21 April, 2024



What Is a Cryptocurrency and How to Identify Crypto Gems

09 Sep, 2022

12 Dec, 2023

There has been a lot of talk about blockchain and cryptocurrency technology, and how these technologies are in the process of revolutionizing several industries across the globe. This article will take a look at the difference between the two technologies and take an in-depth look at what cryptocurrencies are.

What is a Blockchain?

A blockchain is a distributed record keeping system that is independent from a central authority or organization. Normally, a blockchain is referred to as decentralized, due to the fact that it is not maintained or owned by any central body. Instead, a blockchain relies on its community of transaction validators to maintain it.

These transaction validators ensure the integrity of the blockchain and make it very difficult for hackers to alter information that is stored on the blockchain. As a result, blockchain is considered to be an extremely secure framework for record keeping.

Generally, blockchains are used to transact on. Meaning, people transact with a digital form of value on the blockchain and the blockchain processes and records all of these transactions.

What is a Cryptocurrency?

Simply put, a cryptocurrency is the digital value that people on a blockchain network transact with. Each blockchain network currently in the market has a native cryptocurrency, which is a cryptocurrency that belongs to that specific blockchain network. For example, the most well-known blockchain network, Bitcoin, has its own cryptocurrency called bitcoin (BTC).

How does Cryptocurrency Work?

As mentioned at the beginning of this article, cryptocurrencies are built on top of blockchain networks. These blockchain networks address a problem that was faced by previous attempts at creating a purely digital currency, which is preventing people from making copies of their holdings and attempting to spend it twice.

Individual units of cryptocurrencies can either be referred to as coins or tokens, depending on what their respective use cases are. Some cryptocurrencies are intended to be used as units of exchange for goods and services, while others serve as stores of value. Some cryptocurrencies can even be used to participate in specific games and financial products.

How are Cryptocurrencies Created?

A common method for cryptocurrency creation is a process called mining. In fact, the cryptocurrency market leader, bitcoin, implements this process in its blockchain network.

Mining can be an energy-intensive process in which computers compete with other computers in the network to solve complex mathematical puzzles to verify the authenticity of all of the transactions on the network.

As a reward for their effort in solving the complex puzzle, the owner of the computers stands a chance of receiving newly created, or minted, cryptocurrency.

Not all blockchain networks employ mining as a cryptocurrency creation process in their operations. Other networks may opt to use a different method that has a significantly lighter impact on the environment.

Pros and Cons of Cryptocurrency

There are divided opinions on cryptocurrencies, as well as debates making the rounds as to whether or not the technology will have a future. Below are some of the main pros and cons for the technology.

Cryptocurrency Pros

People Believe in its Future Value

Cryptocurrency supporters see these digital currencies as the future of finance and technology. As such, these supporters are rushing in to purchase cryptocurrencies with the belief that these cryptocurrencies will become more valuable in the future.

Removes the Need for Central Banks

A number of cryptocurrency supporters like the fact that cryptocurrency technology removes the need for central banks from managing the money supply. This is largely due to the fact that these banks tend to reduce the value of money via inflation.

Banks the Unbanked

Cryptocurrencies are believed to be a promising foothold for communities that have been under-served by the traditional financial system.

No Central Points of Attack

Many argue that blockchain technology, the underlying technology of cryptocurrencies, offers a more secure financial framework than the current financial framework used globally. This is because a blockchain network is decentralized and has no central point of failure that can be exploited by hackers or cyber criminals.

Passive Income Opportunities

Some of the cryptocurrency projects that are in the market not only allow holders to benefit from the speculative rise in the coin’s price, but also allow holders to generate a passive income. The most common passive income opportunity is staking – the process of locking up tokens for a return on investment that is paid in cryptocurrency.

Cryptocurrency Cons

Untested Projects

Many of the projects in the market are untested. In addition, blockchain technology in general has not been able to gain wide adoption. As such, long-term investors may not see the returns that they had originally hoped for if the underlying idea behind cryptocurrency technology does not reach its potential.

Short-term Risks

Short-term investors have added risks to deal with as prices in the market tend to change rapidly. Although that means that many people have made money fairly quickly by buying in at the right time, many others have lost money by doing so just before a crypto crash.

