What Is Cryptocurrency?
In terms of both popularity and technological innovation, cryptocurrencies have gone a long way from their reputation as havens for money launderers and criminals. As much as $1-2 trillion was predicted for the cryptocurrency market value in 2018, while in 2021 it exceeded $3 trillion. It’s been suggested that the technology underpinning cryptocurrency might have a significant effect and application in anything from healthcare to entertainment.
Cryptocurrencies, on the other hand, remain a contentious issue. In contrast to crypto critics such as Warren Buffet and economist Paul Krugman who’ve called the most famous cryptocurrency ‘evil’, others like venture capitalist Marc Andreessen think crypto is ‘the new internet’ and see them as an opportunity. Some claim that the cryptocurrency market is overvalued, while others argue that it represents the next step in democratizing the financial sector. It’s easy to dismiss them as the latest craze in the world of financial technology, but at the most complicated level, cryptocurrencies are a revolutionary technology that keeps challenging the economic, political, and social foundations of our world.
When it comes to cryptocurrencies, we’re talking about digital assets that are protected by cryptography, a form of data encryption. Newer cryptocurrencies also operate to offer some obligations to their holders, in addition to buying and selling goods and services. Because they can’t be exchanged for something like gold, they have no inherent worth. There is no central authority issuing them, hence, they are not regarded as ‘legal’ money.
As of right now, the majority of cryptocurrency users are among the so-called “early adopters”. According to a report by Coinbase and ARK Invest, there are over 10 million Bitcoin holders globally, with approximately half of those keeping the currency solely for financial motives. According to Statista, it has been estimated that the user base of all cryptocurrencies globally increased by 190% between the years 2018 and 2020, which can be seen in the rise of the number of wallets, accounts on exchanges, and identification improvements.
Cryptocurrencies aren’t essential in the long run because of the efficiency of fiat currency supported by the government. The benefits of cryptocurrencies are purely hypothetical for the majority of early users. If there is no big real advantage to utilizing a cryptocurrency, broad acceptance and use will not occur. And in this case, let’s see the benefits of using them:
Pseudonymity
Using cryptocurrency to buy products and services online doesn’t require sharing of personal information. Many people believe that the anonymity of cryptocurrency transactions is guaranteed, but that’s not true. What crypto really provides is pseudonymity, which is a kind of near-anonymity. With these, people may make transactions without revealing their personal information. In the eyes of law enforcement, a transaction might, nevertheless, be linked to a specific person or organization. Despite mounting worries about privacy and identity theft, cryptocurrencies can still provide their users with certain advantages.
P2P Purchases
Cryptocurrency transactions do not necessitate the involvement of intermediaries, which are usually financial institutions, and the absence of such a “middleman” reduces transaction costs. If the financial system is breached or the user has faith in the traditional system, customers stand to gain greatly. A bank can restore any missing data from its backups if its database was damaged or hacked. In contrast, with cryptocurrencies, if a small piece of the system was hacked, the rest of the system would still be able to confirm transactions.
On the other hand, they are not totally safe from cyberattacks. Decentralized Autonomous Organization (DAO), a decentralized fund meant to democratize the funding of Ethereum projects, was one of the “biggest digital heists in history”. The Ethereum-based decentralized application (DAPP) was breached, with hackers gaining access to $55 million of the money. In the end, a large portion of funds was recovered. But the case produced a ripple effect and triggered SEC to apply US securities laws to exchanges and offerings.
“Smart” Capabilities
The holders of some cryptocurrencies may be entitled to extra perks, such as voting rights and limited ownership. Voting rights may, for example, be included in the software code of a coin. In the future, cryptocurrencies might embrace fractional ownership interests in tangible assets like art or real estate.
Technology Behind Cryptocurrency
Many cryptocurrencies, including Bitcoin, are built on blockchain technology. To keep track of all transactions, it relies on a public and constantly updated ledger. Blockchain is revolutionary because it doesn’t require a central authority, such as the government, bank, or any other institution to conduct transactions. The buyer and seller communicate directly, eliminating the need for third-party verification. This lets companies and services be fully decentralized by excluding expensive intermediaries.
