Wednesday, June 29, 2022

What Is Crypto Currency Based On

What Determines Cryptocurrency Value

What is Cryptocurrency? A Simple Explanation

What is the value of cryptocurrency based on some factors? Its worth noting that purchasing a digital currency is not the same as buying stocks or bonds. And as cryptocurrency is not a corporation, its safe to say that there are no corporate balance sheets to review or revenues and profits to create a baseline against other digital currencies. Private blockchain-related businesses issue most of the digital currencies found on the market today.

Further, given that theyre also not backed by the government, factors like the monetary policy, inflation rates, and economic measurements that generally influence a currencys value do not apply to this matter. When you are interested in investing your assets in cryptocurrency, you need to know what is the value of the cryptocurrency based on different systems.

You also need to know that the value of digital coins keeps on changing in a fast manner. Under any circumstance, it is up to every crypto player to evaluate for themselves the noteworthy probability of todays digital coins, notwithstanding the risks that these digital currencies are vulnerable to.

Know How To Store Your Digital Currency

If you buy cryptocurrency, you have to store it. You can store it on an exchange or in a digital “wallet,” for example one of the crypto wallets described in our Blog post Which cryptocurrency wallet to choose. While there are many different kinds of wallets, each has its own benefits, technical requirements and security. As with exchanges, you should investigate your storage choices before investing.

How Can You Mine Cryptocurrency

Mining is how new units of cryptocurrency are released into the world, generally in exchange for validating transactions. While its theoretically possible for the average person to mine cryptocurrency, its increasingly difficult in proof of work systems, like Bitcoin.

As the Bitcoin network grows, it gets more complicated, and more processing power is required, says Spencer Montgomery, founder of Uinta Crypto Consulting. The average consumer used to be able to do this, but now its just too expensive. There are too many people who have optimized their equipment and technology to outcompete.

And remember: Proof of work cryptocurrencies require huge amounts of energy to mine. Its estimated that 0.21% of all of the worlds electricity goes to powering Bitcoin farms. Thats roughly the same amount of power Switzerland uses in a year. Its estimated most Bitcoin miners end up using 60% to 80% of what they earn from mining to cover electricity costs.

While its impractical for the average person to earn crypto by mining in a proof of work system, the proof of stake model requires less in the way of high-powered computing as validators are chosen at random based on the amount they stake. It does, however, require that you already own a cryptocurrency to participate.

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How Are Cryptocurrencies Valued

The value of a cryptocurrency usually depends on the utility of its underlying blockchain though there have been many instances where social media hype and other superficial factors have played a role in pumping up prices.

The cryptocurrencies of blockchains perceived to have a wide range of utilities are usually more valuable than those that dont offer much. It all boils down, though, to the demand for the coin relative to its supply and whether the buyer is willing to pay more than the amount the seller initially acquired the coin for.

Notably, cryptocurrencies tend to favor a deflationary system, whereby the number of new coins introduced to the market is predictable and gradually reduces over time.

For many cryptocurrencies, another important element is the total number of coins that can ever exist is often fixed. For instance, there will be only 21 million bitcoins created, of which more than 18 million are already in circulation. This deflationary-based system is the complete opposite of what we have in traditional finance, where governments have the license to print an infinite number of fiat notes and inadvertently devalue their currencies.

Increased Regulation In 2021

What Is The Basis For Value For A Crypto

The rise in the popularity of cryptocurrencies and their adoption by financial institutions has led some governments to assess whether regulation is needed to protect users. The Financial Action Task Force has defined cryptocurrency-related services as “virtual asset service providers” and recommended that they be regulated with the same money laundering and know your customer requirements as financial institutions.

The European Commission published a digital finance strategy in September 2020. This included a draft regulation on Markets in Crypto-Assets , which aimed to provide a comprehensive regulatory framework for digital assets in the EU.

On June 10, 2021, The Basel Committee on Banking Supervision proposed that banks that held cryptocurrency assets must set aside capital to cover all potential losses. For instance, if a bank were to hold bitcoin worth $2 billion, it would be required to set aside enough capital to cover the entire $2 billion. This is a more extreme standard than banks are usually held to when it comes to other assets. However, this is a proposal and not a regulation.

Also Check: How To Hedge Your Crypto Portfolio

What Is An Altcoin

The very first cryptocurrency was Bitcoin. Since it is open source, it is possible for other people to use the majority of the code, make a few changes and then launch their own separate currency. Many people have done exactly this. Some of these coins are very similar to Bitcoin, with just one or two amended features , while others are very different, with varying models of security, issuance and governance. However, they all share the same moniker every coin issued after Bitcoin is considered to be an altcoin.

How Pwc Can Help

Any blockchain solution, no matter how prescient, is only as good as its execution. This is where PwC excelsby offering proven expertise in managing complex implementation programs from start to finish.