Adding to the point that cryptocurrencies experience frequent value fluctuations, these wild changes in value may shadow the basic ideas behind the projects that cryptocurrencies were created to support. For example, people may be less likely to use BTC as a payment system if they are not sure what its value will be worth the next day.

Environmental Impact

The environmental impact of cryptocurrencies such as Bitcoin that use the mining protocol cannot be ignored. A comparison by the University of Cambridge, for instance, showed that worldwide Bitcoin mining consumes more than twice as much energy as all U.S. residential lighting.

Regulation Still Needs to Catch Up

Governments from across the globe have not yet fully established how to handle and regulate cryptocurrencies. Therefore, regulatory changes and crackdowns have the potential to affect the market in unpredictable ways.

A Transformational Technology?

The underlying blockchain technology that powers cryptocurrencies has been praised as a potential game-changer for a large number of industries. These industries range from shipping and supply chains to banking and healthcare.

Digital ledgers are able to facilitate new types of economic activity that were not possible before since they remove intermediaries and trusted actors from computer networks.

This potential makes for an attractive investment to people who believe that there is a future for cryptocurrencies. For anyone that believes in this promise, investing in cryptocurrencies represents a way to earn attractive returns while still supporting the future of the technology.

A Stable, Censorship-Resistant Store of Value

Another common reason to invest in cryptocurrency is the desire for a reliable, long-term store of value. Unlike fiat money, most cryptocurrencies have a limited supply, capped by mathematical algorithms.

This makes it impossible for any political body or government agency to dilute their value through inflation. Moreover, due to the cryptographic nature of cryptocurrencies, it is impossible for a government body to tax or confiscate tokens without the cooperation of the owner.

This property makes cryptocurrency attractive to people who are worried about hyperinflationary events, bank failures, or other disaster scenarios. Bitcoin in particular has attracted attention due to its deflationary and censorship-resistant properties, leading proponents to describe it as “digital gold.”

Potential or Speculation?

While many supporters believe that digital currencies could become part of daily life, the cryptocurrency market is currently dominated by speculative trading. Studies of blockchain activity show that exchange trades remain the most prevalent use for cryptocurrencies—and account for far more economic activity than ordinary trades and purchases.

Cryptocurrency skeptics, including Warren Buffett, Bill Gates, and JPMorgan CEO Jamie Dimon have all warned of a potential crypto bubble.

Cryptocurrencies are not unique in being subject to speculative manias and irrational exuberance. Other assets such as cannabis stocks, technology stocks, precious metals, and even houses have also been subject to market bubbles, which ended badly for many investors.

As a new technology, some speculative behavior is to be expected in the cryptocurrency space, especially as blockchain technology matures. However, new investors should be wary of falling into psychological traps such as herd instinct, Fear of Missing Out, or the Greater Fool Fallacy, which can make all the difference between a calculated risk and a foolish one.

What Exactly Are Cryptocurrency Gems?

Cryptocurrency gems are cryptocurrency coins and tokens that are undervalued and not really in the public eye, with the potential to deliver massive gains. The price of these cryptocurrency gems is often very low, like below one U.S. cent per coin.

These coins also have a smaller market capitalization, also known as a market cap, and require a lot less participation and volume from investors in the market to increase their value by 100x. So how exactly do you spot these 100x opportunities? Let’s take a look,

What To Look For

There are quite a few criteria that you can use to determine whether or not the reward of investing in a cryptocurrency outweighs the risk of doing so. A coin does not need to have all of them, but the more of the boxes a project ticks, the better.

This also increases the chances of the project becoming a 100x cryptocurrency gem. Let’s take a look at some of the most important criteria that can be used to identify cryptocurrency gems.

The Project’s Team

The first thing that you want to get as much information on is the team behind the project. Try to find out if the team has previously worked on other projects in the market and how capable they are of delivering on the promises they’ve made to their community.

It will be good to also see how active the community are on social media as well as how open they are to community feedback and if they actually act based on the feedback. Lastly, see if you can find out who the backers of the project are.

