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What is cryptocurrency?

What is cryptocurrency? That's a good question to which we cannot give a short answer. Many people think of digital money when they think of Crypto currency. This is partly true, but partly not. If you have not previously immersed yourself in the workings of money, then we will change your perception of money and value enormously.

What is value and scarcity and how are the two related?

Value is an expression for something that people value. But why do people value something? This is because a large group of people decide that something is valuable. This could be anything. For example, reference is often made to the tulip mania of 1634.

What happened during the tulip mania?

During the golden age, the then newly introduced tulip bulbs were sold for a value of 10x the annual salary of an experienced craftsman. In this period you could buy a canal house in exchange for 1 tulip bulb. This came to an abrupt end in 1637 by

Why choose Bitterbalpool?

  • Earn 5% return on your Cardano risk-free.
  • Help beat poverty in the Netherlands, we donate 25% of our own pool rewards to the Dutch food bank.
  • Stakepool with Dutch-speaking support.
  • We invest in the further adoption of Cardano in the Netherlands by providing clear information about blockchain and crypto.
  • Professional and reliable dedicated servers spread over multiple locations in the world. Read more about our servers

Different types of cryptocurrencies and their uses

A starting crypto investor will not be immediately familiar with the differences between cryptocurrencies. That is why we are happy to explain it to you so that you know what you are doing. Many reputable crypto investors are not aware of this information. Now that you have learned something about what blockchain is, it is good to delve into what types of cryptocurrencies exist.

Many people will only know the terms 'Bitcoin' and 'Altcoins'. Altcoins means: Everything that is not Bitcoin. This subdivision is becoming less and less relevant as more and more investors choose to invest in other currencies instead of Bitcoin.

Store of value coins

To start with the most famous: Bitcoin. Bitcoin is a store of value. This coin mainly focuses on realizing scarcity and is designed in a way that this scarcity is supported in all facets. Bitcoin is very difficult to mine (Proof of stake) and takes a lot of energy to produce. Bitcoin is therefore a good way to 'store value' and is resistant to inflation.

In addition, there is a limited amount of Bitcoin with a low amount of 21 million. There will never be more Bitcoin on the market. Besides the fact that this coin is difficult to produce (mine), it will also become increasingly difficult. Every 4 years, the rewards for the miners halve, so that the supply of 'new Bitcoin' becomes smaller and smaller.

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Bitcoin has a 4-year cycle, which is related to the halving of the reward for the miners. This principle is called 'the halving'. In general, we have a bull market about half a year after the last halving. This is further explained in the next section.

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The value of Bitcoin is therefore mainly determined by the demand for the currency in combination with the increasing scarcity.

Layer one protocols

We call the next type of coins the layer one protocols or in Dutch. 'The base layer'. This brings us directly to the Altcoins. Most Altcoins focus more on the applicability and functionality of the blockchain in our daily lives instead of focusing only on scarcity and value storage.

A layer one protocol is therefore a basic layer for building other applications. This involves realizing a programmable base layer. The best-known example of such a base layer is Ethereum. This is where smart contracts come into play again. These smart contracts help to link other external blockchains to this base layer. The base layer is considered the most decentralized point where transactions can be stored.

Layer one protocols therefore focus on further decentralizing our world and laying a foundation for others to realize this. What type of blockchains can then be applied further differs enormously. In addition to decentralization, these Layer one protocols should also focus on efficient transactions.

The last part of the Layer one is that a layer one should focus on keeping the energy consumption of the blockchain as low as possible. A layer one can choose which consensus method is used (Proof of work / Proof of stake).

On the one hand, the value of a Layer one protocol is determined by its scarcity. Almost every coin has a fixed amount of coins that can be generated (Same as Bitcoin). In addition, the value of a Layer one protocol is also determined by the Network value of the blockchain. How many other dapps (decentralized apps) are currently active on the blockchain and how many users are active using these dapps.

Some examples of Layer one blockchains are for example:

  • Ethereum
  • Cardano
  • Solarium
  • Polkadot

These blockchains differ from each other in several aspects and all excel in different areas. For example, at the time of writing, Ethereum is the blockchain with the most working dapps and Cardano is the blockchain that is most decentralized based on Proof of Stake.

Layer two protocols

A Layer two protocol is therefore a separate blockchain that runs on the layer one. The purpose of a layer two blockchain is to combine the transactions on the layer one and thereby speed up with less costs. Mainly Ethereum has a number of layer two protocols. This is because Ethereum is a somewhat slow network. Because performing transactions on Ethereum is very expensive, an external blockchain is used to bundle transactions and then attribute them to the base layer.

