This is a continuation of my first post on CryptoCurrencies, here I am continuing on the other questions that a newbie would have.
Watch out – Japanese Crypto exchange has reported that it was hacked and a lot of money has been stolen from its digital wallet – Read the story here.
Let’s continue exploring the fundamentals and then get to the latest happenings!
What determines the value of these currencies?
In the simplest terms, the value of the currency is determined by the amount of faith the investors have in the currency. If people believe that this is something great, they will go for buying the currency and the seller would sell for a higher price and the buyer will pay the asked price. There is a lot of speculation involved. If there is news that there is something wrong with the currency, people will sell off the price that the buyers accept. The price goes up and down so fast.
Consider the US Dollar or the Indian Rupee or even the stock market.
In case of the non-fiat currencies these days, it is the faith that the market has on the economy, the various government policies that determine the development of the nation, the amount of import/export that happens in a country, the strength of the national security and stuff that determine the value of the currency.
In case of stocks, consider Britannia Industries, for example, there are a variety of products that the company sells and they have a revenue and the value of the stocks are proportional to the profit they make, the new products that they have in the pipeline and the popularity of the company’s products.
Similarly, the crypto currency’s value is determined based on its popularity. The faith that the community has on the currency, drives more people to start buying the currency. As the demand grows higher, the price goes up. But, this is totally unpredictable. A small negative news could send the currency plummeting deep down, resulting in a bloodbath. This is at times more like a gamble. In most countries, there are no laws governing them and hence there are more scams where so many people have lost a lot of money.
The success of a currency relies on Mass Adoption. The more people get to know and start using them, the currency’s value increases. It’s just like, if your currency is accepted by many people, it is more likely that you will tend to use it more. That is how we moved on from the barter system to the Fiat currencies and now to the Non-Fiat currencies. It is the faith on the currency.
The fluctuations in the price of the cryptocurrencies are quite high. And another point to note is that, when there is a spike in the price or when the price plummets, the exchange websites freeze – either due to high server loads or maybe they were programmed to get themselves locked! (Oh Man, that’s definitely not funny). So never imagine that you could sell off immediately when the price starts plummeting! If you could get lucky, then you may be able to sell off, else you might miss the tide and lose money.
Oops, If it is so uncertain, How do I choose a cryptocurrency?
There are a lot of things to consider. Each cryptocurrency has a development team, that had developed the software that creates and runs the cryptocurrency. They have their software as open source on GitHub. They have reddit pages and other channels like chat forums.
As an investor, I must do the below as part of my research before investing –
check their GitHub to see how actively they are making code changes, how many active code contributors are there, what are the applications or services that they provide right now and what other apps are there in the pipeline for development and delivery.
Check their reddit pages for updates on progress, new wins, etc,
Take part in their chat forums, try to have a chat with the development teams and other members. If they have a clear roadmap and if they keep up with their plans, then the coin would do well in the days to come
This is how one could make a decision to invest in one cryptocurrency.
Eg – Check out the Reddit page of BitCoin, the Code Repository of BitCoin.
How to determine when to Buy and When to Sell?
Well, that is a million dollar question!!! It seems no one really knows the right answer. The key to generate money from the cryptos and not lose is to make a good research on each currency, and select very few and invest a small number. Try to follow the markets, observe how it reacts to different news and then expand your portfolio. And once you make a profit, sell off, take a fair share in your pocket and then buy more in dips. It is better to be content than being greedy while venturing into new avenues 😀
Is it a Currency or an Investment Instrument?
Right now, the cryptocurrencies are both.
You can invest in them and wait for them to give returns.
You can also use them to buy stuff. Check out the below, these are the beginning. You can find more people accepting cryptocurrencies in the future.
Microsoft – Add money to MS account with BitCoin
KFC – Chicken with BitCoins
Buy a Pizza – With Crypto Coins
Use BitCoins on our dear WordPress.com and Dell too.
Use CoinMap to locate places that deal with BitCoins and you can also add your business to the Map so that people can locate you if you accept payments with BitCoins.
What are ICOs? What are ICO scams?
So what is an ICO – Initial Coin Offering? This is just another way for a company that is into the blockchain technology to create a white paper explaining the product that it intends to build and raise money. This is like a pre-sale where people trade their bitcoin or other cryptocurrencies to buy the ICO. The developers of the ICO would use this fund to complete developing and release their currency. Once the currency is into the market, the investors of the ICO will profit if the currency soars high. Sounds simple, but there are more scammers out there, who just promise a great product, raise a lot of money and then run away with it. That is when people lose a lot of money. They invested in something that was a fake promise and booomm!!
The Ethereum is one example of a successful ICO. It is noteworthy that the Ethereum guys raised 30,000+ Bitcoins. OneCoin is an example of a scam. Enigma is an example where investors lost money since their security was breached. It is said that the CEO didn’t enable 2FA for his account and that paved way for successful hacking attack. Even before the actual ICO launched, the hackers used the Enigma’s slack channels to lure investors and they took off that money!! Enigma has refunded it’s investors and has become more secure now. Read more about Engima here
NO RISK NO REWARD, but watch out and take CALCULATED RISKS, if you care about not losing your money!
EDIT – Budget Updates – The Indian government will take all measures to eliminate the use of crypto-assets in financing illegitimate activities. The government will also explore the use of blockchain technology for ushering in the digital economy.
It is interesting that the blockchain technology is to be considered. Start-ups and blockchain enthusiasts could be happy with this statement and start delving into developing POCs and apps!
Stay tuned for more intersting posts – Wiki on the block chain, Democracy on the Block chain, Smart contracts and the list goes on..