Cryptocurrencies have changed the world and how transactions work. Since the introduction of Bitcoin, many more cryptocurrencies have entered the crypto market. While fiat money is centralized and federally regulated, cryptocurrencies are virtual currencies that are decentralized, unregulated, and not pegged to anything tangible. Due to this, the value of cryptocurrencies tends to fluctuate unexpectedly.
As it’s almost impossible to predict the value of cryptocurrencies, many people are skeptical about whether to invest in them. This article aims to investigate if cryptocurrencies and other crypto assets are a good investment or not. If you are new to the crypto market, this guide will also help you understand the basics of cryptocurrencies, how they are mined, and how they can be stored for the long term.
The crypto markets are very different from normal stock markets and Forex. We will also help you to navigate the crypto market and create a crypto trading account. So, let’s dive right into the cryptic world of cryptocurrencies.
What Are Cryptocurrencies?
Cryptocurrencies are virtual currencies that use cryptography to ensure safe and secure transactions. They are built on the blockchain, a peer-to-peer (P2P) database system of interconnected computers. Unlike fiat money, cryptocurrencies are not tangible and are completely digital. Therefore, you don’t have to carry physical money in your wallet to make payments.
These digital currencies are called cryptocurrencies because they use the latest encryption technology to ensure safe and secure transactions. Additionally, cryptocurrencies are transparent and immutable, making them one of the safest forms to transact funds. Every crypto transaction is recorded in a public ledger, offering traceability.
Bitcoin is the first cryptocurrency launched on 3 January 2009 when Satoshi Nakamoto placed the genesis block of the Bitcoin blockchain network. Today, there are millions of cryptocurrencies and tokens traded around the world with Ethereum, Litecoin, Dogecoin, and Tether being the most popular examples. Cryptocurrencies are created on the blockchain making it a decentralized asset. More about it on the next seduction.
What Is A Blockchain?
Blockchain is a decentralized, digitally distributed ledger that exists in a peer-to-peer (P2P) network of interconnected computers. Every transaction that occurs in the blockchain is recorded in the form of blocks, which are then linked together with a hash value that cannot be changed.
This makes the blockchain immutable and transparent as any change made to the original chain will be recorded as a new block. Advanced cryptography links The blocks together, and an attempt to disrupt the block will be recorded.
In the case of cryptocurrencies, their transaction history is recorded as new blocks and added to the chain. If the ownership of the cryptocurrencies changes, transaction details and details of the new owner will be added as a new block.
This helps us to track when the cryptocurrency was created and who were the owners. This is a unique feature that fiat money does not have and can prevent funds from being used for terrorist and fraudulent activities.
How To Mine Cryptocurrencies?
Crypto mining is the process by which new cryptocurrencies are added into circulation. Mining also involves validating crypto transactions on the blockchain network and adding it to the distributed ledger.
To validate the transactions, the users in a blockchain have to consent to it. There are various types of consensual mechanisms in the blockchain. Proof of Work (PoW) is a consensual mechanism in which crypto validators are rewarded for solving complex cryptic puzzles using their systems.
Miners use high-end computer hardware to solve these puzzles. These computational hardware are very costly and consume enormous amounts of electricity. Miners compete with other users to solve mathematical puzzles to earn crypto in return.
The cryptocurrencies generated from the blockchain can then be transferred to their crypto wallets. There are several types of wallets to store the generated cryptocurrencies. In the case of a hot wallet, validators can then send these cryptocurrencies to their peers or exchange them in crypto exchanges for real money. This is how cryptocurrencies are added into circulation.
However, as more miners use advanced hardware to mine cryptocurrencies, it gets more difficult to obtain them. This is because the cryptic equations get more complex as the competition increases. There are no laws that prevent users from mining cryptocurrencies. However, they have to pay taxes while selling cryptocurrencies.
Here’s the timeline of how crypto mining works:
- The miner validates a crypto transaction and adds the information into a new block.
- The block is cryptographically secured and the block is added with a hash value to link it to the blockchain network.
- The miner earns a reward in cryptocurrency for validating the crypto transaction.
- The miner then spends the cryptocurrency for purchases or exchanges it for real money, adding it to circulation.
What Drives The Crypto Markets
Cryptocurrencies are decentralized, which means that they are not pegged to anything. Fiat currency markets, world economics, and political scenarios do not affect the crypto market much. Supply and demand are what drive the crypto market. The various factors that influence the market trend of cryptocurrencies are explained below:
Supply
The circulating supply of a cryptocurrency means the total supply of crypto tokens available in the market at any given time. The value of the cryptocurrencies depends on how many coins are mined and how many coins are currently traded. The rate of lost or destroyed coins also affects the overall value of cryptocurrencies.
The maximum supply of Bitcoin is set at 21 million. The Bitcoin blockchain protocol is created and programmed in such a manner that only a specific number of Bitcoins can be mined. If the demand for a cryptocurrency is more than its supply, the value of the coin is driven up.
Market Capitalization
The market capitalization of a cryptocurrency is the total value of all coins that were mined. The total market capitalization of a cryptocurrency decides its position in the overall crypto market and its price. Crypto coins with higher market value show that they have more investors.
