Last updated on June 21st, 2023 at 04:43 pm
Cryptocurrencies are virtual assets secured by cryptography and operate on a decentralized network powered by blockchain technology. The terms cryptocurrency and blockchain still sound complex to many. However, Bitcoin as a digital asset has been in the news for a long time.
Many questions are being asked about cryptocurrencies at the moment. Some of these center on legitimacy and how to invest in these digital coins. In this article, we will be answering seven common questions being asked about cryptocurrencies.
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What is Cryptocurrency?
Investopedia defines cryptocurrency as a virtual currency that is secured by cryptography and operates on a decentralized network powered by blockchain technology. A blockchain is a series of blocks containing transactions in the form of a database that is distributed across thousands of computers connected to a central network. The distribution of these databases allows for transparency and prevents the manipulation of the data.
With cryptocurrencies operating on the blockchain, it is impossible to duplicate or double-spend them. While these digital assets are gradually being accepted as a payment method for goods and services, Nerd Wallet attributes the interest in these unregulated currencies to trading for profit with speculators driving the prices upward at times.
Cryptocurrencies are described as unregulated because they are not issued by a central authority like central banks. The most popular cryptocurrency is Bitcoin. Bitcoin has been in existence for slightly over a decade after its presumed pseudonymous founder, Satoshi Nakamoto released the white paper in November 2008.
Ethereum, Bitcoin Cash, Tether, Dogecoin, and many more are also examples of digital assets. Digital currencies, with the exception of Bitcoin, are collectively known as altcoins.
Some companies issue their own digital assets called tokens which can be used to trade specifically for goods and services offered by these firms.
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How do individuals make money from cryptocurrencies?
DeFi Planet has elaborately explained to you how you can earn passive income with crypto. These strategies are outlined below.
- Trading crypto
- Crypto mining
- Making crypto dividends
- Staking
- Yield farming
- Accepting crypto as a payment method
- Participating in special events
Trading Cryptocurrencies
Trading cryptocurrency is the first option that comes to mind when questions about making money from digital assets are asked. Trading crypto deals with exchanging fiat currency for crypto or exchanging one crypto for another on platforms called exchanges.
Exchanges permit individuals to purchase coins to keep in their digital currency wallets. Common examples of exchanges are Coinbase and Binance. Crypto traders may decide to buy coins when the market is bearish and sell them when the market is bullish.
Cryptocurrency Mining
Mining is the process of verifying cryptocurrency transactions and adding them to the blockchain network. The process involves solving complex mathematical puzzles. And the node that finds the solution to the puzzle first, gets the opportunity to add the block to the blockchain.
The “so-called” miner that successfully adds the block is rewarded with freshly minted Bitcoins. However, the process is expensive due to the relatively high cost of gas needed to power these computers. Miners make money from crypto mining in the form of rewards or other incentives.
Making cryptocurrency dividends
Buying some digital coins and holding them for a period of time yields interest. This new method of making additional perks on cryptos is championed by some firms that reward individuals for essentially buying their digital assets and holding them for a fixed time. COSS, CEFF, NEO, KUCOIN, and more are examples of digital assets that offered dividends over a period of time.
Staking
Staking is a strategic way of verifying transactions involving cryptocurrencies that can’t be mined. While mining is based on the proof-of-work consensus mechanism, staking is based on the proof-of-stake mechanism.
Both mechanisms involve solving complex mathematical puzzles, however, in staking, investors stake a number of their coins for a period of time to stand a chance to add the next block. Investors who stake a higher number of coins for longer periods have greater chances of verifying the transaction.
The validator node that approves the transaction gets paid in form of transaction fees. This is also a means of making extra cash from crypto.
Yield farming
This method of earning from cryptocurrency involves leveraging financial products offered by decentralized platforms and investing in them to earn a certain percentage. This adventure is a high-risk, high-return investment opportunity where users are rewarded for locking up tokens on different DeFi platforms.
Accepting crypto as a payment method
This strategy is particularly useful for individuals who own online businesses. Accepting cryptocurrencies as a payment method for goods and services opens doors to a new pool of customers willing to pay in digital coins.
This method also accumulates more revenue because processing crypto transactions are less expensive compared to card payment and bank transfers.
Also, businesses that accept crypto as a payment method may decide to hold these digital coins in their wallets and sell them when they rise in value, thus making more money.
Participating in Special events
Participating in special events is an avenue to make more cash. Some of these events include giveaways, burns, buyback, airdrops, rewards, and forks.
