New to the World of Cryptocurrency? 5 Things You Need to Know
From the sudden spike in Dogecoin’s value in May 2021 to SoftBank’s US$200 million investment in one of the largest cryptocurrency exchanges in Brazil, news on cryptocurrency has been on the rise. As such, many young investors and newcomers have taken interest in crypto without much - or any - in-depth understanding of how it works.
If you are new to the world of cryptocurrency and in need of a resourceful guide to help you get started, here’s a rundown on five things you need to know about cryptocurrency.
#1: What is Cryptocurrency?
Cryptocurrency is essentially a digital currency that can be used as a medium of exchange - think of it as a digital form of cash. Unlike fiat currency, however, cryptocurrency is not regulated yet by any central authority. With cryptocurrency, all transactions are stored in a decentralized public distributed digital ledger that can be accessed by anyone who has it.
Blockchain and Cryptography
To ensure security, the transactions are secured through cryptography, a method of protecting information and communications through the use of codes. Therefore, though anyone connected to the network would be able to view transaction activities and balances in the ledger, the names and addresses pegged to the transactions are in the form of codes.
This is known as blockchain technology, where individuals can confirm transactions without a need for a central clearing authority. This then allows for a more transparent, permissionless and trustless method of transaction, and at a lower cost too since there’s no middlemen involved.
Here’s an example to get a clearer picture:
Suppose Sally sents 1 Bitcoin to Bob. This transaction would then be broadcasted to a peer-to-peer network consisting of computers known as nodes. The network of nodes validate the transaction request and Sally’s status using algorithms. Once verified, the transaction is combined with other transactions in the Bitcoin ledger to form a new block of data that will be added to the existing blockchain in a way that is unalterable. This would allow anyone with access to the digital ledger visibility of the transaction made.
In the traditional banking system, on the other hand, the bank manages its ledger and is stored within the system’s central computer. This would mean that only the banks have control over this ledger. With cryptocurrency, this ledger is transparent.
#2: Bitcoin is Not the Only Type of Cryptocurrency
Bitcoin is the first ever cryptocurrency created by pseudonyms Satoshi Nakamoto in 2008. However, it is not the only one.
The currencies created after Bitcoin are collectively known as altcoins, which - like Bitcoin - are built on a decentralized peer-to-peer network. As of April 2021, there are over 10,000 cryptocurrencies available in the market, though many of them have little to no trading volume or following.
To understand the large amount of cryptocurrencies in circulation, Coin Market Cap reported the total value of cryptocurrency as of May 2021 to be more than $1.7 trillion. The total value of Bitcoin was known to be $735 billion, down from April's high of $1.2 trillion.
While Bitcoin continues to spearhead the world of cryptocurrencies in terms of market capitalization and popularity, there are other virtual currencies worth noting too. One such crypto is Ethereum, which is known to be used to create decentralized financial systems or more commonly known as DeFi.
Cryptocurrencies are known for their volatility due to the unexpected changes in market sentiment that can lead to sharp and sudden moves in prices. This is where stablecoins come in.
Stablecoins are a type of cryptocurrency whose values are pegged to real-world assets such as fiat currency and precious metals (think USD and gold). The daily fluctuations are almost negligible, which helps to protect individuals from market volatility and risks. Presently, there are over 200 different types of stablecoins available in the market, though there are a handful of more popular ones.
This includes Tether (USDT), which is backed by the U.S. dollar and known to be the world’s first stablecoin. As of 21 June 2021, it is reported to have a market cap of more than $62 billion. Another stablecoin pegged to the U.S. dollar is U.S. Stable Coin (USDC).
DAI, on the other hand, is a crypto-backed stablecoin, though it does maintain a soft peg to the U.S. Dollar. It is an ERC-20 token on the Ethereum blockchain with no central authority overseeing the entire system.
#3: What Can You do With Cryptocurrency?
Now that you have an understanding of the basics, it is time to get into the details of some of the use cases of cryptocurrency.
If you are unsure on how to invest in cryptocurrencies, it’s pretty simple. Similar to how individuals buy and trade stocks in the market, you can buy cryptocurrency and sell it when the value increases over a period of time. However, when it comes to investing in cryptocurrencies, it is imperative to understand that since they have a relatively low correlation to economic data, it is critical to perform technical analysis and understand crypto news.
To begin investing in cryptocurrencies, it is first important to find an exchange platform to perform any investment activities. At present, there are a handful of exchanges from Coinbase to Binance and Coinhako.
Though the market is relatively volatile, many individual investors and businesses alike have begun investing in cryptocurrencies. A report by Yahoo Finance revealed that electric vehicle giant Tesla and fintech firm Square are amongst a slew of companies that have invested in Bitcoin.
Non-fungible tokens (NFTs) are a form of cryptocurrency that have been adopted in the gaming industry. NFTs are essentially crypto tokens that represent a unique digital asset of a game. Since each NFT represents a unique feature, they offer varying values and are not interchangeable. This gives gamers a new, authentic in-game item to play with, which no other user within the game owns.
#4: Why is Cryptocurrency Popular?
Cryptocurrencies appeal to many individuals for a range of reasons. For one, the blockchain technology behind cryptocurrency allows for a decentralized financial system that could possibly be more secure than the current traditional payment system by mitigating existing issues such as double spending. Moreover, with a decentralized system, it removes third-party party regulators from managing the money supply, over time, financial institutions may reduce the value of money through inflation.
Another reason why cryptocurrency is gaining popularity is due to the advancements of digitalization in the current environment. As the world adapts and pivots to offer more digitized solutions, cryptocurrency - as a digital currency - is said to be the future of finance due to the nature of it being backed by technology. Furthermore, a report by CNBC stated that businesses such as Paypal have already allowed users to buy, sell and shop with digital currencies.
#5: How to Earn Interest on Crypto?
If you’re keen on investing in cryptocurrency, here’s the good news: You can deposit your crypto assets into interest accounts to earn free cryptocurrency. These platforms offer options for you to increase your overall crypto holdings through interests earned on your deposit.
The best part? You don’t even have to actively manage your account.
One such platform is Hodlnaut.
Hodlnaut is a Singapore-based platform that offers financial services to individual investors where they are able to earn interest on their crypto assets. With an AUM of $250 million at the time of writing, Hodlnaut is known to offer some of the best interest rates available for cryptocurrencies. The effective annual interest rates are as follows:
When depositing crypto assets with Hodlnaut into a crypto interest account, you can earn interest without actively trading crypto. Furthermore, the seamless signup process takes minutes to complete and includes a mandatory KYC (Know-Your-Customer) verification. Once done, users can begin depositing their crypto to earn interest immediately, further boosting the productivity of their crypto assets.
Additionally, users who have passed the KYC process will be able to join Hodlnaut’s Affiliate Program where they can invite a friend to join Hodlnaut and earn 10% of their friend’s interest, allowing them to earn passive income.
We hope that this guide has addressed some of the key fundamentals of cryptocurrency. It is always crucial to learn and understand the basics before investing in any asset, including digital currencies. Plus, you can even earn additional passive income when you hodl with Hodlnaut!
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