What You'll Learn
- Is there a safe haven in the crypto market?
- Why the rate of a promising cryptocurrency cannot update the historical maximum in any way
- How Complex Businesses Based on Cryptocurrency Projects Work
What You'll Learn
- Distinguish Between Cryptocurrency Projects
- Avoid Questionable Cryptocurrencies
The Bitcoin blockchain was created as the first network that opened up the ability for people to work with cryptocurrencies. Since the creators of Bitcoin are unknown, it is impossible to answer the question "Why was Bitcoin created in the first place?" There are various conspiracy theories on this matter, but these are still only guesses.
After the growth of the popularity and price of Bitcoin, there were those who wanted to repeat this success. The code of the protocol is open, so copying the technology was not difficult. Probably, the attraction was the opportunity to create a new blockchain, start mining before others, and take possession of a significant amount of coins before the popularity and price increased.
The first alternative blockchains, such as Litecoin, appeared. The creators of Litecoin stated that transactions would be faster and cheaper (in general, this was the case), but the new blockchains did not offer fundamental technical innovations. The main application of blockchain technology was simple payments — transfers of cryptocurrency from user to user.
In 2012, the Ripple blockchain was launched, which is being developed to this day by the company of the same name. The internal cryptocurrency of the blockchain is XRP. Ripple was one of the first companies to propose the use of blockchain for more complex financial transactions — interbank transfers and the exchange of currencies and other valuables that can be represented in the form of tokens on the blockchain.
The first bank to use Ripple was Fidor Bank, which announced a partnership in 2014. Since then, the number of companies using Ripple has continued to grow. However, since 2020, the US regulator SEC (US Securities and Exchange Commission) has been investigating Ripple. XRP coins are not registered as securities, and the SEC considers them as such.
Dynamics of the Ripple exchange rate. Unlike many other cryptocurrencies, during the last rally in the crypto market, XRP failed to update its all-time highs due to pressure from the US regulator
After the advent of Ethereum and smart contract technology, the issuance of cryptocurrency became available to a wider range of people. Further, the issued tokens can be used for various purposes — payments, discounts, access to some services, etc.
.ICO
One of the most popular ways to make money has become to attract funds to projects by selling tokens or coins. This mechanism is called Initial Coin Offering (ICO).
New companies sold some of their tokens with the promise of making them useful in their project. This method can be compared to the initial sale of shares.
At the same time, a distinctive feature of ICOs, as a rule, was the complete absence of a legal connection between the real ownership of the company and tokens.
Also, the presence of tokens in any project does not automatically make the product itself more attractive. These factors led to the fact that most of the ICO projects of the 2017-2018 period were unsuccessful, and investors did not see profits.
The situation is radically different in the modern cryptocurrency market. As a rule, most projects are funded by venture capitalists who are well versed in the nuances of the proposed projects. The projects themselves, in turn, include in their token model a connection with the real income of the product, as well as the function of product management.
Stablecoins
Stablecoins are the foundation of the modern cryptocurrency market. These are fixed-rate coins. For example, there is a company that issued its cryptocurrency and stated that it was ready to exchange the token for $1 at any time.
In fact, for investors, such cryptocurrencies are the gateway to the world of digital assets. Investors exchange their money for stablecoins, and then spend it on exchanges to buy bitcoin, ethereum, and other crypto assets.
Examples of stablecoins are USDT and USDC.
Stablecoins are used by both private investors and large players who want to be able to buy crypto assets at any time. Thus, the dependence of capital on market volatility is reduced.
In a sense, stablecoins can be compared to money in a brokerage account: people keep their capital there, rather than on a deposit, in order to buy additional shares during market drawdowns.
Stablecoins are also used for cross-border transfers, because sometimes it is easier to send money to another country using blockchain rather than traditional banks.
The exchange rate of USDT against the US dollar. Sometimes the rate can fluctuate under the influence of supply and demand, but in the long run, it tends to $1
Decentralized Finance
How Can a Cryptocurrency Project Make Money? The most obvious answer is through commission fees. In 2019-2020, a completely new segment emerged in the crypto industry — decentralized finance (DeFi for short). This is a general name for projects that use smart contracts to create things that are familiar to the traditional economy, such as exchanges or banks.
Here are some examples of the most well-known and widely used DeFi projects.
Exchange
Uniswap is a decentralized exchange where users can exchange one blockchain asset for another, such as exchanging ethereums for USDC stablecoins. At the same time, the exchange takes place without the participation of any counterparty, but due to the liquidity of assets that other users have provided to the protocol.