The market capitalization of a cryptocurrency decides its popularity and indicates that the crypto project has a good roadmap and future. Usually, cryptocurrencies with a large market cap are considered good for long-term investments. Meanwhile, mid-cap cryptocurrencies are more volatile than large-cap coins.
Press & Social Media
The value of cryptocurrencies depends on how it is portrayed in the press and media. If a celebrity or an influencer endorses a cryptocurrency, its popularity increases, driving its price high. For example, when Elon Musk tweeted about Dogecoin, its prices skyrocketed.
Similarly, negative publicity associated with crypto coins can lead to the plummeting of their values. Many social media influencers are accused of executing a ‘pump-and-dump’ strategy. Therefore, the social media clout and attention a crypto asset gains can affect its value.
Institutional Players
Bitcoin was initially started as an experimental project. However, as the market for digital assets evolved, the crypto market attracted a lot of institutional investors. Unlike regular crypto investors, institutional players invest billions of dollars in crypto assets, changing the trend of crypto markets.
The influx of institutional investors has significantly increased the liquidity of the crypto assets. These sudden fluctuations in the prices of crypto assets have also led to the rise of several instruments like futures and options. Today, institutional players have strong investments in crypto assets, making it a good long-term investment.
Global Events
As crypto assets are decentralized, they are immune to inflation. However, the macroeconomics of certain regions surely affects the crypto markets. The global markets and the rise in interest rates have certainly affected the price of Bitcoin. While cryptocurrencies are decentralized, the stance of the government on crypto assets also influences its prices.
Likewise, the prices of certain cryptocurrencies like Tether and USD Coin, which are pegged to the US Dollars also experience a dip when USD falls. The fluctuation of strong fiat currencies due to a global event can cause a rise or fall in cryptocurrency prices.
How To Trade In Crypto?
The crypto market has a total valuation crossing trillions of dollars and it is expected to rise shortly, making it an ideal investment method. Crypto mining is a method for gaining cryptocurrencies. However, you need to invest a huge amount to set up the necessary hardware to mine cryptos. These mining rigs require enormous amounts of electricity to solve cryptic transactions and gain crypto rewards.
Due to the increase in the rise of crypto miners and the limited supply of certain cryptocurrencies, it is not feasible now. Don’t worry, there are more ways to buy, store, exchange, and sell cryptocurrencies to make a profit. Here are three ways using which you can trade in cryptocurrencies.
Centralized Exchanges (CEXs)
If you are new to the crypto space, centralized exchanges (CEXs) are the best method to start your crypto portfolio. Centralized exchanges offer the utmost safety and security as they are regulated by an agency. Additionally, the user interface of these exchanges allows players to easily navigate and make investments.
However, centralized exchanges require traders to undergo KYC (Know Your Customer) procedures. Also, there are fixed trading fees while making the buy and selling crypto assets. However, it is a good way to start an enticing crypto portfolio if you are a beginner in the space.
Here’s how you can start a crypto trading account in a centralized crypto exchange.
- Install The Trading App: You can head over to the Google Play Store or Apple’s App Store to install the best crypto trading app on your smartphone. Pick a centralized exchange that can be accessed on your laptop and smartphone to help you make transactions easily.
- Complete KYC (Know Your Customer): Once you have installed the app, sign up using your email address and mobile number. The exchange might prompt you to submit your ID for verification. You can submit your passport, driver’s license, or any government ID to complete the KYC procedure.
- Deposit Money Into The Wallet: To start investing in crypto, you need to buy it first. For this, you need to invest fiat money into the centralized exchange’s wallet. Use fiat payment methods like online banking, e-wallets, or credit cards to make deposits.
- Time To Buy Cryptocurrencies: Once you have deposited fiat money into your wallet, use it to buy cryptocurrencies of your choice. Search for the cryptocurrency that you want to buy and look at its current price. You can also wait for a dip to buy crypto so that you can make a reasonable profit while selling.
- Selling Your Coins: If you think you are ready to sell your crypto investments for a profit, head over to the wallet and choose the coin that you want to sell. Enter the quantity and tap on the ‘sell’ button to initiate the transaction. Your cryptocurrencies will be exchanged for fiat currency and deposited into your exchange wallet.
Decentralized Exchanges (DEXs)
Decentralized exchanges (DEXs) are not regulated by any government or financial entities, allowing you to have greater control over your crypto assets. There are no intermediaries in decentralized exchanges, allowing you to make crypto transactions with very low fees.
However, you can only buy or sell cryptocurrencies using the crypto assets from your crypto wallet. This provides paramount security to your crypto investments and transactions. Also, you don’t have to undergo any KYC procedures to buy or sell crypto at decentralized exchanges as it is completely decentralized and unregulated.
Peer To Peer (P2P) Trading
In P2P trading, you can directly buy or sell cryptocurrencies with other traders. P2P trading offers a greater degree of anonymity, as it is wallet-based and eliminates intermediaries. P2P trading is faster and more cost-effective than all other forms of crypto trading.