Blockchain technology is accessible to all parties involved. It’s like with Google Docs, where many users may simultaneously have access to the ledger in real-time. Checks that are written to friends and then cashed by both parties are reconciled at the time of deposit. If you or your friend forgets to update your checkbook ledger or you don’t have sufficient funds in your bank account to pay the check, things may become complicated.
If you use blockchain, you and your friend are able to see the same transaction log. Because the ledger relies on both your approval and verification before a transaction can be added to the chain, both of you must approve and verify it before it can be added. Additionally, the chain is protected by cryptography, and nobody can make changes to it.
The blockchain uses consensus techniques and many nodes instead of a single server to record transactions. A node is a computer that joins the blockchain network and automatically downloads a copy of the blockchain. All nodes must agree for a transaction to be legitimate.
Despite the fact that blockchain technology was first proposed for Bitcoin in 2009, there are numerous additional uses for it. It’s capable of transforming such sectors as cybersecurity, banking, voting, and even education. 10% of global GDP, according to the World Economic Forum, will be kept using blockchain technology by 2027.
Mining Cryptocurrency
In the process of mining, two things happen: (i) cryptocurrency transactions are validated and (ii) new currency units are generated. Miners must have powerful equipment (hardware and software) to be successful and efficient.
One computer isn’t strong enough to mine coins since you’d be wasting a lot of electricity. Mining pools are a common solution to this problem since they allow miners to work together to enhance their computer power, distributing rewards among the group. Miners compete with one another to verify pending transactions and take advantage of low-cost power in order to make a profit.
More than 19% of all mining is done by AntPool alone, with F2Pool and BitFury in second and third places, respectively. More than 70% of all Bitcoin mining takes place in China, as the country features low power costs and the majority of mining equipment is manufactured there.
Cryptocurrency Exchanges
It is possible to trade cryptocurrencies for other digital currencies or fiat money on cryptocurrency exchanges. All major government-backed currencies, as well as cryptocurrencies, can be exchanged there. Poloniex, Bitfinex, Kraken, and GDAX are some of the biggest exchanges that trade more than $100 million a day. As exchanges are regulated by the government, in order to create an account, users need to verify their personal information and prove their identity.
To avoid providing personal information, some users choose to conduct peer-to-peer transactions using other services. To avoid the need for a third party to function as a middleman, peer-to-peer transactions let users use software to exchange cryptocurrencies directly.
Crypto Wallets
When it comes to sending and receiving digital cash, a cryptocurrency wallet is a must-have. Hardware wallets are thought to be more secure than software ones. The Ledger wallet, for example, resembles a USB thumb drive and plugs into the USB port on a computer or laptop.
A private key needed to sign new transactions is stored in the Ledger wallet, while the transactions and balances for a bitcoin account are logged on the blockchain. In order to send out new transactions, your computer first requests a signature from your wallet. This signature is then broadcast to the blockchain. Even if your computer is compromised, your crypto funds are safe since the private key never leaves the hardware wallet. Still, if the wallet is lost or stolen, all holder’s assets will be lost irreversibly.
Now let’s look at a virtual wallet by Coinbase, which is an example of a software wallet. Using it, the holder’s money is stored online, which increases the potential risk. However, such services often introduce certain services to enhance the wallet’s security (like Vault at Coinbase).
How Does Supply and Demand Work in Crypto Market?
Cryptocurrencies are completely digital and possess no physical form. This is the reason why some people think that they are worthless. But pricing isn’t that simple.
Like commodities, stocks, securities, etc., cryptocurrencies can be traded. The price of a product is influenced by how much demand there is for it and how much is available for purchase. The price is established based on how the supply and demand are related.
The price rises if there is a high demand for a coin, but the present supply is limited. ‘Overbought’ is the term used to describe a situation when demand for a currency surges regardless of its actual worth. The term ‘oversold’ is used to characterize coins that have been sold in large quantities without a good justification.
CRYPTOCURRENCY PRICE FACTS
- The price of a cryptocurrency is influenced by the supply and demand balance;
- Because of the limited maximum supply of most cryptocurrencies, it is impossible to mine all of them;
- Because of their quantity, overpriced coins might command a premium price;
- If you’re looking for a bargain, look for coins that have been oversold.
