Cryptocurrency is a risky and relatively new instrument that traditional investors avoid. High volatility, negative news, and difficulty in understanding how the system works create an aura of mystery and inaccessibility around cryptocurrencies.

This article will try to change the situation and convince the reader that cryptocurrencies can be one of the elements of a reasonable investor’s portfolio. Let’s walk through the following plan:

  • Types of cryptocurrencies.
  • Traditional cryptocurrencies as replacements for fiat.
  • Advantages of ecosystems and DeFi projects.
  • Memes, pyramid schemes and fraudulent projects.
  • Peculiarities of investing in stabelcoins.

Types of cryptocurrencies

Cryptocurrency is the collective name for digital assets that work with blockchain technology. At the time of writing, there are more than 17 thousand different cryptocurrencies, which differ in purpose, encryption features, transaction speed, degree of anonymity of users, methods of passive income, type of issue, the maximum supply of currency, the presence of inflation mechanism, etc.

The main and common feature of cryptocurrencies is decentralization through blockchain technology. Blockchain is a database contained on the devices of the network participants, blocks of transaction data in this network are linked cryptographically, so it is almost impossible to fake information, for this you need to have control over most of the network devices. No one (not even the creator of the network) can tamper with the information himself. The system is quite cumbersome, so the transaction speed of the first cryptocurrencies (classic Bitcoin, for example) is quite low, but this problem is solved by modern projects (such as Solana).

Cryptocurrency projects are very different from each other, so for the most correct determination of the risks and benefits of investing, it is necessary to divide the cryptocurrency into conditional groups. Within this article we will distinguish:

  • Traditional cryptocurrencies.
  • Ecosystem cryptocurrencies.
  • Stablecoins.
  • Memes, shieldcoins and other fraudulent projects.

Traditional cryptocurrencies as replacements for fiat

Bitcoin’s creator, Satoshi Nakamoto (pseudonym) conceived to use blockchain technology to create a digital analog currency, the feature of which is its independence from traditional financial systems. Conventional currency is controlled by banks and the government, they control issuance and mediate economic relations between entities. Blockchain allows you to create a decentralized system, the information is not stored on one server (as in banks), it is simultaneously on the devices of users around the world, there is no single control center. Thus, the problem of sole control over the mass of money is solved.

Cryptocurrency has the property of “antifragility,” it is a dynamic system, in the future, independent of the economy of a particular state or interstate formation. On this basis, it has the following advantages over fiat:

  • Decentralization. There is no way to fake transactions, you can not control them, the updating and operation of the network (in most projects) is made by a group of enthusiasts, who are rewarded for this in cryptocurrency.
  • Relative cheapness and high speed of transfers around the world, with no restrictions.
  • Deflationary nature of projects with limited maximum supply (Bitcoin, Zcash, Litecoin).
  • Ease of use, no need to enter personal information to register a wallet.
  • Security of transfers and the user’s identity. Most cryptocurrencies are extremely sensitive about the privacy of transactions. The identity of a cryptocurrency holder can be found out only if he or she has somehow provided his or her personal information in conjunction with the wallet address.

However, traditional cryptocurrencies are not without disadvantages, among them:

  • High volatility, the price of cryptocurrency in a short period of time can change in any direction – to fall in 2 times, to rise in price by 3 times, etc. The upside stage is called “cryptolet”, the crisis stage is called “cryptozyma”, and winter is usually longer than summer.

Cryptoleto and cryptozyma

  • Lack of a legal framework in most countries. The citizen’s cryptocurrency is not protected in any way, fraud in this sphere is not prosecuted, the holder himself is responsible for the safety of his funds. They try to fix the situation by introducing the concept of “digital asset”, but the privacy of payments play a cruel joke here, it’s very hard to catch a fraudster, especially if he followed the rules of basic care when dealing with a purse.
  • High commissions outside the system, cryptocurrency conversion to fiat eats up a significant part of the amount.
  • Bad reputation. For most citizens, cryptocurrency is a financial pyramid with complex technical content. The situation is gradually changing due to the work of enthusiasts; in 2021, 60% of surveyed Americans are interested in cryptocurrency and consider it as a means of payment. The number of searches on search engines is also growing.