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How can individuals invest in cryptocurrencies?
Investing in cryptocurrencies is quite delicate because of the associated risks. DeFi Planet suggests that before investing in crypto, thoroughly embark on research and also speak to a crypto advisor. This is because thousands of digital coins exist and only a few of them are reliable.
Some major strategies of investing in cryptocurrencies include:
- Allocate a small percentage of your portfolio to crypto
- Research and chose a digital asset
- Select a platform to buy crypto
- Store your crypto
- Allocate a small percentage of your portfolio to crypto
Because the cryptocurrency market does not work like the usual stock market but is being piloted by speculations, greed, and the fear of missing out (FOMO), it is advisable to invest only a little percentage of your portfolio in crypto. Even though this decision is up to you as a potential investor, 10% or 5% of your portfolio is ideal for investing in crypto.
- Research and chose a digital asset
As mentioned earlier, over a thousand cryptocurrencies exist but only a few of them are reliable. It takes careful research to choose a digital asset to invest in. Bitcoin is still the most popular cryptocurrency followed by Ethereum.
Due to the volatility and associated risks, many investors now fix their eyes on stablecoins whose values are pegged to fiat currency like the US Dollar. Circle, Tether, and Celo Dollar are examples of stablecoins.
There is also a growing interest in Decentralized Finance (DeFi) protocols and Non-Fungible Tokens (NFTs).
- Select a platform to buy crypto
Unlike fiat currencies, cryptocurrencies are not yet offered by banks or investment brokerages. However, there are several exchanges that offer them. Some of these exchanges are accompanied by wallets where these digital assets can be stored.
Coinbase, Binance,Gemini, e-Toro, Quidax, and many more are examples of exchanges. Some exchanges trade only a limited number of digital assets while others trade a vast number of them.
It is necessary to select a trading platform based on your needs.
- Store your crypto
Cryptocurrencies are typically stored in digital asset wallets. These wallets are software programs that store your private and public keys on the blockchain where your digital assets exist. The wallet does not store your crypto but gives you access to it on the blockchain with private and public keys.
Several types of wallets exist and they include online, paper, hardware, desktop, and mobile wallets.
4. What determines the value of cryptocurrencies?
Because cryptocurrencies are not censored by a central authority, a number of factors determine their value. These factors, according to Tradimo, include:
- Node Count
The node count is a measure of active wallets on the network of a particular digital asset. This can be easily checked on the internet.
- Rising Demand and Adoption
Just like the laws of demand and supply in basic economics, the same applies to the crypto market, its trading volume, and market Cap. Similarly, the rise in the adoption of digital assets further gives weight to its value. For instance, due to massive adoption, Bitcoin which traded at less than $700 in the past now trades at about $45,000 presently.
- Inflation of fiat currency
When the price of a fiat currency falls, the price of a digital asset will rise. This inverse relationship occurs because you will be able to get more of the fiat currency with your digital asset.
5. What are the coins to look out for in 2021?
The cryptocurrency market has grown massively. Based on the current market capitalization, the top ten digital assets to look out for this year include:
- Bitcoin (BTC): Since its creation in 2009, Bitcoin now has a market cap of over $971 billion. Its price has skyrocketed and increased by over 8000% compared to five years ago.
- Ethereum (ETH): ETH is the second-largest cryptocurrency that serves both as a digital asset and a platform. Its market Cap. has exceeded over $461 billion. The Ethereum blockchain is favourable for building smart contracts and other Decentralized applications (DApps). Within five years of development, its worth has grown from about $11 to over $2,500.
- Binance Coin (BNB): BNB is a coin developed by one of the largest crypto exchanges, Binance. Besides being used for trading on the Binance platform, it is now being accepted as a payment method for some goods and services like hotel and travel bookings. In 2017, its value was just $0.10 but it has now grown and trades at about $400, with a market Cap. of over $83 billion.
- Cardano (ADA): ADA has a Market Cap of over $83 billion and it is notable for embracing the proof-of-stake consensus mechanism. Just like Ethereum, it has a platform for the development of smart contracts and DApps. ADA is the native coin. ADA traded at $0.02 in 2017, is now worth $2.11.
- Tether (USDT): Tether is a stable coin whose value is backed by the U.S Dollar or Euro. It has a Market Cap of over $67 billion. Many investors and e-commerce stores that accept crypto as a payment method have an interest in Tether because it cushions against the effect of crypto volatility.