Supply and Demand in Detail
There is an economic theory that studies the link between supply and demand to discover what impact they have on the pricing of a given commodity or service. Everything that can be traded on a market is included in the theory.
The price of a coin rises if it is in low supply, or if demand for it is big. Price wars have broken out between those who want to buy it and those who are ready to pay more. When the supply of a cryptocurrency is high and the demand is low, the price of that coin decreases.
Suppliers will often increase the number of goods if there is a surge in demand for them. To profit from greater sales, producers are eager to increase the output. When it comes to most cryptocurrencies, this is difficult because of two simple reasons: the quantity is restricted and coins are distributed.
The overall supply of a specific cryptocurrency is determined by its max supply. The total number of Bitcoins in circulation is 21 million. More than 18 million BTC have already been mined, and the remaining are gradually being added to the pool of total supply of Bitcoins in circulation. But can the system be changed so that additional coins will be released? No. Trying to double spend coins on a distributed network would be impossible unless users were ready to spend more money than they would get.
The demand for cryptocurrencies is influenced by a wide range of variables. Trends, media attention, and famous personalities’ endorsements frequently take precedence over the utility and purpose of what is in demand. Even the fear of missing out (FOMO) can have a significant impact on investing decisions. The question then arises as to whether or not an asset, stock, or cryptocurrency’s huge rise in value is justified.
Overbought is the term used by those who believe it is unjustified. Interest in a specific asset is sparked by a mix of factors, such as those outlined above. Since its supply is no longer able to keep up with the demand, the price increases significantly. Those who feel the asset is overpriced may view the hype as irrational and the investment as a waste of time.
In the same way, the opposite can happen. Overselling occurs when the supply of an asset exceeds the demand for it. There are more potential sellers than potential purchasers. The asset’s value decreases when there is little or no interest in it. Despite the generally unfavorable sentiment around the asset, an astute trader who recognizes its hidden potential will make a purchase. As long as the item is truly oversold, the price will rise back up, and the trader will benefit.
When demand and supply are equal, the market is in equilibrium. Both commodities and services are supplied in proportion to demand. Equilibrium is achieved when the volatility of the market is eliminated.
Actually, there is no such thing as a perfectly balanced market. Compared to more established markets, crypto markets are still at their early stages of development, which means they are much farther from equilibrium. The crypto market’s pricing may level down at some point in the future. Cryptocurrency’s tremendous volatility is a big part of what makes it so fascinating for traders, who have greater risk in a volatile market, but they also have the potential for greater profits.
Is Cryptocurrency a Good Investment?
Although the value of cryptocurrencies may rise, many investors still regard them as speculative investments rather than long-term ones. What’s the deal? For you to benefit from cryptocurrencies, someone else needs to pay more for the coin than you did. Just like conventional currencies, cryptocurrencies create no cash flow.
The “greater fool” investment notion goes something like this. A well-run corporation, on the other hand, grows its worth over time by increasing its profitability and cash flow.
Some significant crypto voices urge future investors to stay away from cryptocurrency. “It’s a highly effective means of sending money and you can do it anonymously,” said Warren Buffett who tried to compare Bitcoin to checks. “But a check is also a method of transferring money. Is a check worth a lot of cash as they are able to transfer money?”
A currency needs stability in order for merchants and customers to establish what a fair price for products is, and those who regard cryptocurrencies like Bitcoin as the future of currency should keep this in mind. Throughout their existence, Bitcoin and other cryptocurrencies have been everything but steady.
Even though Bitcoin traded at a high of about $20,000 in December 2017, the value of this currency sank to a low of under $3,000 in January 2018. By the end of the year 2020, it was back to record highs.
It’s a paradox because of the fluctuation in the pricing. People are less inclined to spend and circulate Bitcoins now if they believe they will be worth more in the future, making them less viable as a currency. If Bitcoin’s value triples in a year, what’s the point of spending them now?
What to Know Before Investing in Cryptocurrency in 2022?
For investors, one of the biggest hurdles is not being swept up in the crypto hype. But still many of them have included digital currencies into their portfolios. Analysts, on the other hand, continue to warn investors about the volatility and unpredictable character of cryptocurrency.
