Cryptocurrency market – things to know for a beginner
Cryptocurrency market is large and diverse. Hundreds of projects are aimed at making our world safer, richer and more efficient. Cryptocurrencies naturally often show phenomenal growth rates, which attracts an ever increasing number of new buyers. If you are just considering buying cryptocurrencies, you will find the answers to the key questions of beginners here:
- Why blockchain is a huge breakthrough;
- Basic differences between the classes of crypto assets;
- Where you can buy cryptocurrencies;
- Safe ways to hold cryptocurrencies;
- Basic rules for novice investors.
Blockchain – the basis of the majority of cryptocurrencies
The key benefit of cryptocurrencies is that they are based on a technology that allows for exchanging the assets directly between the users – Peer-to-Peer, bypassing dozens of intermediaries, i.e. public authorities and banks. The legendary creator of bitcoin Satoshi Nakamoto embedded this concept at the stage of creation of the White Paper, a document, in which he explained his idea.
In order to get a better picture of why bitcoin represents a true revolution in the industry of finance, let’s compare it to traditional dollar, euro and rubles (they are also called fiat money or fiat).
| Fiat money | Bitcoin |
|---|---|
| Performance of payments requires a multitude of intermediaries in the form of commercial banks, central banks and payment services, making the exchange process expensive and slow | Exchange is performed directly between the users, which is much cheaper and faster |
| Privacy is very low | Privacy is very high |
| Emission of new money is not restricted, which leads to continuous printing of new money, inflation, loss of purchasing power | Emission is strictly limited by the algorithm and is decreasing through the years. In the years of its existence, bitcoin value grew by thousands of times |
| The government may interfere in the financial system at any moment, which leads to never-ending change of the rules | All rules are laid down in the algorithm and can be changes only with the consensus of the majority of owners |
All these undisputable benefits of bitcoin became possible thanks to the blockchain technology. Blockchain is essentially a decentralized register of data, where all blocks contain information about the previous ones. Therefore, it is technically possible to check when and where bitcoin is credited to a wallet and to which wallet it was sent. Meanwhile, the privacy is preserved, as the public address of the wallet does not contain any information about its owner.
To start with, you need to know the meaning of the following notions:
Users are people who download a cryptocurrency wallet, send and accept payments using this wallet. Users pay a small transaction fee to miners.
Mining. Miners support the computing power of the blockchain using special equipment. Their main task is to avoid double spending in the system and make it as cryptographically secure as possible. The benefit of the bitcoin blockchain is its unique cryptographic security, which makes it nearly impossible to hack it.
Staking. As of now, mining is available for such cryptocurrencies as Bitcoin, Bitcoin Cash, Litecoin, Dogecoin and partially Ethereum (transitioning to staking after the launch of Ethereum 2.0). For the majority of other cryptocurrencies, the users who have a certain share of cryptocurrency in their wallets act as miners. This action is called staking. In this case, high computing capacities are not required for confirming transactions, while the transactions themselves are faster than in the bitcoin blockchain. The examples of such cryptocurrencies are Cardano, Polkadot.
Assets of the cryptocurrency market
Cryptocurrency diversity is huge, with many of them being unique projects bringing new opportunities to our lives. Let’s look into some typical technologies and the spheres of their application.
Ethereum (ETH) and other blockchain platforms
Ethereum (ETH) is not just a cryptocurrency, but a platform for development of decentralized applications based on smart contracts. These could be other cryptocurrencies, useful services, databases, etc. The developers of new crypto projects no longer need their own complex blockchain with the entire infrastructure, as the computing capacities are supported by the mother platform. Other interesting examples of blockchain platforms include Cardano (ADA), EOS (EOS), Tezos (XTZ).
How the blockchain platforms are used in practice:
You can create tokens. Tokens are crypto assets created on the basis of mother blockchains, such as Ethereum. They essentially represent a certain virtual value embedded in the code.
You can launch a fundraising campaign. ICO (Initial Coin Offering) is a very good example. It is a new way of financing a project by issuing tokens and selling them to investors.