Benefits of ecosystems and DeFi projects

Crypto-enthusiasts quickly realized that it is not enough to create a convenient decentralized currency, it is necessary to form around it a number of tools inherent to traditional finance. Handy applications for wallets and transfers, options for passive income without the use of expensive equipment (mining), the ability to take a loan, quickly buy the necessary cryptocurrency or exchange it for another, etc.

A significant part of cryptocurrencies is the internal currency of individual projects, among the largest:

  • BNB is the cryptocurrency of the largest cryptocurrency exchange Binance,
  • UNI is the native token of the largest decentralized crypto exchange Uniswap.
  • NEAR is a token of the NEAR Protocol blockchain platform.
  • MANA is a cryptocurrency of the Decentraland project, which uses blockchain to create a meta universe.
  • APE is the token and security counterpart of the decentralized developer community ApeCoin.
  • AXS is the internal currency of the blockchain game, Axie Infinity.

In addition, there are cryptocurrencies that act as the basis for the creation of other cryptocurrencies, tokens or even blockchains. The most popular ecosystem today is Ethereum, it includes several hundred projects and about 200 million users (this is the number of wallets that hold ETH cryptocurrency), other similar projects are actively developing.

Increase in daily Ether transactions

For example, Solana, one of the fastest blockchains, has squeezed out competitors in 5 years and entered the top 10 cryptocurrencies by capitalization. More than 13 thousand tokens have been created on the blockchain, and the number of active wallets is growing.

The advantages of investing in such cryptocurrencies:

  • Fundamental analysis. Some cryptocurrency projects are created and maintained by legal entities that publish financial information in the public domain. If there are no specific reports, you can use the information on official resources (websites, accounts in social networks), where they often publish specific figures and tell about the achievements of the project. In the end, there are observers, where you can find a variety of reliable information about the number of active users, the circulating supply of cryptocurrency, etc.

Variety of assets

  • Interested in projects with a gaming or social component – there is StepN, Axie Infinity, Sandbox and many others.
  • Believe in the future of blockchain and want to invest in a technology project – the high-speed Solana, developer-oriented Algorand, Bitcoin’s main competitor Ethereum, etc.
  • Do you think that cryptocurrency can compete with traditional financial institutions – Aave lending platform, Function X bank replacement, another lending platform, more popular and versatile JUST, etc.
  • And this is not a complete list, the world of cryptocurrency attracts programmers who create interesting and daring projects, from the use of blockchain at the state level with the Russian Waves, to artificial intelligence technologies Fetch.ai.
  • Passive earning – stacking, etc. Stacking is a variant of passive earning with cryptocurrency, when a user keeps his assets in a certain wallet and thus ensures the system is operational. But, in addition to the classic stacking, there are other ways, it depends on the specific project. A token holder can lend its assets, rent the power of its PC for a fee (Livepeer, Render Token), become an encrypted server for storing other users’ data (Siacoin) and so on.
  • The ability to participate in the life and development of the project. The same principle works here as with the shares. By buying tokens for some projects, you become their co-owner. Together with other users, you can make management decisions and determine what the project lacks and what you need to get rid of.
  • Privileges. This depends on the specific issuer, DeFi projects give better credit or deposit offers, cloud storage allocates more space for information, streaming blockchain platforms offer better broadcasting quality, etc.

Despite all the pluses, investing in specific projects has the following nuances:

  • Most of the information about the projects is presented in English on the official websites, we have tried to correct this situation, and described more than a hundred different cryptocurrencies.
  • Blockchain itself is not new, there is specialized literature and relevant courses to learn the basics. But some projects go further and work with experimental technologies like Web 3.0 (Polkadot, Polygon, Lisk) or Internet of Things (XYO Network), which scare most investors with its technical complexity.
  • You can run into a pacifier, more about such projects below.