Users' assets are combined into so-called pools. For example, to exchange Ethereum for USDC, there is a corresponding pool consisting of these assets. Each exchange is subject to a commission based on the volume of the transaction. The fee is proportionally distributed among those who have contributed their assets to the pool. The DeFi project itself can also take part of such a fee.
Crediting
Another example of a DeFi protocol is the Aave lending platform. "Lending" actually means "credit". Aave also uses a pool model — users provide their assets to the platform by making a so-called deposit. Further, other users can borrow these assets against the security of their own assets.
Users who take out a loan pay interest income to those users who have made a deposit. Thus, a credit system emerges. The rate on loans and, accordingly, deposits in Aave is regulated by the ratio of supply and demand. The Aave protocol takes a portion of the interest income for itself, and AAVE token holders receive a reward that resembles a dividend payment.
Memecoins
Cryptocurrencies are created for various purposes: someone wants to launch a new blockchain, someone creates products in DeFi, and someone makes tokens for the sale of plant products. There are also so-called memecoins, created for purely speculative purposes without a financial and business model, except for the issuance of tokens themselves.
The first memecoin is considered to be Dogecoin, which Elon Musk sometimes tweets about
It is important to understand that the cost of memecoins depends entirely on the hype. For example, Dogecoin could grow in price by hundreds of percent solely because of Elon Musk's attention
Why Understand the Features of Cryptocurrencies
It is necessary to understand all this variety of cryptocurrencies in order not to run into a knowingly fraudulent project or not to buy a token that someone created as a joke.
Therefore, the cryptocurrency market is called extremely high-risk. Learning and self-education, as with any financial market, is where you need to start. You definitely shouldn't throw yourself into the whirlpool.
Make money on the growth of the rate
Why do users, investors, and traders come to the cryptocurrency market? For various reasons, but most hope to make money on the growth of the market. It should be remembered that blockchain technology itself is still developing, and the cryptocurrency industry is young and dynamic. The attraction also lies in its innovativeness: cryptocurrencies are at the intersection of finance and IT.
Transfer Money
Many people who own cryptocurrency find it appealing to use it for payments or simple storage of funds. After all, you will agree that it is convenient when you can transfer funds to any country anonymously and without an intermediary. Cryptocurrency transfers have no geographical restrictions, because public blockchains work anywhere in the world where there is a connection to the Internet.
Also, cryptocurrency payments are interesting in terms of commission costs, because the transaction fee does not depend on the amount of funds transferred. Cryptocurrencies, on the other hand, have high volatility (price volatility). Fluctuations of 20% per day are not uncommon. However, there are the same stablecoins (cryptocurrencies whose price is pegged to the price of the dollar or euro).
Make Money on Trading
High volatility attracts traders and investors. Yes, investing in cryptocurrencies comes with high risks, but it also means potentially high returns. The rise in the price of bitcoin by thousands of percent impresses people around the world, and they are trying to find a "new diamond" — a cryptocurrency that will grow tens and hundreds of times.
It is important to note that trading in the cryptocurrency market is in many ways similar to trading in the stock markets. The same rules of technical analysis apply, exchanges have interfaces familiar to many traders. But there are peculiarities inherent in the crypto market: trading takes place around the clock and seven days a week, and traders' funds are stored not in brokerage accounts, but in the wallets of exchanges or traders themselves.
Who Is Trying to Make Money on Cryptocurrency
Financial markets tend to grow for the long term, and the crypto market is no exception. Bitcoin, Ethereum, and many other liquid and world-famous cryptocurrencies update their highs with each cycle.
Investors are trying to find promising tokens of innovative blockchain projects that offer new products. Such investors can be both private and institutional (e.g., venture capital funds and incubators).
Private investors do not want to be left out and make their medium- and long-term investment portfolios. Also, thanks to DeFi, there is an opportunity to earn passive income in cryptocurrencies: an example of the Aave lending protocol was given above. Such methods of generating income as mining and staking also remain popular.
At a glance
- Despite some similarities, ICOs carry significantly more risks compared to IPOs. For example, the investor does not receive a share in the company.
- Stablecoins can become an entry point into the cryptocurrency market. Although these currencies carry risks, they usually boast a stable exchange rate against conventional currencies.
- Memecoins can grow in price by thousands of percent, but this dynamic is explained solely by speculative demand.
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