Crypto 101: How to Smartly Invest in Cryptocurrencies
Second article of our Crypto 101 series. After you weighed all risks, it’s time to talk about how to invest in crypto. There are several approaches to investing that include purchasing and just holding crypto, mining, and staking.
Let’s talk about them in detail.
Buy and Hold (HODL)
Crypto world is growing very fast these days, and if you think that it’s already too late to invest in Bitcoin or Ethereum today, don’t worry! You can still get involved in the crypto world quite easily and at low costs. There are more than 6500 cryptocurrencies in the market. Don’t rush, though, and do a good research. Here are some useful tips and resources:
- coinmarketcap.com — a website that shows cryptocurrencies’ main metrics and analytics. Let’s go through the main metrics, so that you can choose a few coins from the list that you like for further research:
Market cap is a metric that measures the cumulative value of a cryptocurrency. It is calculated by multiplying the current market price of a coin with the total number of coins in circulation.
Trading volume, or volume, is the number of units traded in a market during a given time.
Circulating supply — the number of cryptocurrency coins or tokens that are publicly available and circulating in the market.
Market price — the current price at which an asset can be bought or sold. The market price converges at a point where the forces of supply and demand meet. The market price can be affected by government’s laws and regulations, the level of adoption and the utility of tokens.
- coin/token utility — a very important thing to consider.
In 2017, during the notorious ICO bubble boom, many “businessmen” were attracting investments and launching coins just for the sake of launching coins. Some of those projects still exist, while many have died, and there are more vanish. The reason is that they have no potential use cases, and thus have no future.
Read a projects’ white paper to understand the utility and learn more about the token. White paper is created by the founders and/or developers of a crypto project to explain its purpose and technology.
Join the project’s social media communities and forums, look at what other people are saying about it, and what’s on their roadmap.
A roadmap is a strategic plan that determines a goal and includes the major milestones needed for its realization.
- don’t get scammed
Scam projects in the crypto world are usually multi-level marketing coins, pyramids or Ponzi schemes.
The most famous include Bitconnect and OneCoin.
Bitconnect was promising “up to 120 percent return per year” if you send your Bitcoin to bitconnect platform and exchange them for BCC (bitconnect coin).
OneCoin is one of the largest cryptocurrency pyramids, which functioned from 2014 to 2017, deceiving about three million people and defrauding investors of around $5 billion in total. The pyramid worked according to the classical Ponzi scheme, in which participants receive a reward for each new investor invited. Interestingly, OneCoin didn’t have it’s blockchain, while it was promising to “kill Bitcoin”.
To avoid those schemes, do simple research. First of all, find out information about the development team. All team members have to be real people. Find their social media pages, double-check their biography, and what projects they were involved in previously.
The world of crypto is moving towards pure transparency. Take a look at the project’s GitHub repository. You don’t need to be tech-savvy, just look if the repositories are getting updated frequently and if there has been much work done. Poor projects have their github repositories empty or almost empty and non-active.
You can subscribe and follow latest updates about cryptocurrencies, networks and blockchain technologies.
These simple tips can help you get started with your crypto investing path. However simply purchasing and idly holding your virtual assets might not bring you desired profits, if not only you are lucky to choose a mooning token. Cryptocurrency is also a subject of inflation. To get more of your assets, you might consider going into active cryptocurrency investments — mining or staking.
To understand how blockchain “employees” earn cryptocurrencies, each should first understand the importance of consensus algorithms in blockchain.
In cryptocurrencies, there are no banks and no governing centers that keep record of transactions. Users’ balances and transactions are recorded in a blockchain. It’s essential that everyone keeps an identical copy of it.
Satoshi Nakamoto, the creator of Bitcoin, proposed a Proof of Work system to coordinate participants. The participants are also called validators or miners, they verify transactions, creating new blocks and receiving a reward for their work. To disincentivize the participants of PoW consensus from malicious behavior they are required to validate transactions using expensive equipment and extensive resources. If a validator behaves maliciously, other participants report it, and the attacker loses a chance to validate transactions and thus all the expensive equipment becomes useless.
In Proof of Stake consensus instead of purchasing special equipment, validators are required to stake a number of coins to get a permission to validate transactions and receive rewards. In PoS fraudulent behaviour is punished by slashing and ban on further activities. Slashing means that a significant part of the validator’s stake is removed.
In a nutshell, crypto mining is a process of solving complex math problems. Spending their time and computing power to solve that math equations miners provide a so-called ‘Proof of Work’ for the network, which verifies transactions and creates new tokens through this process. For this work, miners receive rewards.
Everybody can start mining crypto: individuals, groups of people, or businesses.
However, this process requires basic coding skills, considerably expensive equipment and significant use of electricity. Moreover, solving those complex mathematical equations involves more and more power thus it only gets more and more expensive with the time.
Mining equipment today offers a variety of choices. Due to the great difficulty in validating bitcoin transactions, miners use highly specialized and expensive ASIC chips. Most other networks (except for bitcoin) allow miners using less complex and expensive graphics processing units like NVIDIA or Advanced Micro Devices to prove transactions. The difficulty in this mining can still vary from one cryptocurrency to another. You can calculate your probable rewards for mining using different profitability mining calculators such as this one.
Very soon Ethereum will make a transition from Proof of Work to another consensus algorithm — Proof of Stake. PoS doesn’t require special high-powered equipment sucking up electricity, like mining does. To validate transactions participants simply have to stake their coins (like a security deposit). The more you stake, the more chances of that node to be chosen to validate a transaction and create a new block.
Delegated PoS consensus algorithm deploys the system of voting where stakeholders outsource their work to a third-party. In other words, they are able to vote for a few delegates that will secure the network on their behalf, while also receiving rewards.
Now you should have a basic understanding of the ways to make your first steps in investing in cryptos. In our next article we will describe and analyze the best ways to buy cryptocurrencies and start investing.
Citadel.one is a non-custodial Proof-of-Stake platform for the management and storage of crypto assets. In the initial release, users can create public addresses for all supported networks with one seed phrase, connect their ledger or trezor device, or import an address generated by another wallet. The analytical dashboard provides relevant information on wallets’ balances and networks’ main metrics. One of the main functions of the Citadel platform is participation in the PoS consensus — users can stake and delegate their assets, claim rewards, and follow the latest network proposals in the voting tab. Citadel.One offers its users an instant cryptocurrency exchange service that allows fast and secure crypto assets swap, and it is also possible to buy and sell crypto with a credit or debit card.
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