Cryptopedia

Fundamentals II

What it Means to Invest in Cryptocurrencies?

Investing in cryptocurrencies can be hard to understand for many investors. The value proposition may not be so clear to them and this can generate doubts among traders. This is why it is certainly important to understand what it means to invest in cryptocurrencies. 

Understanding how technologies evolve is something that we can do by looking at history. However, it becomes more difficult to be among the first adopters of a technology or a trend. It may not be so obvious where the world is going and what is going to happen in a few years. 

For example, investing in Ford before being what it is today would have made investors rich nowadays. The same can happen with other technologies, for example, self-driving cars and their mass adoption in the coming years. 

With cryptocurrencies something similar happens. There are many users around the world that consider Bitcoin valuable because it provides decentralized financial services and solutions. This provides power. It is basically making a bet on the future of this new coin as an innovative monetary solution with a high potential to grow and a low downside. 

Understanding Bitcoin Mining

Bitcoin mining is a process that allows the Bitcoin blockchain to create new BTC coins and bring them into the market. Bitcoin mining process is similar to that of gold. Gold needs to be mined. Companies invest a lot of resources to dig, search for and extract gold. The same happens with Bitcoin and its proof-of-work (PoW) system that works in a decentralized network of computers. 

Every single time we process a transaction on the Bitcoin network, it will be necessary for participants (miners) to verify using computers that the funds are legit and that they can be transferred. All the Bitcoin miners are rewarded in BTC for the mathematical problems they solve when confirming these transactions.

At the time of writing this post, Bitcoin miners are earning 6.25 BTC every block they mine – which usually happens every ten minutes. In order to be a profitable miner, you will need to spend hundreds of thousands of dollars and mine Bitcoin at scale. 

Understanding Altcoins

As we know, Bitcoin is the largest cryptocurrency in the world. But there are many other virtual currencies in the market. Every single cryptocurrency that is not Bitcoin can be considered altcoins. Ethereum (ETH), XRP and Litecoin (LTC) are altcoins. Altcoin also stands for alt + coin, or alternative coins to Bitcoin.

There are different types of altcoins in the market. In the next guides, we are going to share the various kinds of altcoins and their functionalities. You will learn about stablecoins, ERC-20 tokens and more. You can buy altcoins on a wide range of crypto exchanges. 

Each of the altcoins represent different things. For example, Ethereum can be considered the Google of virtual currencies because of what its network is offering (it works as a platform for creating decentralized applications and smart contracts). Altcoins such as XRP are used in order to process bank transfers and help the banking system work in a much more efficient way. 

Stablecoins

In the previous Fundamentals II guide, we have explained what altcoins are and how they work. One of the different types of altcoins in the market includes stablecoins. Stablecoins are cryptocurrencies that, as the name suggests, have a stable price. 

Stablecoins are usually tied or linked to fiat currencies, for example, the U.S. dollar (USD), the Euro (EUR) or even the British pound (GBP). The most popular stablecoin in the world is Tether (USDT). The company behind Tether claims it has 1 USD backing each USDT issued. 

Currently, Tether has a market capitalization of over $16 billion and it is the third-largest cryptocurrency in the world after Bitcoin (BTC) and Ethereum (ETH). Tether is also among the most traded virtual currencies in the world. 

Stablecoins are used to trade virtual currencies, process transactions or even save money. Cryptocurrency exchanges are already allowing users to trade BTC against USDT and vice versa. That means that you can sell BTC and receive USDT or sell USDT and receive BTC. At the same time, stablecoins can certainly be used to reduce exposure to volatile virtual currencies, including Bitcoin and Ethereum, but still have fast and easy access to the most used cryptocurrencies in the world. 

People in countries such as Argentina or Venezuela are using stablecoins in order to escape capital controls and have access to foreign currencies. Indeed, these countries now have black market rates for these stablecoins. 

ERC-20 Tokens Explained

ERC-20 makes reference to a token standard that is based on the Ethereum (ETH) network and that is used for smart contracts running on this network. Companies and developers have already been using this standard to create a large number of tokens running on top of Ethereum. 

Each ERC-20 token is linked to a specific ETH address that can receive tokens. At the time of writing this guide, there are hundreds of ERC-20 tokens, if not thousands. The most popular ERC-20 tokens include Tether (USDT) – the stablecoin that we have mentioned before – Ethereum (ETH) – the second-largest cryptocurrency – Chainlink (LINK), Uniswap (UNI), Binance USD (BUSD), Yearn.Finance (YFI) and many others. 

During the Initial Coin Offering (ICO) craziness in 2017, a large number of projects created their own ERC-20 tokens that were later sold to investors in the market. Many of these ERC-20 disappeared in recent years. 

If you want to receive ERC-20 tokens and you have an Ethereum address in your Ledger Nano S wallet (or any other ERC-20 compatible wallet), then you can simply send the ERC-20 token to this address. If you want to send USDT to your wallet, then you just need to use your traditional Ethereum address where you will receive your USDT. 

Take into consideration that this process does not apply for exchanges. Crypto exchanges such as Binance work with a different system and you will have to send your USDT (and any other ERC-20 token) to its respective address. Remember that you are giving the custody of your coins to an exchange when you use it as a wallet. 

You can check our guide on cryptocurrency wallets.