Learn More About Cryptocurrencies

Learn More About Cryptocurrencies

Image source: SoFi.com

Cryptocurrencies are a digital form of money, implying that they are purely digital — no physical coin or bill is issued. They are a medium of exchange for goods and services. As a peer-to-peer money system, cryptocurrencies don’t need intermediaries before they can be transferred between persons. 

Bitcoin, the first and the largest cryptocurrency by market capitalization was founded in the wake of the 2008 financial crisis. The noble crypto asset was created by an anonymous person or a group of persons under the pseudonym Satoshi Nakamoto. 

There are a handful of cryptocurrencies out there, with more being created every day, however Bitcoin (BTC), Ethereum (ETH) and Tether USD (USDT) are the top 3 largest cryptocurrencies in existence. Since coming to the limelight, crypto assets have been gaining a lot of interest  — attracting both retail and institutional players. 

Today, most merchants and payment gateways accept crypto payments — facilitating easy and convenient payments for goods and services. Although most countries don’t have a soft landing for crypto, blockchain, the underlying technology for cryptocurrencies has found increased adoption across nations.  

Cryptocurrencies are secured by a cryptographic ledger technology called blockchain which makes it tamper-proof and immutable. Bitcoin solves one of the biggest problems associated with digital money — the problem of double-spending. In contrast to the traditional monetary system, cryptocurrencies are not issued by any central body, thus it is free from central control and manipulation. 

Ultimately, they are resistant to censorship and cannot be shut down because they are mostly decentralized. 

The Cryptocurrency Market

Cryptocurrencies are traded either in centralized or decentralized exchanges. Crypto exchanges are currently the primary contributor for transacting cryptocurrencies while centralized exchanges account for a large percentage of the total volume of cryptocurrencies traded across exchanges. 

Centralized exchanges (CEX) operate just like the traditional stock market with a single point of control. As the most commonly available and easy to use exchange, centralized exchanges are somewhat controversial as cryptocurrencies are deemed decentralized by convention. 

The notion of centralization implies that a third-party or a middle-man is employed in the conduct of transacting cryptocurrencies. Traders or users entrust their funds in the care of the middle-man as they engage in day-to-day transactions. In centralized exchanges, orders are executed off-chain

Decentralized exchanges (DEXs) in contrast are a direct opposite of their centralized counterparts. Transactions in a DEX are executed on-chain (with smart contract), in other words users or traders do not trust their funds in the hands of a middle-man or third-party. Every order (transactions) is published on the blockchain — which is unarguably the most transparent approach to cryptocurrency trading. 

The only drawback to decentralized exchanges is that it could be a bit complex for newbies who might have a difficult time navigating through the exchange. However, new generation DEX like Uniswap, Sushiwap have further simplified this process. 

They deploy Automated Market Makers (AMM) to replace the concept of Order Books. In the AMM model concept, there are no makers or takers, only users who execute trades. As already stated, AMM-based DEXs are more user-friendly. They are used conveniently and are mostly integrated into wallets like Trust Wallet, MetaMask and ImToken

Mining Cryptocurrencies

Most cryptocurrencies like Bitcoin are mined. Mining is a process by which new cryptocurrency transactions are completed and new blocks added to the blockchain. Miners receive incentives for verifying transactions or adding new blocks to the blockchain. This is a competitive process, the probability of mining a block is largely dependent on the hashing power of the miner’s computer. 

For the Bitcoin network, the block reward is currently 6.25 bitcoins. For each block mined, the miner who added the block will receive 6.25 bitcoins. The rewards continue to halve every four years in a major event called Bitcoin Halving. The last halving occurred in may 11, 2020, reducing the reward from 12.5 bitcoins to 6.25 bitcoins. 

In addition to the mining rewards received, miners also earn from the transaction fees paid by users when sending, trading cryptocurrencies. Such fees could range from a few cents to several dollars. 

The mining computers pick up transactions from a pool of pending transactions, then run a check to ensure the user has sufficient funds to complete the transaction and a second check to make sure the transaction was duly authorized. 

In the event that such a user doesn’t have enough funds to cover for transaction fees, the transaction will likely revert back to the users as a failed transaction. Miners are more likely to pick up transactions with larger transaction fees.  This is why it is commonly regarded that ‘the larger the fees, the faster is the transaction execution’. 

Cryptocurrency Wallets

Cryptocurrency users have the option of choosing between online, offline or hardware wallets. Depending on the choice you make settling for a wallet with the most secure features is optimal. Although offline and online wallets have proven to be secure, hardware wallets are known to provide the highest security for your digital assets.  

Online wallets are generally free, user-friendly and readily available and as such, they are the most commonly used wallets in the crypto industry. At the same time, they’re the most vulnerable among the different types of crypto wallets. Next to a hardware wallet, an offline wallet offers relatively better security for your crypto assets. 

If you are using a cryptocurrency wallet for the very first time, sticking to a secure yet user-friendly wallet should be your number one goal. For highest security, Hardware Wallets such as the Ledger Nano X is recommended by experts. 

Backing up crypto wallets is an important process in safe-guarding crypto assets. In the event of losing one’s wallets, funds can be easily recovered unto a new wallet using the private keys or passphrases obtained from the back up. 

How Profitable Is Crypto Investment?

Cryptocurrencies are considered highly volatile assets, and as such they are subject to large price fluctuations. In theory, High risk investments implies high rewards, this is true for cryptocurrencies as well. In the event of a potential downside, the loss incurred could be devastating. This is why investment advisors preach to ‘Never invest an amount you are not willing to lose at any given point in time.’ 

The upside potentials are virtually endless, Bitcoin was trading around $1000 in early September in 2020 and is today trading above $19k. With over 6000 cryptocurrencies out there, it requires a lot of analysis to pick a good coin or token with a higher upside potential. However, the odds of earning profits in a bull market is always high since, as the popular aphorism goes, “A rising tide lifts all boats”.