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Over the past decade, even average investors around the world made fortunes from their cryptocurrency investments since the launch of Bitcoin in 2009.
Crypto is hot and happening, triggering a craze among people to make the most of it. However, the market is getting more complicated with wild price swings, which stem from its underlying structure – unregulated and decentralized.
Even in the current scenario, some investors face more losses than profits; there are others, who are minting money. It is an ideal example of “Information Asymmetry.”
Information Asymmetry refers to a situation when innovative technologies and methods arrive, only a tiny fraction of investors become ‘experts’, while most other people fall for the hype due to a lack of knowledge, and become victims of scammers.
If you are making fortunes in the crypto market despite the price fluctuations, you are probably an expert. The signs are that you can feel the market pulse backed with in-depth knowledge about Blockchain, algorithms, and other criteria.
Here are the signs that a person is an expert in cryptocurrency investment.
1. You Know about Different Consensus Algorithms
Different consensus algorithms are below:
- Proof of Work (PoW): The use of this consensus algorithm is for selecting a miner for the next block generation. Bitcoin uses PoW. The idea behind developing this algorithm is to solve a complex mathematical problem and find an easy solution. This mathematical puzzle needs plenty of computational power and this is why the node that solves it gets the right to mine the next block.
- Practical Byzantine Fault Tolerance (PBFT): PBFT is another consensus algorithm concept by Miguel Castro and Barbara Liskov in the late 90s. These researchers designed PBFT to work efficiently in asynchronous systems. The objective of this algorithm was to solve various problems relating to existing Byzantine Fault Tolerance solutions.
- Proof of Stake: Proof of State or Delegated Proof of Stake hands over the voting power to those who own the most coins. However, it also leads to centralization, because the wealthiest entities will potentially secure the most voting power, such as large corporations, banks, billionaires, and government, which will defeat its purpose.
2. You are Aware of the Six Criteria of a Good Cryptocurrency
Knowing the following six blockchain criteria is essential to achieve expertise in cryptocurrency investment:
- Immutability: Immutability is one of the key features of blockchain technology. Immutability refers to something that cannot be altered or changed, and that’s why it is incorruptible. This blockchain feature ensures that the technology remains as it is – an everlasting, unalterable network.
- Decentralized Technology: The blockchain network is decentralized, which means no central authority such as governments or banks has their influence on the network. Instead, a group of nodes does the job of maintaining the network.
- Enhanced Security: Due to robust security, no individual or group can influence or change the features of the blockchain network for their benefit. Having encryption with the help of cryptography makes sure to add an extra layer of security for the network. Cryptography is a complex mathematical algorithm that functions as a firewall against threats.
- Distributed Ledgers: The users on the blockchain network maintain the ledger. The distributed ledgers spread computational power across various computers to ensure better results.
- Consensus: As discussed in the previous section, every blockchain network grows due to consensus algorithms. The blockchain architecture has an intelligent design, and consensus algorithms are at the core of it.
- Faster Settlement: Traditional banking or finance systems are slow. Often it takes several days to process a transaction after a final settlement. Also, such transactions are easily corruptible. Blockchain provides a much faster settlement than traditional banking systems. This way, users can transact faster, saving a lot of time.
3. Crypto Mining
This is suitable for people who are tech-savvy and want to know how cryptocurrencies like Bitcoin are made. Mining going straight to the source is not cheap. This may require upfront computing hardware costs that do not guarantee fast rewards.
Also, mining consumes a huge amount of energy in addition to investing in a PC or specific hardware. Miners may also receive “transaction fees” to verify other people’s transactions.
4. Day Trading
Not all investors can lock in their money in cryptocurrency. Many prefer to invest for a shorter period. However, it requires an appetite for risks. This includes fast trading as well as a clear insight as to how and why the prices of various cryptocurrencies change.
Only experts should try this method, as they are confident in their timing of trading in the crypto market and know the basics of buying consistently at lower prices and selling at higher values. Some people may use the dollar average to buy the same coin at a different price.
This method will not always bring the most profit, but it is generally the method where inexperienced investors can lose most of their money, but experts can still make the most of it.
HODLing refers to the method of holding cryptocurrencies for making profits in the future. This method is ideal for investors with long investment goals, and who are ready to take their chances.
This method involves buying crypto assets from a crypto exchange, and keeps buying more often when prices drop, which is known as “buying the dip.” After months HODLing, you can sell the assets at a significantly higher profit.
Prices of established cryptocurrencies, such as Bitcoin, Ethereum, and Litecoin fluctuate frequently, but they generally maintain an upward trend throughout the year. Relatively newer crypto coins are likely to start at a higher price because of the hype around, but eventually, lose value and struggle to recover. So, experts prefer HODLing the tried and test crypto tokens for makings profits in the long run.
If you are an expert investor, you would pick a cryptocurrency that has long-term profit-making potential by going through its whitepaper. The document will explain the coin’s origins, its purpose, and will provide enough information to help you figure out if it will withstand the test of time.
6. Arbitrage between Crypto Assets
Arbitrage is about trading one crypto coin for another or trading one specific cryptocurrency on different exchanges.
This method could be ideal for investors who are familiar with day trading and got a higher risk appetite than people who only prefer day trading.
If you are an expert and hands-on trader, you would know about various imbalances in the market and grab the opportunities to make a profit whenever possible.
This method is similar to how many investors play around with fiat currencies in traditional currency markets.
There are also more complex ways, such as transferring value between multiple cryptocurrencies on the same exchange and having a larger number of the first currency.
Seasoned investors usually follow this method when the prices of relatively newer crypto coins go up and down considerably within a short span.
7. Staking: Earning Interest in Cryptocurrencies
If you prefer “staking” or earning interest from cryptocurrencies by holding large numbers of them, then you are game for ‘locked up liquidity’ even if the price changes.
The flipside of holding cryptocurrencies for such a long period is that you cannot sell the coins if the market crashes because of the potential losses. Holding the crypto coins for long will fetch you a small interest.
Another way of staking is earning fees. It is also about holding a sizable stake for the long term, showing confidence in a ‘proof of stake’ (PoS) based coin. The Ethereum (ETH) coin often undergoes such a change, where investors can stake their crypto holdings to validate others’ transactions and earn fees.
Keep in mind that the methods discussed in this article are a general observation of the cryptocurrency market and you need in-depth study to understand how it behaves. So, make sure to do your own research (DYOR) before putting your money in a crypto token, coin, or asset.
This content is accurate and true to the best of the author’s knowledge and is not meant to substitute for formal and individualized advice from a qualified professional.
© 2022 Sumit Chakrabarti