By Lavanga Abeyrathne
Blockchain technology, cryptocurrency, and the decentralised system are nothing new to those of us dabbling in them. However, despite the time these technologies have been key players in the global market, they mark the time when technology truly surpassed the understanding of the casual browser.
Much like the stock market, at a typical gathering, you will find cryptocurrency fanatics – those who are content to remain on the outskirts – and those who have no idea about it. However, now and then, the market booms will put crypto into the spotlight, which is when even the latter categories consider serious investments.
How do you invest in cryptocurrencies, though? What are the rules, techniques, and the process? 230 Interactive Co-Founder and author of bitcoin.lk Sanjay Mendis discussed the same in a recent online forum named “Stepping into the World of Cryptocurrencies”.
“If you do not know what you’re doing, it’s very easy to lose a lot of money to crypto,” Mendis started with a cautionary word. “It is not the crypto’s fault, but rather the people’s, for not doing their due diligence.”
He said that for a technology that has an ambiguous founder, no company, no employees, no marketing, and no physical space, and initially created purely for payments, bitcoin is challenging the global financial system. “It is just an open-source system that you can download from github, get a mining machine, and connect. Simple as that.”
Similarly, ethereum, which came after that, introduced the concept of smart contracts, further revolutionising how transactions are viewed.
But why is this an investment?
Mendis explained that blockchain technology has transformed the internet to what we call Internet 3.0, or the “transactional internet”, and that many people who live in the US are already under the common assumption that blockchain is Stock Market 2.0. In fact, Canada recently launched a crypto ETF system.
Regarding bitcoin, major investors have now started jumping on the bandwagon. Big names like Tesla, JP Morgan, Paypal, and Wall Street started investing in blockchain. This immediately increased the demand for bitcoin – bitcoin isn’t infinite, and Paypal and Stripe are already buying every single one of the 650 bitcoins mined daily.
Locally, even though banks only allow P2P trading and therefore limited accessibility, the P2P bitcoin trading platform Paxful saw a 730% rise in crypto trading, and it’s estimated that during 2020, over $ 5 million was traded off the record as crypto trades.
“Cryptocurrency is dominated by Asia, not the West,” Mendis noted. Of the total hash rate – the mining power needed to run bitcoin – 65% is from China, while the US only has a meager 7%. Surprisingly, in South Asia, Vietnam is a crypto leader, with most other countries also chipping in a fair amount.
High and low tides of Bitcoin
Right now, bitcoin is roughly valued at $ 33,000. However, projections place bitcoin value at $ 1 million by 2026, in just five years. It’s not all smooth sailing, Mendis pointed out, noting that the projections account for the extreme volatility of the bitcoin market.
“It is volatile. Any financial instrument is volatile. Bitcoin’s volatility happens with their halving,” he explained. Halving is an event that takes place roughly every four years (to be precise, every 210,000 blocks) by bitcoin. What happens in this event is that in order to sustain the bitcoin supply longer, the amount of bitcoin given as mining rewards to all the miners is cut down by 50%.
For example, in the four years from 2016 to 2020, 12.50 bitcoins were released per one block. After the recent “halving” in 2020, only 6.25 bitcoins are now released per block. Obviously, as the rate decreases, the demand, and thus the price, skyrockets before eventually settling down, accounting for the massive fluctuations in the market.
In other words, the early miner gets the bitcoin.
Altcoins and tokens
Bitcoin, as the father of all the blockchain technology systems, is a league of its own. Alternative cryptocurrency coins are also called altcoins or simply “coins”. They’re often used interchangeably. Altcoins simply refers to coins that are an alternative to bitcoin.
The majority of altcoins are a variant (fork) of bitcoin, built using bitcoin’s open-source, original protocol with changes to its underlying codes, therefore conceiving an entirely new coin with a different set of features. Others have created their own blockchain and protocol that supports their native currency.
Tokens are a representation of a particular asset or utility that usually resides on top of another blockchain. Tokens can represent basically any assets that are tradable, from commodities to loyalty points. Tokens are created and distributed to the public through an initial coin offering (ICO), similar to an initial public offering (IPO) for stocks.
Keeping up with trends
Crypto investment trends follow a fixed pattern, Mendis said. “When bitcoin prices surge and become stagnant, people invest in altcoins,” he explained, adding that usually, it would go first to ethereum and then other altcoins as well. “With all this, you reach large caps, and then into alt season, where all the ‘sh*t coins’, so to speak, are invested upon, and it reaches exponential growth.”
At the moment, the market is stale because bitcoin is struggling. However, with the usual patterns, this is also the time when people would invest in bitcoin again, Mendis shared. With the performance struggling, more and more people would look to take advantage of it, and bide their time for the eventual rise again. “This is the market fluctuation explained in a nutshell,” he said.
Choose your wallet
A cryptocurrency “wallet” is a collection of private keys, acting as digital addresses, used to store cryptocurrency or move it from one wallet to another. In this way, it is functionally similar to a bank account. Unlike a bank account, wallets are not tied to the user’s personal information in any way. There are three kinds of wallets for crypto investors.
(i) Hot wallets are wallets which are connected to an exchange. They are especially beneficial to those who regularly engage in a lot of transactions with cryptocurrencies. However, because they are tied to a public network, any security flaw in the network can mean significant vulnerability to the user’s wallet.
(ii) Warm wallets are very similar to hot wallets. They differ in two major ways: They tend to be based on downloadable software or apps instead of a web-based service like an exchange, and they rely on 12-digit passcodes or PIN numbers for security and identity verification, whereas hot wallets rely on user-created passwords and asking the user to verify personal information.
(iii) Cold wallets are not connected to a network, effectively cutting them off from potential hackers. A cold wallet can be stored on a USB flash drive, embedded in a mobile device – even written on a paper ledger.
The primary investment strategy among the bitcoin community is a typo, Mendis shared. “HODL”, which is “hold” misspelled, has since become an acronym for “hold on to dear life”. It essentially means buy your assets and hold on to it long term. It is a long-term accumulation strategy.
Savings on crypto is much more rewarding than typical banks, he noted, with passive income coming between 7-10% of US dollar rates. Trading, of course, works pretty similar to stock markets. Sell when it’s high, buy when it’s low.
“If you’re into crypto trading, you should ideally have an approach of all three methods. Save something for a rainy day, put 10-15% into savings, and trade the rest of it,” he noted.
As a final note, he pointed out that this is not a get-rich-quick project. “Invest for the long term. At least five-year cycles. Don’t think of making money tomorrow.”