- XRP (XRP): It has a market Cap. of over $63 billion. XRP was created by some of the founders of the payment processing company, Ripples. It traded at $0.006 in 2017 and is currently worth $1.14.
- Dogecoin (DOGE): Dogecoin has been backed by celebrities, Elon Musk, and a dedicated community. This coin is prominent for its creative memes. Doge has a market cap. of over $40 billion. In 2017, Dogecoin was worth $0.0002 and presently trades at $0.31.
- USD Coin (USDC): With a market Cap. of over $27 billion, USDC is a stable coin that is pegged to the USD and powered by Ethereum. It is commonly used to complete global transactions.
- Polkadot (DOT): Has a market Cap. of over $33 billion and aims to integrate multiple blockchains, ultimately changing how cryptos work. Since its launch in 2020, adoption has been impressive. DOT was worth $2.93 in September 2020 but has now increased by 774% to $25.61.
- Solana (SOL): SOL was built to power DeFi protocols, DApps, and smart contracts. With a market Cap. of over 20%, SOL transactions are verified by a unique hybridization of the proof-of-stake and proof-of-history consensus mechanism.
6. Is cryptocurrency a scam?
As mentioned earlier, the cryptocurrency market is fueled by speculation, FOMO, and greed. In this market, investors are bound to either make or lose money.
It is important to always remember that there are over a thousand crypto projectors but only a handful of them are real. According to a report by CBS News, cryptocurrency scams soared by over 1000% between October 2020 and July 2021.
DeFi Planet understands that many people may consider cryptocurrencies to be scams due to the volatility of the market. For instance, in May 2021, Bitcoin which traded slightly above $55,000 dropped to below $40,000 and has struggled to rise since then. There’s no doubt that many who lost funds due to this fall considered it a scam investment.
Before regulatory clampdowns, there were a lot of fake initial coin offerings (ICOs) where companies rallied around to raise funds for projects. After crowd fundings, it would be discovered that such projects were nothing but fake.
Essentially, there are real and fake cryptocurrencies. Besides ICO scams, other ways hackers may launch attacks in the crypto space include:
(I) Exchange and wallet hacks: Exchange hacks were previously lucrative but hackers have since diverted attention to wallets. Hackers steal email addresses by breaching the email and marketing databases of wallet providers. Scammers leverage these addresses by asking users to reset their passwords and the rest becomes history.
(ii) Social media scams: Social media is an important tool that propels the visibility of crypto projects. However, hackers use this space to target crypto holders by creating fake accounts to solicit for digital currencies or taking over popular accounts to defraud unsuspecting victims.
(iii) Social engineering scams: Hackers manipulate crypto holders to gain vital information regarding their addresses. In this case, hackers send phishing links to their targets. When the targets click on them, they are redirected to fake websites where information about their crypto accounts is retrieved.
(iv) DeFi rug pulls: DeFi rug pulls is a new type of scam in the DeFi space where hackers target investors with interests in magnifying returns from yield farming. The hackers target smart contracts that lock funds. When the smart contract expires or reaches a particular threshold, hackers steal funds from it.
7. Will cryptocurrency replace fiat money in the future?
Crypto enthusiasts believe that digital currencies will be around for a long time to the point of making fiat money go into extinction. With the wide-scale adoption of cryptocurrencies we are witnessing, coupled with other advantages like speedy transactions, transborder transfer of funds, and safety of the blockchain, hopes are high that crypto will take over soon.
While El-Salvador, a country in Central America, has declared Bitcoin as a legal tender, two other African nations — Nigeria and Tanzania have proposed rolling out digital currencies too.
According to Finance Magnets, a number of factors give cryptos an edge over fiat money. They include:
- Market capitalisation
- Transparency
- Cheaper services with cryptocurrencies, and
- Rise in crypto trading
In the event that cryptocurrencies surpass fiat money in the future, possible expectations have been highlighted in a report by Futurism. The report considers the unregulated and decentralized status of crypto projects, as well as digital currencies supporting universal basic income than fiat.
In Conclusion…
- Cryptocurrencies are virtual assets backed by the blockchain. There are several crypto projects at the moment with Bitcoin being the most popular. Investing in crypto requires thorough research because the market is largely driven by greed and speculations.
- Investors make money from cryptocurrencies through trading, mining, yield farming, and accepting them as a payment method.
- There are high hopes that cryptocurrencies will dominate the entire financial space soon.
