What is Cryptocurrency?
A new form of digital asset that works under decentralized control is Cryptocurrency. Over this system, there is no control of governments or central authorities. But it uses encryption techniques to provide safety over transactions. In simple words, digital assets work as a medium of exchange in cryptocurrency.
How Does Cryptocurrency Work?
In the cryptocurrency market, people own digital coins and use them as a medium of exchange. Here the cryptocurrency uses ledger for transactions. Ledger is a secured database that stores coin ownership records of individuals. The computerized database uses strong cryptography for security. Thus, it secures the leakage of transaction records with others than the owner of the coins.
Here the digital coins don’t exist in any physical form like paper money. So, it is like virtual money. The central authority doesn’t issue this coin to an individual. The reason is that the network employs decentralized control. Under this decentralized control, the cryptocurrency uses distributed ledger technology for transactions. This technology is Blockchain. Sometimes, the cryptocurrency works in centralized control too. So, this is when a single issuer issues a cryptocurrency or creates it before issuance.
Types of Cryptocurrencies
There are different types of cryptocurrency, but here we will see the most common types. The cryptocurrency prices vary for different types. They are
- Bitcoin cash
- Ethereum Classic
- Stellar Lumen
- Bitcoin SV
It is a common type that uses blockchain technology. Blockchain technology helps to make peer-to-peer transactions between users.
In 2011, Litecoin was an alternative to bitcoin. The Litecoin has few advantages over bitcoin such as
- Faster transaction times
- 84 million coin limit
- Different algorithms operation
It is an open-source platform like other types that work under blockchain technology. Ethereum allows the code running of other decentralized applications.
The aim of launching a ripple is to provide fast transactions at a low cost. Here, it allows the exchange of any types of currencies.
The launch of bitcoin cash includes certain features to improve the original Bitcoin. One can see improvement in the
- Size of the blocks
- Number of transactions
Another version of Ethereum is Ethereum Classic. It helps to run smart contracts without the effect of any fraud and third-party members.
Zcash provides the greatest security of transactions. Here the users can receive or send Zcash without disclosing the sender and receiver.
Stellar Lumen (XLM)
Stellar provides the benefit to a user for sending any type of currency to someone in a network.
Tether is a popular group of stablecoins in cryptocurrencies. Tether and other types of stablecoins work to reduce price fluctuations.
Bitcoin SV (BSV)
Bitcoin SV stands for Bitcoin Satoshi Vision. It is an original Bitcoin with some features. It gives top priority to a few things such as
- Fast transaction processing times
- Number of transactions
These are the common types of cryptocurrencies in the market. There are some other types that a few users using it in the cryptocurrency such as
- Binance Coin (BNB)
- Monero (XMR)
How Cryptocurrency Rates are determined?
Several factors determine the cryptocurrency rates. They are
- Node Count
- Rising Demand
- Mass Adoption
- Inflation of fiat currencies
- Production Cost
Node count is a good indicator to determine the cryptocurrency prices. It measures the number of active wallets in the network. The first thing is to compare the total market capitalization and node count on the network. After comparing these two indicators, you will get a fair price of the cryptocurrency.
Supply & demand is another indicator that determines the cryptocurrency rates. For instance,
- More people buying bitcoins – Price will go up
- More people selling bitcoins – Price will go down
If the cryptocurrency faces mass adoption, it will increase its value. Because there is a limited number of cryptocurrencies available in the market. When its demand among people increases, it leads to an increase in value.
Inflation of Fiat Currencies
Fiat currencies are government-issued currencies. They look like paper money or coins in a country.
- Price of fiat currency falls – The Price of bitcoin goes up
The direct costs and opportunity costs are the two costs needed to produce a coin. Such a production cost determines the cryptocurrency rate. For the cryptocurrency mining, one may need certain resources and energy. Such factors play a vital role in determining the currency rate.
Which is the biggest determinant of cryptocurrency rates?
Supply and demand is an important determinant of cryptocurrency exchange rates.
|High token supply||Less Demand from traders and users||Rate will drop|
|Limited token supply||High Demand from traders and users||Rate will rise|
Reasons for fluctuations in cryptocurrency rates
- Cryptocurrency is a nascent market, as most people are not familiar with cryptocurrency.
- Cryptocurrency features limited liquidity in the market.
- A large number of users of around 100,000 are joining the market every day. This increases the volatility of the market.
- The difference between the buy and sell price on cryptocurrencies can be huge in dollars.
Advantages and Disadvantages of Cryptocurrency
Advantages of Cryptocurrency
- It is easy to do transactions between two parties without the help of any third-party member.
- All transactions are safe and secure, as it uses public and private keys
- One can do fund transfers at a low processing cost
Disadvantages of Cryptocurrency
- There is a chance for illegal activities in cryptocurrency. Some of them are laundering and tax evasion
- Cryptocurrencies are volatile
- Cryptocurrencies involve a lot of unknowns
Things to remember while buying Cryptocurrencies
When you invest in cryptocurrency, you need to follow a strict strategy. Also, remember the following things.
- The Business Proposition – Good businesses solve difficult problems through analysis and problem-solving skills. This is the same for crypto startups. Check whether you can solve a problem while buying cryptocurrencies.
- Total & Circulating Supply – Analyze the largest supply of coins that are undermining.
- Price History – Check the coin status on exchanges for its availability and the price of the coin.
- Developer Activity – Check whether the coin has an active developer community to buy it or not.
- Community Activity – To buy cryptocurrencies, check whether the coin has an active community.
Thus, one can invest in cryptocurrency after understanding several factors about it. Cryptocurrency is a big pool that provides great opportunities for investors. One can use it in the right way for better results.