You can also use P2P trading to pay for services like a regular e-wallet, providing more flexibility for crypto transfers. However, peer-to-peer crypto transactions carry higher risks as there is no regulatory authority to oversee these crypto transactions and prevent any fraudulent activities.
How To Store Cryptocurrencies?
As cryptocurrencies are digital assets that are not tangible, you need digital wallets to store them. However, with rampant cyber attacks, it is the need of the hour to store your crypto assets securely and safely. There are two types of crypto storage methods by which you can securely store your crypto asset until you need to use it.
Custodial Wallets
Custodial wallets are owned, operated, and managed by third parties like crypto exchanges. Custodial wallets offer industry-leading security measures to store your crypto assets. This ensures the safety of your crypto investments from hackers and scammers who use the latest techniques to gain access to your crypto assets. Custodial wallets store your private keys, allowing you to have easy access to your keys easily, but preventing others from gaining access to them.
Non-Custodial Wallets
In non-custodial wallets, you don’t need to share your private keys with anyone. This offers an additional layer of security as the safety of your crypto assets does not depend on the trust between you and the storage service. This ensures that only you have access to your crypto funds. Non-custodial wallets can either be hot or cold.
What Are Hot And Cold Wallets?
Custodial and non-custodial wallets can be hot or cold,
Hot Wallets
Hot wallets allow you to store your crypto assets online. These wallets generate the private keys for you to access cryptocurrencies. However, hot wallets are more vulnerable to scammers and cyber attacks as they are connected to the internet. Hot wallets constantly try to update their security according to the latest crypto scams and hacking methods.
Cold Wallets
Cold wallets are not connected to the internet, drastically reducing the risk of being compromised. Cold wallets are also called ‘offline wallets’ or ‘hardware wallets’, meaning that you can store your keys in hardware and keep them off the internet until you need to access them. However, cold wallets can be costly and any damage to your cold wallet can prevent you from recovering or accessing your crypto assets.
Crypto Scams And Frauds
Ever since the rise in the popularity of cryptocurrencies, there has also been a rise in crypto scams and frauds. The decentralized and digital nature of cryptocurrencies also makes them an attractive target for hackers. Here are a few types of crypto scams that you need to look out for:
- Fake crypto exchanges: Scammers create fake websites and exchanges to lure in crypto enthusiasts and steal their cryptocurrencies.
- Pump and dump: Fraudsters create fake hype around a cryptocurrency, prompting crypto enthusiasts to invest huge sums of money. The fraudsters then sell their crypto holdings when the price soars high.
- Giveaway Scam: Some scammers advertise you to send cryptocurrencies to them and that they will double it and send it back to you. If such offers are too good to be true, it is most likely a scam.
- Blackmailing: Scammers threaten you saying that they have your private information and send them cryptocurrencies or share your private keys with them to prevent making it public.
- ICO (Initial Coin Offering) Scams: Fraudsters create fake crypto projects and offer fake ICOs to collect funds from crypto enthusiasts.
Is It Safe To Invest In Crypto?
Crypto investments put off a majority of normal traders as cryptocurrencies are digital assets that are not tangible and as it is not pegged to anything. Like all investments, you need to know the risks and benefits associated with it.
Educating yourself about the potential and drawbacks of cryptocurrencies can help you make the right decision and make a profit at the end of the day. Here are a few risks associated with cryptocurrencies:
- Unregulated: Compared to fiat money, cryptocurrencies are unregulated by any central agencies. Most jurisdictions around the world do not have any legal framework to regulate crypto assets. It is unknown how regulations would affect its prices.
- Volatility: Cryptocurrencies are highly volatile, which means that their prices can fluctuate uncontrollably. This can increase or decrease the value of the cryptocurrencies in your portfolio.
- Scams & Hacking: Cryptocurrencies are digital assets, making them an easier target for hackers and scammers. You need to share your private keys with online wallets to store these assets, making them more susceptible to hacking.
Here are a few positives of cryptocurrencies, that make them an ideal form of investment:
- Decentralized: Cryptocurrencies are decentralized and unregulated, making them free from any external regulations. This also prevents the fluctuation of prices of cryptocurrencies due to the change in financial policies and inflation.
- Lower Fees: Crypto transactions are unregulated and do not involve any intermediaries. This means crypto transactions carry lower fees when compared with fiat transactions.
- Transparency: Cryptocurrencies operate on the blockchain, making it immutable and highly transparent. Cryptocurrency transactions cannot be manipulated or erased. Being involved with blockchain technology makes cryptocurrencies easily traceable.
Conclusion
Bitcoin has revolutionized banking and transactions. Currently, there are more than 20,000 cryptocurrencies available for crypto enthusiasts to invest in. This has increased the popularity of decentralized finance (DeFi) and decentralized apps (dApps).
While there are certain risks associated with cryptocurrencies, the benefits of it far outweigh these drawbacks, making it an ideal form of short-term and long-term investment.
However, you need to do research before investing in cryptocurrencies. We hope this article has helped you to identify the potential of crypto investments and accustom you with how you can buy and sell cryptocurrencies.