What PwC delivers:

  • Design, development, testing and training of blockchain solutions
  • Integration and management of third party implementation partners
  • Rigorous PMO and proactive management of overall efforts

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Two Primary Paths For Using Crypto

The first question to ask when considering using crypto in your companys operations is: Do we hold crypto on our balance sheet or simply adopt crypto-enabled payments? To determine the right path for your business, you need to make a careful determination of the best fit for your business objectives. Consider the potential benefits, drawbacks, costs, risks, system requirements, and more. The following sections will provide some broad considerations around two different paths as your company embarks on its crypto journey.

Enabling payments: Hands-off

Some companies use crypto just to facilitate payments. One avenue to facilitate payments is to simply convert in and out of crypto to fiat currency to receive or make payments without actually touching it. In other words, the company is taking a hands-off approach that keeps crypto off the books.

Enabling crypto payments, such as bitcoin, without bringing it onto the companys balance sheet may be the easiest and fastest entry point into the use of digital assets. It may require the fewest adjustments across the spectrum of corporate functions and may serve immediate goals, such as reaching a new clientele and growing the volume of each sales transaction. Enterprises adopting this limited use of crypto typically rely on third-party vendors.

The Gold Standard: A History

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“We have gold because we cannot trust governments,” President Herbert Hoover famously said in 1933 in his statement to Franklin D. Roosevelt. This statement foresaw one of the most draconian events in U.S. financial history: the Emergency Banking Act, which forced all Americans to convert their gold coins, bullion, and certificates into U.S. dollars. While the legislation successfully stopped the outflow of gold during the Great Depression, it did not change the conviction of gold bugs, people who are forever confident in gold’s stability as a source of wealth.

Gold has a history like that of no other asset class in that it has a unique influence on its own supply and demand. Gold bugs still cling to a past when gold was king, but gold’s past also includes a fall that must be understood to properly assess its future.

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How To Use Cryptocurrency For Secure Purchases

Using crypto to securely make purchases depends on what youre trying to buy. If youd like to spend cryptocurrency at a retailer that doesnt accept it directly, you can use a cryptocurrency debit card, like BitPay, in the U.S.

If youre trying to pay a person or retailer who accepts cryptocurrency, youll need a cryptocurrency wallet, which is a software program that interacts with the blockchain and allows users to send and receive cryptocurrency.

To transfer money from your wallet, you can scan the QR code of your recipient or enter their wallet address manually. Some services make this easier by allowing you to enter a phone number or select a contact from your phone. Keep in mind that transactions are not instantaneous as they must be validated using proof of work or proof of stake. Depending on the cryptocurrency, this may take between 10 minutes and two hours.

This lag time, though, is part of what makes crypto transactions secure. A bad actor trying to alter a transaction wont have the proper software keys, which means the network will reject the transaction. The network also polices and prevents double spending, Zeiler says.

What Is The Use Case Of Cryptocurrency

Initially, cryptocurrency was pushed as an alternative to fiat currency based on the premise that it is portable, censorship-resistant, available globally and an affordable means of executing cross-border transactions. But, other than the digital assets pinned to fiat currencies, the value of cryptocurrencies hasnt been able to replicate the level of stability needed to function effectively as a medium of exchange.

As a result, most crypto holders have shifted their attention to the investment potential of cryptocurrencies, which has since birthed the speculative side of the crypto market. Investors seem to be more concerned about the possibility that the price of a cryptocurrency may rise sometime in the future than whether they can use cryptocurrencies to purchase goods and services, and so crypto is now predominantly viewed as an investment.

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Can Bitcoin Be Converted To Cash

Bitcoin can be exchanged for cash just like any asset. There are numerous cryptocurrency exchanges online where people can do this but transactions can also be carried out in person or over any communications platform, allowing even small businesses to accept bitcoin. There is no official mechanism built into bitcoin to convert to another currency.

Nothing inherently valuable underpins the bitcoin network. But this is true for many of the worlds most stable national currencies since leaving the gold standard, such as the US dollar and UK pound.

Security Trust And Transparency


The blocks of transactions mentioned earlier are added to the ledger in chronological order. Every block is tied to the block before it. Block after block is added this way forming a chain that shows every transaction ever made on that blockchain. Heres another fun infographic to explain:

And every ledger in the network is constantly updated so that they are all the same, giving every member of the network the ability to verify who owns what.

Because of this, the network is nearly impossible to hack. Unlike banks with central servers that are easily broken into, hacking into a block in the blockchain to alter a record would require hacking every proceeding block in every ledger on the network. An impossible task.

And unless every node on the network goes down, the data on the network will always be safe.

The security and robustness of a decentralized network eliminates the single point of failure problem we mentioned earlier that all banks face.

The term cryptocurrency comes from the fact that transactions are protected by strong cryptography.