You can tokenize assets. These are the assets of the real world written into a blockchain by using tokens. For example, the popular Tether token shows the cost of the US dollar at 1:1 ratio. There have been examples, when ownership certificates for property, bonds, gold, etc., were issued by using tokenization.
You can create NFTs. NFTs are unique non-fungible tokens, with each representing its own value. This allows you to create NFTs associated with objects of art, collectibles, etc. In 2021, the value of some NFTs surpassed $20 million.
DeFi – the money of digital finance
Cryptocurrency market is the world of the new economy, in which cooperation between the people reached a fundamentally new level. Decentralized finance, commonly known as DeFi, is the new stage of this revolution. DeFi is a collective name of projects aimed at replacing classic financial companies and banks. DeFi are P2P apps, which means they remove central financial intermediaries. A large market of DeFi tokens is issued as smart contracts, although there are also independent platforms. The most known projects are lending platforms MakerDAO and BlockFi, decentralized exchange Uniswap, asset tokenization platform Polymath, etc.
- What you can do using DeFi:
- Take out a loan at a low interest and with no red tape;
- Earn money on farming, i.e. providing liquidity at an interest;
- Exchange tokens without intermediaries;
- Tokenize shares, bonds and other assets.
Stablecoins
High price volatility is the main feature of the cryptocurrency market. Therefore, it may be rather problematic to trade some cryptocurrencies paired with others. Stablecoins offers a solution. They are, as a rule, digital equivalents of fiat currencies, pegged to their rate at 1:1 ratio. In order to achieve that, stablecoins use different approaches. A good example is Tether (USDT), a digital equivalent of the US dollar.
How stablecoins are used:
- To make exchange between cryptocurrencies and fiat money at the exchanges easier;
- Margin security for buying cryptocurrencies;
- Insurance asset of crypto investors in the event of an increase of volatility.
Where do I buy cryptocurrency
There are dozens of ways to buy and sell cryptocurrency. However, safety is a priority and therefore we will discuss not just possible ways, but the options experienced investors use.
1. Centralized cryptocurrency exchanges
Centralized exchanges, such as Binance and Coinbase account for the lion’s share of cryptocurrency turnover. In this case, the exchange plays the role of the intermediary between the clients. All transactions are not immediately recorded on the blockchain. A client deposits cryptocurrency to the exchange, performs transactions and only withdrawal back to the wallet is recorded on the blockchain. This allows for considerably faster processing of transactions and lower fees. Without centralized crypto exchanges, effective trading would have been extremely complicated. However, this system does have its drawbacks.
| Pros | Cons |
|---|---|
| Instant execution | Centralization contradicts blockchain philosophy |
| High liquidity (a possibility to quickly buy or sell a large volume of cryptocurrencies) | Large amounts are held in the wallets of the exchanges, which attracts hackers. From time to time, the exchanges suffer from hacker attacks |
| Low fees | |
| Universal in nature. You can exchange any cryptocurrencies for other cryptocurrencies and fiat at these exchanges | |
| Many deposit and withdrawal methods. You can deposit fiat from a credit card or a bank account and withdraw cryptocurrency and vice versa | |
| Infrastructure for active trading. Excellent platforms, good choice of orders | |
| Multilingual support |
2. Decentralized cryptocurrency exchanges (DEX)
At DEX, users exchange cryptocurrencies between each other without intermediaries, using smart contracts. The data on the transaction is immediately recorded on the blockchain. Such exchanges are the representatives of the DeFi industry and fit perfectly in the blockchain philosophy. However, they are more suitable for investing than for active trading. Uniswap, which operates an application based on Ethereum blockchain, is an example of such exchange.
