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7 Things You Need To Know About Cryptocurrency in 2021

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Whether or not you choose to trade Bitcoin or any other cryptocurrency, it is important to understand what it is and the trends driving it.

The bottom line, however, is that the world’s money is flowing onto the blockchain, and the use of cryptocurrency is growing at an exponential rate.

#1 - What Is A Cryptocurrency

The word cryptocurrency is a bit of a misnomer and perhaps the biggest hurdle for people to understand. Cryptocurrencies aren’t money in the sense of a dollar or a euro. Cryptocurrencies are tokens that take up space on a blockchain. A blockchain is a form of distributed ledger, the cryptocurrency is the means of tracking value on that ledger.

Think of it like an abacus. The frame of the abacus represents the network of computers that support the blockchain and the beads are the cryptocurrency that makes the abacus network work. Cryptocurrency/Blockchain networks are made up of miners. The miners keep track of transactions, maintain the distributed ledger, and get rewarded with “mined” coins.

The point of blockchains and cryptocurrencies is to keep track of value in a decentralized manner. The applications for blockchain are virtually endless but tend to center around the transfer or storage of value. Bitcoin is the first and most widely used cryptocurrency and it is little more than a way to exchange value across the Internet. To own and trade in cryptocurrencies, you need to have a wallet and an account with an exchange but more about that later.

#2 - POW or POS

Not all blockchains are alike or are intended to do exactly the same thing but they all have a few fundamental qualities that are the same. The primary differentiator is whether the blockchain is a Proof-of-Work or a Proof-of-Stake network.

In a proof-of-work (POW) blockchain the computers that support the network, called miners, employ large amounts of time and power to do their work. Not because it has to be that way but because that’s the way the original method of verifying transactions is time-consuming. The miners are, in effect, racing to prove who verified the transaction first and not actually verifying the network. POW miners earn previously unmined cryptocurrency for their efforts, a system that is inherently flawed due to limited quantities of the underlying cryptocurrency. Eventually, all the tokens will be mined, and then what?

Proof-of-Stake is the future of blockchain technology and cryptocurrency. Instead of spending a vast amount of computing power to prove who did what first, proof of stake networks allow the miners to put up capital and earn fees for processing transactions. The capital, or stake, functions as a node in a banking network by guaranteeing transactions and providing liquidity.

#3 - Bitcoin is the world’s reserve crypto

Bitcoin (BTC) is the world’s first and most widely trusted cryptocurrency. As of the first week of January, 2021, Bitcoin accounted for nearly 70% of the entire cryptocurrency market and that figure is rising. The value of Bitcoin is up more than 550% since the beginning of 2020 and momentum is still on the rise. The first days of 2021 saw the price of Bitcoin rise to a new all-time high nearly 100% higher than the previous high set in late 2017.

When it comes to cryptocurrency, Bitcoin is the standard that everyone else is trying to beat. The problem is that no other cryptocurrency has quite managed to topple it from its roost. Even Ethereum, the world’s second-largest cryptocurrency by market cap, has failed to really compete in terms of value but that may be changing. Bitcoin is a POW network that’s only good for one thing and that is transferring value, Ethereum is the leading cryptocurrency for smart contracts.

#4 - Ethereum is reinventing the wheel

They say you shouldn’t reinvent the wheel but that’s what Ethereum’s (ETH) founders and development team have done. If Bitcoin is a wheel, Ethereum is a wheel that can run complex programs and execute on smart-contracts when pre-set conditions are met. The problem with Ethereum is that it has some flaws that keep it from fulfilling its promise but there are plans to fix them.

Ethereum is currently a proof-of-work blockchain but the switch to proof-of-stake is already underway. The Beacon Chain was launched in late December and will become the backbone of the new Ethereum proof-of-stake network. The Beacon Chain has already attracted billions in staked dollar-value and will eventually coordinate all the shards and sidechains the completed ETH 2.0 upgrade will bring.

The price of Ethereum is lagging Bitcoin relative to the dollar but it is catching up fast. The launch and success of the Beacon Chain have helped propel this coin to a three-year high with new all-time highs in view.

#5 - Exchanges, Wallets, And Cold Storage

How do you buy a cryptocurrency? On a growing number of exchanges that will soon include the likes of Paypal. In the U.S., the top exchanges include Coinbase and the Gemini Exchange. Coinbase may go public with an IPO in 2021, or at least that's the rumor. The Gemini Exchange is a business of the Winklevoss twins, two of Bitcoins earliest and most vocal proponents. There are quite a few to choose from but be sure to stick with the U.S. licensed and regulated exchanges.

A wallet is different from an exchange. An exchange account will include a wallet that can hold the listed cryptocurrencies while a wallet may not allow trading at all, only sending/receiving. Holding cryptocurrency off-exchange is the recommended best-practice for those not actively trading. The Exodus Wallet is only one of many that facilitate not only holding but the exchange of cryptocurrency as well.

Cold storage is the practice of holding your cryptocurrency in a wallet that is not connected to the internet. This keeps the digital keys that prove ownership safe in the most secure manner possible. Investors can store their keys on any memory stick and use a safe or safe deposit box for added safety.

#6 - Defi - Decentralized Finance

Defi or Decentralized Finance is an umbrella term for a variety of applications aimed at disrupting the traditional banking and finance industries. Defi is vital to the evolution of blockchain because it elevates cryptocurrency from merely transferring value to more complex financial transactions. If you think that this sounds a lot like the “smart contracts” Ethereum is intended to run you are right. The Ethereum network is the number one for Defi at the start of 2021.

Some of the applications that defi is being used for include insurance, loans, crowdfunding, derivatives, trading/investing, and even betting. In fact, staking funds on a POS blockchain network is a form of defi. At last count, there was more than $23 billion in USD locked into defi applications and the value is only growing.

#7 - Stable Coins And The U.S. Dollar

Cryptocurrency is a volatile market there is no doubt. There is a way to utilize blockchain technology, however, and avoid most if not all of the day to day volatility, and its called Stable Coins. Stable coins are cryptocurrencies or tokens built on top of cryptocurrency (think Ethereum) that are pegged to a stable value. The most obvious peg is the dollar and there are several stable coins pegged to it including the Tether Dollar (USDT) and the USD Coin (USDC).

At the start of 2021, the Tether Dollar was the 3rd ranked cryptocurrency in terms of market cap. With nearly $23.5 billion in circulation, it will most likely hold onto this spot for some time. The USD Coin is a stable coin pegged one-to-one with the dollar and backed by a consortium that includes exchange Coinbase and one of Bitcoin’s largest mining operations, Bitmain. With $4.6 billion in circulation, it holds the 13th spot in regards to market cap firmly securing the dollar’s place as the 3rd largest cryptocurrency market.

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