The cryptocurrency market is in full swing since the beginning of 2021. With the price of BTC soaring past $50.000, many are looking to buy bitcoins and take part in this financial revolution.
However, some are still wondering what the fuss is all about. This article will try to go over the main reasons why cryptocurrencies are important in today’s world. We will try to explain what lies behind their profit-making potential and how they can be a prospective asset for the future.
To begin, we need to go over the cryptocurrency that started it all – Bitcoin.
What is Bitcoin?
Bitcoin was the first cryptocurrency that was released way back in 2009. Its mysterious creator, Satoshi Nakamoto, remains anonymous to this day.
The original cryptocurrency was created with the goal to provide humanity with a global currency for the exchange of value on the internet. This digital peer-to-peer payment system showed the world that a currency can be created, without the need of any third parties for transactions or its issuance.
Instead, new coins would be created through a mathematical process called mining, with a limited supply of 21 million coins ever to be issued. All transactions are recorded on the blockchain, an immutable public ledger, where all transactions remain accessible and transparent for everyone.
Why are cryptocurrencies beneficial?
Thanks to their decentralized nature, cryptocurrencies offer numerous benefits that other assets don’t. For instance:
- No governing body – the decentralized nature doesn’t allow a central governing authority to control the network. This means that no one can shut down a blockchain, and as long validators verify transactions, it remains accessible to anyone.
- Fraud resistant – the decentralized ledger is distributed among thousands of computers over the internet. This makes it inherently resistant to change or fraud.
- Fast and cheap international transactions – because there are no 3rd parties involved in the process, the fees for international transfers are minimal and near-instant.
- Inclusive and permissionless – cryptocurrencies, are, for the most part, permissionless. Anyone with an internet connection is free to use their networks. This allows people in countries with poor banking networks and bad monetary policies to access a sound monetary network and participate in the internet economy.
How can you make money with cryptocurrencies?
Over the years, cryptocurrencies have provided numerous opportunities for investors to make profits. Let’s have a look at what the current options are.
We already mentioned mining in our introduction earlier. This is the process of minting new coins using powerful computers called mining rings. Furthermore, mining takes care of the transaction validation in proof of work blockchains such as Bitcoin.
In a nutshell, it consists of solving complex mathematical puzzles and receiving newly created cryptocurrencies for the effort. The process uses a lot of energy, and miners spend a valuable resource – electricity to mine new coins.
Staking is another consensus mechanism for validating transactions, which is applied to proof-of-stake blockchains. It’s a much more energy-efficient process, as users need to lock their coins to secure the network and validate transactions, instead of spending power to do so.
They are then rewarded with the transaction fees for each block they helped validate.
Lending and providing liquidity
A large number of financial products have become available over the years, where users can use their cryptocurrency to lend them to other users and gain interest.
They can also provide liquidity to decentralized exchanges and receive trading fees in return for the service they provide.
Of course, one of the best ways to make profits from cryptocurrencies is to trade them on different exchanges. Users can trade cryptocurrencies for each other or for FIAT money to make profits.
However, it’s also one of the most riskier ventures when investing in cryptocurrencies. Trading requires advanced technical analysis and capital management knowledge if you wish to be successful.
Moreso, due to their high volatility, cryptocurrencies can bring incredible profits, but also cause severe losses for the inexperienced trader.
Investing and “Hodling”
A more beginner-friendly tactic to making money with cryptocurrencies is to simply invest in them regularly. This works especially well with Bitcoin, as the original cryptocurrency has seen its value go one way on the long term – up.
For instance, a dollar-cost average strategy consists of buying a fixed amount of crypto at regular intervals. This way, investors can negate the short-term spikes in cryptocurrency prices and accumulate assets for long-term profits.
Starting out as a niche technology, cryptocurrencies have become widely accepted over the past decade. Bitcoin jumpstarted an entire industry, which has revolutionized the way modern finances work.
Furthermore, crypto provides numerous ways to make some passive income for investors. This makes them some of the most interesting assets to hedge against the economic instability of today.
With that said, if you plan on starting a crypto venture, make sure you stay up to date on the tax regulations regarding these assets in your country.