| Pros | Cons |
|---|---|
| Direct exchange complies with the ideology of cryptocurrency community | There may be difficulties with buying or selling large volumes |
| You can buy and sell rare tokens, which are not listed at classic exchanges | Poorly suitable for active trading |
| No fees for deposit and withdrawal to a classic exchange | Difficulties with crypto/fiat conversion |
| Limited choice of cryptocurrencies |
P2P Exchanges
P2P exchanges allow users to exchange assets directly. Often, the security of the exchange is ensured by an escrow, i.e. holding of the user funds prior to the transaction. P2P exchanges are not designed for active trading, but are very good for bitcoin/fiat conversion, as usually such platforms support an impressive number of payment systems and fiat currencies, while you can choose the best rate among a multitude of offers. A prime example of such an exchange platform for a long time was LocalBitcoins, where bitcoins could be bought and sold in 75 currencies from countries around the world.
| Pros | Cons |
|---|---|
| Large choice of payment methods for crypto/fiat conversion | Support a limited number of cryptocurrencies, mainly bitcoin and major altcoins |
| You can choose the best rate of the many offers | Not all currency pairs have liquidity. If you need to exchange a large amount at a good rate, it may take a while |
| P2P exchange – the exchange acts only as a guarantor of the transaction | |
| Low fees |
Where do I hold cryptocurrency?
Another burning question is where do you keep your cryptocurrency after you’ve bought it. You need to consider their options based on the purpose of the purchase and security. Let’s review some key options.
Cold wallet
A cold wallet is the most secure way to store cryptocurrencies. Its main feature is the option of full disconnection from the network in order to avoid hacker attacks. It is perfect for holding large amounts. A cold wallet is loaded on an external storage medium, which can be easily disconnected from a computer connected to the internet – most frequently, it is a flash drive. Ledger is a classic example.
Hot wallet
This is a wallet connected to the internet, such as Jaxx. It can be used to hold small amounts of cryptocurrency for your daily needs. These wallets can be stored both on the user’s PC and on external servers or cloud. The probability of them being hacked is much higher, but if you observe the security rules, they can also be considered rather reliable.
Cryptocurrency exchange wallets
If active trading is your goal, then a cryptocurrency exchange wallet is for you. They are sometimes hacked, so you are recommended to use the exchanges that have a high rating. Read the reviews on our website to stay up to date on the leaders of the industry.
5 rules of novice investors
Before you start investing in cryptocurrencies, you also need to understand some specifics of the market. This will help you avoid mistakes that could lead to the loss of your portfolio.
1. Do not invest in cryptocurrencies more than you can afford to risk. This class of assets is very volatile (prices are unstable). You can get rich using the volatility, as the growth may reach hundreds of percent at times. But! What grows fast can fall dramatically just as fast. Experts do not recommend investing in cryptocurrency the money the financial well-being of your family depends on. Treat crypto investment as an interesting opportunity to diversify your capital.
2. Be careful with leverage. The majority of exchanges offer margin lending. For example, if you have $1,000, the exchange can lend you $10,000 for the purchase. Profit/loss potential increases proportionally in this case. 10% of price movement with leverage 1:10 can double your capital or reduce it to nothing.
3. Do not buy during the pump. Pump is a sharp growth of price by tens or even hundreds percent. Quite frequently, it is the final stage before the dump, which leads to sudden correction.
4. Keep analyzing and monitoring the market. There are technologies behind every cryptocurrency. Therefore, you need to continuously improve your knowledge in order to reach expert level.
5. Start from the buy & hold strategy. For the majority of beginners, buying and holding promising projects is the best option.
Security is the key to freedom
This is only a short review of the opportunities the cryptocurrency market has to offer to beginners. However, this is the area where you will need to constantly improve and explore new opportunities.
It is true that cryptocurrencies can make you richer and more independent. They can help you regain the long forgotten privacy, instill confidence in the cooperation between people and help build a new, fairer world. However, there is a reason why we emphasized security of your funds in this article. In the era of high technology, this issue comes to the fore, as the new time brings not only new investment opportunities, but also opportunities for scammers.
Therefore, it is very important to make a conscious choice of the wallet and the exchange, where you will register and trade. Security of holding and transferring of assets, privacy of personal data are the key priorities of our resource. The website features professional reviews of cryptocurrency exchanges, exchange platforms and wallets. Before you start investing, spend some time comparing the competitors and checking facts, which will help you protect your capital and earn more.