1. Consider the Purpose of Your Cryptocurrency Investments
You should ask yourself why you’re willing to make a cryptocurrency investment before you even begin with it. There is a wide variety of investing options accessible (many of which offer more stability and less risk than digital currencies).
Was your attention attracted just because of the craze going on about cryptocurrency? Or do you have a better reason to invest in digital tokens? If you’re looking for a way to diversify your portfolio, you may want to consider investing in cryptocurrencies.
2. Research the Industry
Before making an investment, it is especially important for first-time digital currency investors to get a basic understanding of how the crypto market operates. Spend some time learning about various currencies available. It’s important to go beyond the most popular currencies and tokens, such as Bitcoin, Ethereum, Litecoin, and Ripple. A fundamental understanding of how the blockchain works in the crypto world should also be acquired.
Some features of blockchain technology may be difficult to understand if you don’t have a background in computer science or coding. To make blockchain technology more accessible to a wider audience, various introductory texts have been written.
Research the blockchain technology behind the tokens you’ve chosen to invest in and see if they provide any unique features that set them apart from their competitors. Having a deeper grasp of cryptocurrencies and blockchain will allow you to make more informed financial decisions.
3. Join a Crypto Community
Things happen pretty fast in the digital currency industry because it is becoming increasingly popular. Crypto enthusiasts and digital currency investors often communicate with one another, which is a part of the reason why this is happening. Join the community to stay up to date on the latest cryptocurrency news.
4. Read the Whitepaper
Read the project’s whitepaper if you’re thinking of making an investment. This is something that every cryptocurrency project should have, and it should be easy to access.
Pay close attention to the documentation since it should contain all information you need to know about the project’s goals, a detailed overview, timeline, and specifics. It is considered a negative if the whitepaper lacks statistics and particular project specifics. If something appears to be missing, incomplete, or deceptive, this might indicate that the project has fundamental flaws.
5. Importance of Timing
If you’ve done your research, you’ve probably got a good feel for the cryptocurrency market and selected one or more projects to invest in. Investing at the right moment is the next step. The digital currency market is very volatile and fast-paced.
The popularity and worth of a new currency may make investors act rapidly if they purchase it early. In reality, keeping an eye on the market before making a move will increase your chances of success. In general, crypto prices tend to follow certain trends.
Bitcoin is frequently seen as a harbinger of things to come in the crypto industry. Some types of news (for instance, when a fraud has been committed or the price of certain tokens has been manipulated) may have a significant impact on the market and influence the price fluctuations.
Finally, keep in mind that the digital currency market is very speculative. Many investors have invested funds into the virtual token world just to watch their money disappear literally overnight. If you’re still about to make an investment, do your due diligence and be cold-minded.
Why Are Cryptocurrencies So Popular?
There are many reasons why people are attracted to cryptocurrencies with the most popular of them being the following:
- Coins like Bitcoin are seen as the future of money, and supporters are scrambling to get their hands on them as soon as possible;
- Because central banks tend to inflate the value of money over time, some proponents prefer that cryptocurrency removes these institutions from the money supply management process;
- Those that favor cryptocurrencies prefer blockchain technology because it is decentralized and can be more secure than traditional payment methods;
- Speculators who favor cryptocurrencies because they’re rising in value have little interest in their long-term adoption as a means of moving money.
Are Cryptocurrencies Legal?
Such cryptocurrencies as Bitcoin have been legal in the United States since February 2020, and they are also legal in Canada, the United Kingdom, and Japan, as well. However, there still are significant questions about their legality even though the IRS (Internal Revenue Service) states the legality of Bitcoin and other virtual currencies.
The value of cryptocurrencies is not based on the inherent worth of silver or gold, and they aren’t backed by any centralized authority. To put it another way, their value is entirely dependent on how much others appreciate them. Investors may have not many legal resources in case there are some complications concerning the ownership or transactions because cryptocurrencies aren’t under the control of a central authority.
Can Cryptocurrency Be Used for Illegal Activities?
There are lots of questions regarding the most common misconceptions about cryptocurrency because it’s still a relatively new technology.