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Gold Standard System Versus Fiat System

As its name suggests, the term gold standard refers to a monetary system in which the value of currency is based on gold. A fiat system, by contrast, is a monetary system in which the value of currency is not based on any physical commodity but is instead allowed to fluctuate dynamically against other currencies on the foreign-exchange markets. The term “fiat” is derived from the Latin “fieri,” meaning an arbitrary act or decree. In keeping with this etymology, the value of fiat currencies is ultimately based on the fact that they are defined as legal tender by way of government decree.

In the decades prior to the First World War, international trade was conducted on the basis of what has come to be known as the classical gold standard. In this system, trade between nations was settled using physical gold. Nations with trade surpluses accumulated gold as payment for their exports. Conversely, nations with trade deficits saw their gold reserves decline, as gold flowed out of those nations as payment for their imports.

How Big Is The Global Coin Market

At the time of writing, we estimate that there are around 8,000 coins, tokens and projects in the global coin market. As mentioned above, we have a due diligence process that we apply to new coins before they are listed. This process controls how many of the cryptocurrencies from the global market are represented on our site.

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Should You Invest In Cryptocurrency

Experts hold mixed opinions about investing in cryptocurrency. Because crypto is a highly speculative investment, with the potential for intense price swings, some financial advisors dont recommend people invest at all.

For example, while Bitcoin has nearly doubled in value over the last year, reaching a price of over $18,000 in November 2020, its also drastically lost value in the same year, like when it bottomed out at under $5,000 per Bitcoin. Even Bitcoins recent highs, however, are still lower than its 2017 peak of about $20,000 per Bitcoin. All of this is to say, cryptocurrencies, unlike most established currencies, can be very volatile and change value frequently.

Thats why Peter Palion, a certified financial planner in East Norwich, N.Y., thinks its safer to stick to currency thats backed by a government, like the U.S. dollar.

If you have the U.S. dollar in your cash reserves, you know you can pay your mortgage, you can pay your electricity bill, Palion says. When you look at the last 12 months, Bitcoin looks basically like my last EKG, and the U.S. dollar index is more or less a flat line. Something that drops by 50% is not suitable for anything but speculation.

That said, for clients who are specifically interested in cryptocurrency, CFP Ian Harvey helps them put some money into it. The weight in a clients portfolio should be large enough to feel meaningful while not derailing their long-term plan should the investment go to zero, says Harvey.

What Is Cryptocurrency Mining

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Principally everybody can be a miner. Since a decentralized network has no authority to delegate this task, a cryptocurrency needs some kind of mechanism to prevent one ruling party from abusing it. Imagine someone creates thousands of peers and spreads forged transactions. The system would break immediately.

So, Satoshi set the rule that the miners need to invest some work of their computers to qualify for this task. In fact, they have to find a hash a product of a cryptographic function that connects the new block with its predecessor. This is called the Proof-of-Work. In Bitcoin, it is based on the SHA 256 Hash algorithm.

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You dont need to understand the details about SHA 256. Its only important you know that it can be the basis of a cryptologic puzzle the miners compete to solve. After finding a solution, a miner can build a block and add it to the blockchain. As an incentive, he has the right to add a so-called coinbase transaction that gives him a specific number of Bitcoins. This is the only way to create valid Bitcoins.

Bitcoins can only be created if miners solve a cryptographic puzzle. Since the difficulty of this puzzle increases the amount of computer power the whole miners invest, there is only a specific amount of cryptocurrency token that can be created in a given amount of time. This is part of the consensus no peer in the network can break.

Also Check: What Can You Buy With Crypto

Where To Store Cryptocurrency

Cryptocurrency wallets hold the private information you need to make transactions. Hot wallet is the name for a digital wallet that allows you to transfer money via a crypto exchange. Meanwhile a cold wallet is hardware that is not connected to the internet .

To pick a crypto wallet that is right for you, check out Moneys guide to the best crypto wallets. The guide includes the best wallets for those who want to trade just Bitcoin, for those who want to trade on their phones, for those who want to trade on their desktops and more.

How To Trade Cryptocurrency

In many ways, trading cryptocurrencies is like trading stocks especially if youre doing so via a trading app.

On Coinbase, for example, the process is straightforward: You can simply hit the sell icon on the app, pick the crypto you want to sell and how much of it you want to sell. Then hit sell now, and you can get the best available current market price.

However, its important to note that exchanges usually charge trading fees, and also youll likely have to pay a spread when you buy and sell cryptocurrencies .

One big difference between trading stocks and trading cryptocurrency is the volatility. Cryptocurrencys prices often skyrocket or plummet within just a few days. For example, Bitcoin lost 50% of its value between April and July of 2021, before surging to an all-time high of above $68,000 in November.

Many financial advisors recommend that if you are going to invest in cryptocurrency to make it a small portion of your portfolio no more than 5% and treat it as a long-term investment.

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