A disadvantage of this is that this can be at the expense of the decentralization of the blockchain because many of the transactions are not placed live on the blockchain. next to and

Other examples of applications built on the base layer are actually endless. We'll explain some of these common uses below.

CHALLENGE

DEFI stands for Decentralized Finance and is perhaps the largest market in crypto at the moment. You can add everything that currently has to do with finance, but in a decentralized way. So not powered by any company or person. Below we will give some examples of decentralized applications

Decentralized Exchanges

In fact, everyone who starts with crypto buys on a central exchange. Here you deposit euros into an account after which you can use it to buy a crypto currency such as Bitcoin or Cardano. However, more and more people are using a decentralized exchange instead of a central exchange.

On a decentralized exchange there is no permanent entity that monitors trading on the exchange. There are a number of advantages and disadvantages to this. For example, an advantage is that an exchange is always vulnerable to hacks, for example, because it is centrally arranged. Another advantage is that a decentralized exchange cannot be censored by, for example, governments. A disadvantage of a decentralized exchange is that the moment something goes wrong in the transaction, there is no central party that can be held accountable. Another disadvantage is that the liquidity (amount on the exchange) is often less than on a centralized exchange.

More and more people are choosing to trade crypto on a decentralized exchange instead of a centralized exchange. Active traders, who trade crypto for fiat money such as the euro and the dollar, then choose to convert it into stablecoin.

Stablecoins

A stablecoin is a coin that may or may not algorithmically track the value of another currency. For example, most stablecoins track the value of the US dollar. An advantage of this is that you do not have to convert the money into a 'real' US Dollar or euro, but can convert it into a synthetic one.

As mentioned above, a Stablecoin can be algorithmic or non-algorithmic. A non-algorithmic stablecoin, it is managed by a central party that ensures that the value issued in USD is represented by other assets. So it works, as it were, the same as how a bank used to work. However, with these kinds of parties, you have to keep faith in this central party. The best-known example of this is, for example, Tether (USDT) and USDC. There is currently a lot of criticism from governments towards these kinds of parties.

An algorithmic stablecoin

An algorithmic stablecoin has no assets that represent the value of the coin. How does this coin keep its value will be the question that comes to mind. An algorithmic stablecoin operates through a smart contract that manages the supply and demand of this coin. This coin uses a so-called 'Oracle'. This ensures that the current value of the USD is included in a smart contract. The biggest difference between an algorithmic stablecoin and a non-algorithmic stablecoin is that with an algorithmic stablecoin there is no central party that controls the stablecoin.

Some algorithmic stablecoins operate using a reserve asset. So every time $1 needs to be added to the coin's supply, $1 is destroyed from the reserve asset. The best-known examples of this are UST(Terra Luna) and in the near future DJED (COTI)

Oracles

As mentioned briefly above, there are also Oracle tokens. An Oracle token is a token that can translate data from the 'real world' into the blockchain. There are many different types of data that are used for this via Oracles, such as temperature, prices, but also other data such as the number of people on a bus.

There is immediately a problem for which there is no solution yet within the world of Blockchain. When loading data from the real world, there is a risk that a centralized party will make a mistake when entering the data. There are currently many developments within this issue about how this can be solved in a decentralized manner. The most well-known Oracle protocols currently are, for example, Chainlink and Band

Borrowling/Lending

In addition to the decentralized exchanges, there are currently a huge number of loans and lending blockchains that regulate this in a decentralized way. This type of blockchain works in a decentralized way, allowing owners to borrow and lend stablecoin without the involvement of an external party. This principle is therefore algorithmically controlled with interest.

Payment

Before reading all this information, you may have thought that blockchain was only for carrying out payment transactions. I hope this information has helped you to see that this is not the case. Nevertheless, payment remains an important part of blockchain technology.

However, payment can be viewed very broadly. Thus, these tokens are not only intended for the exchange of value between two different parties, but can also be used to automate existing payment options with almost no costs.

Examples of coins that revolve around payment

  • COTI
  • Alchemy pay
  • AMP

real fi

RealFi is a trend that is currently still in its infancy, but in which many developments can certainly be expected in the near future. Cardano is the blockchain that is currently investing heavily in this and for a reason.

RealFi combines the new possibilities within DeFi with a digital ID. For example, when someone currently takes out a loan within a DeFi protocol, this person has to make very high deposits to be able to take out a loan. These down payments can be up to 100% of the loan or more. This is because when taking out a loan there is currently no insight into the payment history of this person, as the bank currently does.

RealFi aims to change this. When people use a digital ID, such as from Atala PRISM, people can anonymously link things to their digital ID. The moment this person wants to take out a loan and uses a digital ID, it is possible to use lower interest rates and a lower down payment for this loan. This is because the risk for the lending party is much lower in this way.