One of the most common, but incorrect misconceptions about crypto is that it is utilized mostly by criminals to fund their illegal activities. However, it’s not true. So let’s take a closer look at some of the most important cryptocurrency myths.
#1. Most crypto transactions are used for illegal actions.
Fact: Research suggests that fewer than 1% of transactions are conducted for illegal activities.
The vast majority of cryptocurrency-related criminality is about fraud, not money laundering, terrorism, trafficking, etc. Traditional financial institutions accounted for the vast majority of illegal economic activities between 2017 and 2020.
#2. Criminals prefer to use cryptocurrency than cash for illegal actions.
Fact: Cash is still the funding of choice for fraudsters.
Every year, the United Nations estimates that about $1.6 trillion is laundered.
Criminal activity in cryptocurrencies decreased significantly from 2.1% in 2019 to less than 0.5% in 2020.
It’s important to note, however, that most cryptocurrency transactions are conducted through centralized exchanges, which are subject to the same anti-money laundering and counter-terrorism financing restrictions as traditional financial institutions.
#3. Cryptocurrency makes it more difficult for law enforcement agencies to investigate white-collar crimes.
Fact: For the vast majority of transactions, public databases (blockchains) can be searched. And the Department of Justice claims that.
Much more information can be obtained from these transactions, including date, time, and amount. It also provides law enforcement agencies with access to the type of cryptocurrency utilized (e.g. Bitcoin or Litecoin), the wallet address, and the transaction identifier (hash value).
There is no chance of data loss or reversal after it has been stored on the blockchain, and the secrecy of data is ensured. It can take months or even years for law enforcement to collect this type of information on currency transactions using cryptography.
The analysis of blockchain transactions has already yielded significant results for law enforcement that has teamed up with private analytics companies to investigate illicit finance cases, terrorist funding, child exploitation, etc.
Although cryptocurrencies aren’t a shelter for criminal activities or illicit financial transactions, it is a great medium for numerous safe and trackable transactions.
Why Investing in Cryptocurrency Is Very Risky?
#1. Cryptocurrency Is Unregulated
Many crypto- and other digital assets are not recognized to be financial items by many people. This is the reason why ASIC (Australian Securities and Investments Commission) may not be able to control the platforms where you purchase and sell crypto. This implies that if the platform fails or is hacked, you may not have any protection against hackers.
Investors lose their funds if a cryptocurrency they have invested in fails. There is no legal tender status for cryptocurrencies in most states. The existing laws are the only means that may provide you with some sort of protection.
#2. Price Is Influenced by the Public
Crypto-asset investments are extremely risky. In the short term, the value of a project can change dramatically due to such factors as media coverage and the opinion of the public.
The value of cryptocurrency may fluctuate according to the following factors:
- Popularity at some period of time which is influenced by such factors as the number of people who use it);
- Value of cryptocurrency;
- How simple it is to trade or use a cryptocurrency;
- Blockchain technology;
- It’s possible that your money will be stolen.
Also, the contents of your digital wallet might be stolen by a hacker.
Public and private keys are both parts of your digital wallet (like your password or PIN). However, the anonymity afforded by crypto-asset systems and the lack of a central data bank make them attractive to some people. Your crypto-assets are unlikely to be returned to you if they are stolen by hackers.
Using an offline ‘hardware wallet’ or ‘cold storage’ may give extra security.
#3. Technically Complicated
Crypto-assets might be difficult to understand because of their complexity. There is frequently no product disclosure statement that describes in simple language and in one location how a crypto-asset works.
The code of a crypto asset may not always be accessible to users. If it is accessible, it could be written in a strange or uncommon programming language, so keep that in mind.
Many people are confused with the techniques for directly dealing with crypto-asset networks. Special-purpose software and realization of how transaction fees work may be required. Inexperienced users are at risk of the following:
- Overpaying for transaction costs known as ‘gas’;
- Sending a transaction to a wrong address;
- Inability to pay for transaction fees (as a result, you may lose both the transaction and fee);
#4. Scams Are on the Rise
A Wild West feel and a sense of mystery pervade crypto society. Cryptocurrency heads meet online to discuss their common interest. New investors may be eager to get in on the activity, especially with the value of Bitcoin surging recently.