Memes, pyramid schemes and fraudulent projects

Lack of regulators and legal responsibility for cryptocurrency market actions led to creation of thousands of fraud projects, pyramid schemes and useless tokens (“memes” projects).

Scams are little-known tokens and cryptocurrencies, they are usually not available on major exchanges, you can only buy them in an exchange or on the official website of the project.

Financial pyramids – a significant part of NFT and GameFi projects are essentially classical financial pyramids, but the incentive for new users is not the hypothetical possibility of enrichment, but an interesting gamble or desire to collect something.

Memes (Dogecoin, Shiba Inu, Floki Inu) are joke projects, created for fun, have no specific goal and vector of development.

All such projects have the following features:

  • Lack of a clear goal of creation.
  • Unthought-out economics, the price of cryptocurrency changes unpredictably (for example, under the influence of tweets of Ilon Musk).
  • Advertising on non-core resources (blogs, YouTube, etc.), which promises huge benefits to all who buy.
  • Centralization and lack of the usual openness for cryptocurrencies, it is hard to track transactions, the “controlling” package of tokens belongs to the creator, he controls the issue, etc.
  • Extreme volatility. For example, a sharp jump in price after creation of a cryptocurrency (at that moment, the creator collects profit and leaves the project) and the subsequent fall.

On such a project, you can earn a lot and quickly, if you sell everything in time, but the ethical side of the issue remains on the conscience of the investor.

Peculiarities of investing in stabelcoins

Stablecoin is a type of cryptocurrency whose price is pegged to a real asset, such as a dollar (Tether) or gold (PAX Gold). In general, stabelcoins can be divided into three categories:

  • Secured by a real asset. The company issuing the stabelcoin has currency, gold, precious securities, or property in its account that supports the price of the token. Typically, exchanging such a token for fiat causes it to “burn.” It is not possible to mine such staplecoins, their issuance is strictly centralized. Examples: Tether, USD Coin, PAX Gold, SwissRealCoin, etc.
  • Secured by another cryptocurrency. Differs from the first option in that the issuer does not have traditional assets in his account. Examples: Dai Token, Reserve Rights.
  • The price of the token is supported by a special algorithm. There is no collateral, there is no centralized issuer to control everything, the token economy works based on a mathematical formula. Examples: TerraUSD, Neutrino USD, Fei Protocol, etc.

The main benefit of stabelcoin (besides its stability) is the ability to pay for goods and services with a stable and decentralized currency.

The growth of interest in stablcoin

But investing in and working with stabelcoins still has a number of peculiarities:

  • Most popular projects are centralized, which means the user may be restricted in some way by the issuer (or by a court order to which the issuer must comply).
  • From time to time, regulators have doubts about whether projects are really 100% backed by fiat or property. For example, Tether repeatedly faces reality checks on its assets.
  • Algorithmic steblecoins are not reliable, there is a risk of losing token value, this happened with the TerraUSD project.
  • Central Banks are taking stablcoins seriously, experts predict that they will either be banned or come under state control. In this case, they will completely lose their decentralization, it will be impossible to use them to bypass all sanctions. Stablecoins will essentially become more technological fiat.

Conclusion

Cryptocurrency is a promising asset for investment, the purchase of which should be approached with caution and responsibility. The main difference between cryptocurrencies as an investment tool and traditional assets is that:

  1. Cryptocurrencies are not yet regulated by laws.
  2. investing in cryptocurrencies = investing in technology.
  3. a lot of empty and fraudulent projects.

At the moment, investing in any cryptocurrency has its own risks, common to all – high dependence on the news background and the influence of big capital, it is best seen in the crisis. In a difficult economic situation, the largest holders of cryptocurrencies are rapidly selling their assets, causing an avalanche-like fall and panic in the ranks of cryptoinvestors, who are prophesied another “end game. Experts have promised more than 400 times that the cryptocurrency pyramid is about to collapse.

The same rule works for bitcoin and any other cryptocurrency as for ordinary assets – look for growth sources, promising and undervalued projects.

By : Melissa BublitzPosted on Categories :