been featured on various websites. In addition, it is the current shirt sponsor for Premier League club Watford. Billy Markus and Jackson Palmer wanted to create a digital currency that could reach a wider demographic than Bitcoin. They also wanted to distance themselves from the controversial history of other cryptocurrencies.
Within the first 30 days after its official launch, more than a million people visited Dogecoin.com. The credits for turning the idea into reality go to Palmer. First, Palmer purchased the domain Dogecoin.com. After looking at the website, Markus reached out to him, and they started working on the coin. Markus developed the Dogecoin protocol based on the existing cryptocurrencies Litecoin and Luckycoin.
Dogecoin theft
In December 2013, millions of coins were stolen from the Dogecoin wallet platform following a hacker attack. The hacker was able to modify the platform’s send/receive page to send coins and tokens to a static address. This incident spiked the number of mentions about Dogecoin on Twitter at the time. Following the breach of Dogecoin, the community started an initiative called SaveDogemas to help those affected by the incident. Over a month later, enough funds were donated to cover all the stolen coins.
In January 2014, the total trading volume of Dogecoin briefly surpassed that of all other crypto-currencies combined. Nevertheless, its market capitalization remained significantly behind that of Bitcoin.
Initially, Dogecoin rewarded miners with a random block reward. However, in 2014, this behavior was updated to a static block reward system.
Jackson Palmer, one of the co-founders of cryptocurrency, left the company in 2015. He believes that cryptocurrencies are fundamentally flawed and are built to enrich their top promoters.
Dogecoin price
During the early days of the cryptocurrency bubble, Dogecoin peaked at $0.017/coin. Its total market capitalization at that time was valued at nearly USD 2 billion.
Dogecoin’s price spiked in July 2020. It was caused by a TikTok trend that aimed to get the coin’s price to $1. In January 2021, the price of dogecoin went up over 800% in 24 hours, largely due to the attention given to it by Reddit users encouraged by GameStop and Elon Musk. One month after, in February 2021, the price of Dogecoin reached a new high of $0.08 following the encouragement of various influencers.
Later on, in April 2021, the rise of Dogecoin coincided with the direct listing of Coinbase on April 14, which boosted its value. However, Coinbase did not allow Dogecoin trading at that time. Its price reached $0.10 on April 14 before hitting a new high of $0.45 on April 16. At that time, the market cap of Dogecoin reached $50 billion, making it the 5th-highest-valued cryptocurrency in the world. Its value had increased by over 7,000% year-to-date.
On May 8, 2021, the price of Dogecoin dropped 34% after Elon Musk’s appearance on “The Tonight Show”. The Dogecoin swing low on the following day was $0.401, which led to a cumulative drop of 43.6% and resulted in a loss of $35 billion in value. On May 9, 2021, SpaceX announced that it would launch a mission to the Moon using Dogecoin, the world’s first space mission funded by a cryptocurrency.
Negative aspects of Dogecoin
The origin of Dogecoin, which is considered a joke, has made it hard to take seriously by mainstream media. In addition, Dogecoin has a long history of scams. Some commentators have likened it to a type of Ponzi scheme. Critics believe that early investors in Dogecoin are incentivized to get others to buy more of the coins to drive up the price, resulting in them benefitting at the expense of later buyers.
Unlike Bitcoin, Dogecoin does not have a supply cap. Instead, it has a stable, deterministic inflation rate of 10,000 coins per block. Its block time is one minute. Five billion new Dogecoins will be created and enter circulation every year.
Positive aspects of Dogecoin
While the price is volatile, it has its benefits. Day-traders (the ones who enter and exit the trade within one day) benefit from the volatility because they can trade-off it and take advantage of its extreme swings. While it may have started as a joke, Dogecoin became the 10th-largest cryptocurrency worldwide in 2021. In addition, in comparison to other big players in the crypto market, Dogecoin uses far less energy.
Website: https://dogecoin.com/
Shiba Inu
The Shiba Inu token is a cryptocurrency created in August 2020 by an anonymous individual or group known as Ryoshi. It was created in August 2020 and is named after the Japanese breed of dog from the Chubu region. Shiba Inu is a coin that has been described as a pump and dump scheme and a meme coin. It has also been surrounded by concerns about the concentration – the concept of a single wallet and the frenzied buying by retail investors.
Shiba Inu is a cryptocurrency created in August 2020. The founders dubbed themselves as the Dogecoin killer.
Vitalik Buterin donated over 50 trillion SHIB to the COVID-Crypto Relief Fund on May 13, 2020.
In October 2021, the price of Shiba Inu rose significantly. It went up by 240% in just one week. However, it then fell considerably during the first week of November.
Website: https://www.shibatoken.com/
To wrap up…
Cryptocurrency is a complicated subject, but understanding the risks and rewards can help you make an informed decision about whether or not to invest in digital assets. You should also be aware of other factors like how much time you have to monitor your investment for fluctuations in price, what type of cryptocurrency wallet will work best with your needs, and if any tax implications may come into play when investing in cryptocurrencies.
Whether or not this blog post has helped you better understand how cryptocurrency works, we hope it’s given you some food for thought on where to start looking next before making the big leap. So, what do you think about investing in crypto? Comment below with your experience so far!
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This article was last updated on December 24th, 2021.