Reports and claimed losses to cryptocurrency investment scams surged dramatically between October 2020 and March 2021. Scammers will have an easier time preying on the public as a result of all of this. They fit in well since many people are unfamiliar with crypto, thus, their statements may appear believable. People may look nice and open to sharing their “advice” and “expert opinion”.
In other words, it all may be part of the plan to entice individuals into investing in your business idea. In reality, several of these scams rely on referral chains to attract new investors by enticing individuals to join.
For the most part, people have been duped into visiting websites that pretend to be about investing in or mining cryptocurrencies, while in reality, those are scams. When it comes to investing, they frequently provide a variety of options with varying levels of return on your money.
For the sake of credibility, websites post phony testimonials and use crypto phrases, but promises of huge and guaranteed returns are nothing more than empty promises and lies. There is a chance that these websites may have an impression that your money will bring you Xs. There have been reports, though, from users being requested to transfer even more crypto to get back their claimed gains when they try to withdraw them. But what they receive is nothing.
Then there are “giveaway scams” that promise to instantly multiply the funds you bring in and are purportedly supported by celebrities or other well-known people in the cryptocurrency industry. People, on the other hand, say they found out afterward that they’d sent their cryptocurrency to a scammer’s wallet instead. People have sent Elon Musk impersonators more than $2 million in cryptocurrency in the last six months alone, according to some reports.
Over five times as many younger persons aged 20 to 49 as older ones have reported losing money in cryptocurrency investment scams since October 2020.
People in their twenties and thirties reported losing the most money to investment scams than any other form of fraud, and cryptocurrencies accounted for more than half of their reported investment scam losses. On the other hand, scams involving crypto investments were considerably less common among those aged 50 and over. If this age group representatives did fall victim to such scams and lost money, individual losses were greater for this group, averaging $3,250 per person.
Crypto scams fall into two categories:
- Fake crypto trading possibilities;
- Use of your own coins to pay for something or invest.
Scammers try to get individuals to invest in bogus crypto trading opportunities. These are some things to watch out for:
- False claims of huge profits and returns;
- Many bank accounts used for transfers which may be changing continuously;
- Fake claims from celebrities or well-known voices in the crypto world;
- Using dating apps and social media to build a love connection and acquire trust.
What Factors Affect Cryptocurrency Prices?
#1. Cryptocurrency Use
For a cryptocurrency to be valuable, it must have some sort of application. Mining for a rare metal, such as platinum, can be lucrative if it’s utilized in the next iPhone; if it isn’t, the metal is considered to be useless. Cryptocurrencies operate under the same dynamic. Alternate cryptocurrencies, such as Ether, can either build on the Bitcoin paradigm or have a different use that provides value. Demand and value for cryptocurrencies rise as their use grows.
#2. Demand and Supply
Code in the BTC blockchain restricts the quantity of Bitcoins available. Until the number of Bitcoins hits 21 million, the pace of rise in the supply of this currency is likely to reduce. Slowing growth in the number of Bitcoins almost guarantees that their price will continue to rise as BTC adoption rises.
Other cryptocurrencies act in the same way. For instance, Litecoin’s supply is limited to 84 million units. Unlike government-backed currencies, the target of the limit is to enhance transparency concerning the money supply. It is possible for anybody to assess the supply of a currency using open source algorithms and, hence, determine the worth of the currency.
#3. Changes in the Laws
The value of cryptocurrencies is heavily impacted by anticipation of future regulation because the regulation of cryptocurrencies hasn’t yet been established. The government of the United States may, in an extreme event, forbid its citizens to own cryptocurrencies, as it did with ownership of gold in the 1930s. Even if ownership of cryptocurrencies was to go offshore, this would have a significant negative impact on their value.
#4. Changes in the Technologies
Changes in technology have an impact on cryptocurrency pricing. The controversy about modifying the underlying technology to speed up transactions had a negative influence on the price of Bitcoin in July and August 2017. The price of Bitcoin jumped from $2,700 to $4,000 in over two weeks after the adjustments. Hackers, on the other hand, tend to lower the price of a coin.