Gaming/NFT/Metaverse

The following three categories of coins have some overlap in our opinion. However, we will briefly explain them one by one.

gaming coins

It is clear that gaming has become an integral part of many people's lives. Nowadays, many crypto games are also released under the name of play to earn. By playing these games you receive a reward in the form of tokens with which you can, for example, buy NFTs in the marketplace in the game.

NFT's

A new introduction that cannot be named inextricably without the other two tokens are NFTs. NFT stands for Non Fungible Token. We will explain NFTs further in another article. An NFT can be anything from a (digital) artwork to a shoe. Everything can be released as an NFT.

As can be read with the gaming coins, NFTs are also widely used in gaming. The idea of ​​this is that items within a game are unique and can be traded and even traded outside of the game. It may even be possible to take an NFT to another game. Think, for example, of a special hat of your unique character in the game. Here we can also directly link to the next category.

Metaverse Tokens

Realizing a digital world where goods can be exchanged in a decentralized way. As described above, you buy a digital hat in one game and take it with you to another game or world. In addition, these two games are forbidden with each other so that you can walk freely from one world to another.

That, in short, is an example of what the Metaverse could look like. The Metaverse is the technological development that many companies, including Facebook (now called Meta) are investing heavily in. Developing a digital world in which we can all work, learn and play.

Metaverse blockchain projects aim to set up a Metaverse decentrally with no central party owning it. Gaming and NFT will therefore also play an enormous role in this. The metaverse will be discussed separately in another separate article.

memecoins

We deliberately saved this category as last because we do not think that these types of coins actually support it. Meme coins or community coins are coins that have no other purpose than to increase the price of this coin. The much-discussed pump and dumping practices often occur here.

We do not recommend investing in this type of coins. Never forget that for every dollar made in profit, someone loses a dollar. Often, behind the scenes, agreements have been made between traders about speculating on these types of coins, so that you often lose money quickly. Examples of Memecoins are: Dogecoin, Shiba Inu and Floki.

Cryptocurrency and Volatility

Over the years, the image of cryptocurrencies has been that it is a hugely volatile market. By (great) volatility we mean that the prices of a currency can rise and fall enormously within a short period of time.

This volatility can therefore be explained by the fact that crypto is a new market and it is still difficult to predict what the value of a coin may do in the future. There is no doubt that many people see the potential in cryptocurrencies. However, it remains to be seen how and when global adoption will come.

In recent years we have already seen that volatility, especially in the large cryptocurrencies, is already decreasing compared to a few years ago. The percentage of investors speculating in these markets is declining, giving way to larger investors and companies that see crypto as an investment in the future and as a protection against rising inflation.

If you want to know more about decentralization: read here…. Blog decentralization

How do I buy crypto?

When you understand all the information about blockchain and cryptocurrencies and have decided what kind of project you want to invest in, then it is time to start buying your crypto coins. Buying crypto coins can be done very easily through the following markets.

How do you store crypto in a secure way?

After you buy crypto. Is it important to think about how you want to store crypto? There are different ways to store crypto. Many investors choose to leave crypto on a market. You may wonder if this is the safest way.

If an exchange is hacked or cannot meet its obligations, your crypto is at risk. The moment an exchange is in danger, this can eventually lead to a 'bank run'. As a result, the exchange may no longer be able to meet its obligations.

There are many scenarios imaginable where your crypto on the exchange could be at risk. That is why we advise you to get your crypto from the exchange and store it in an offline wallet. You then take your secret key offline, as it were, so that no one can access your crypto.

The best way to protect yourself against this is to purchase a hardware wallet. Some of the best and most well-known hardware wallets are for example the Ledger or the Trezor. You can then throw this hardware wallet in a safe at home. This way no one will ever be able to access your crypto. Even if your own computer is hacked, no one will be able to send your crypto.

Why choose Bitterbalpool?

  • Earn 5% return on your Cardano risk-free.
  • Help beat poverty in the Netherlands, we donate 25% of our own pool rewards to the Dutch food bank.
  • Stakepool with Dutch-speaking support.
  • We invest in the further adoption of Cardano in the Netherlands by providing clear information about blockchain and crypto.
  • Professional and reliable dedicated servers spread over multiple locations in the world. Read more about our servers

Earn money with crypto

Many investors do not get into crypto for the good story or potential, but choose to invest in crypto to earn euros or dollars. If you want to make money with crypto to start trading, we have written a separate blog with some tips that you can start with. Watch out. If you are not an experienced trader, do not start trading. In that case, it is better to buy and hold your crypto.

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