Most venture capital firms provide information of cryptocurrency projects they have backed in the past and how well those projects have performed.

The Price of the Coin

Looking at the price of a cryptocurrency is also important when trying to determine if a coin or token is a cryptocurrency gem. By looking at the price of a coin, combined with its total circulating supply, you will be able to calculate the upside potential of the coin or token.

By combining the price of the coin with its circulating supply, you can work out its current market cap, as well as estimate what the price of the coin may reach when looking at potential forecasts for the project’s market cap. When forecasting the market cap, it’s important not to be unrealistic of what the project’s market cap might reach.

A good rule of thumb is to look at the market cap of each of the projects in the cryptocurrency market, and then divide it by the number of coins in the total supply of the coin that you’re trying to calculate the future price of. Although there are multiple factors that will determine if the project can reach a specific market cap, using the market caps of other coins and dividing them by the total supply of a project will give you a more realistic target of what the price per coin will be.

Analyze the Smart Contract

Many cryptocurrency coins are built on top of blockchains like Ethereum and Binance Smart Chain using smart contracts. These smart contracts cannot be changed once deployed, and set all of the functions and parameters of the coin.

Looking at the smart contract code, you will be able to see if the owner is able to mint new tokens, how many tokens he or she holds, and how the coins were distributed. You will also be able to identify any potential exploits due to bugs in the smart contract.

The Number of Holders

You can keep track of how many wallets are holding a specific coin or token using block explorers such as Etherscan and BscScan. Ideally, you’d want the number of wallets holding the cryptocurrency to be continuously growing, and wouldn’t want all of the coins stored in one wallet.

Now that we have taken a look at what to look for to identify cryptocurrency gems, let’s take a look at what to look out for so that you can avoid falling victim to scams.

Red Flags to Look Out For in Cryptocurrency Gems

Over Promising

A good rule to remember is that if it’s too good to be true, then it probably is. If the project’s team is saying that the price of their coin will pump 100x in a week, or that you will get a 10% daily return on your investment, do not invest in the coin! In these situations, the teams are just trying to pump their coin so that they can increase the value of their own holdings before dumping their holding in the market for a profit.

Possible Exploits in the Code

Reading a smart contract’s code and understanding what is going on in the source code is best left to the more technically-inclined community members. Many people just rely on the fact that someone else did the due diligence and the smart contract code is safe.

Some projects may also increase the legitimacy of their coin by hiring firms like Certik and Hacken to audit the project’s smart contract and then publish those results. This gives a higher degree of reassurance that the smart contract can’t be exploited

Bad Tokenomics

Tokenomics is a term used to describe the economics and business model of a cryptocurrency. The tokenomics will shed light on details such as how the coin will be distributed, its use cases, the vesting schedule, the number of coins in circulation, and the total supply.

Usually, coins with bad tokenomics have founders holding a large portion of the coins, or initial backers and cryptocurrency investors who bought coins at a huge discount and are just waiting for the perfect opportunity to dump their coins for a decent profit.

Finding Cryptocurrency Gems

There are a few ways to search for cryptocurrency gems. One of the best ways is to use price tracking websites like Coinmarketcap and Coingecko. These websites list almost all of the tokens in the market that have at least some trading volume and are a great way to find undervalued coins.

You can also utilize group messaging apps like Telegram and Discord. These apps are used a lot in the cryptocurrency space and traders often create their own groups to discuss new coins, send signals, and search for gems together. Teams also create groups to communicate and make announcements to their community more easily.

If you really want to jump on a promising project early then take a look at decentralized exchanges for newly listed coins. Projects will usually list on decentralized exchanges first before getting listed on centralized exchanges like Coinbase and Binance because it is a lot easier to get listed on a decentralized exchange.

To Recap

Cryptocurrencies are digital mediums of value that can be transacted with on distributed ledgers, or blockchain networks. Each blockchain network currently in the market has a native cryptocurrency, which is a cryptocurrency that belongs to that specific blockchain network.

Individual units of cryptocurrencies can either be referred to as coins or tokens, depending on what their respective use cases are. Some cryptocurrencies are intended to be used as units of exchange for goods and services, while others serve as stores of value.

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