Understanding the basics of blockchain and crypto will help you invest more confidently and profitably.
By Billy Endres
With thousands of cryptocurrencies available to buy and sell on centralized and decentralized trading platforms, building a portfolio with confidence can be confusing and stressful.
But it doesn’t have to be.
The basis of any financial investment is simple and cryptos are no different.
Before investing in any asset, it is important to understand what you are buying, its value proposition and whether it has long-term and sustainable use.
Many investors lack understanding of crypto technology and terminology, which can harm their portfolio performance and investment confidence.
For example, do you know the difference between crypto and crypto? Coin and a token?
Many do not. Although this classification may seem arbitrary, it is a significant consideration.
Let’s break down some oft-overlooked crypto basics to help improve your investment portfolio and diversification strategies.
Cryptocurrencies or “crypto” has become an all-encompassing term for blockchain-based projects with tradable inventory. This is primarily due to Bitcoin’s original purpose: to act as a peer-to-peer digital payment currency, or “coin”.
However, the rapid evolution of decentralized technologies has seen the release of thousands of projects over the past decade, many of which have applications unrelated to digital payments or currency.
Some of the most notable use cases for crypto include:
- Network administration
- Oracle Solutions
- Decentralized storage
- Site and Exchange Application
As a word, “cryptocurrency” isn’t going anywhere. But its purpose has undoubtedly changed, and will continue to do so as new blockchain use cases develop and evolve.
Coins vs. Tokens
When discussing cryptos, you’ve probably heard of coins and tokens.
Although both coins and tokens are considered cryptos, these terms are often used interchangeably or incorrectly.
So, what’s the difference and why does it matter?
Coins. Coins are cryptos that belong to their blockchain. Among other things, investors can use them for transactions such as paying gas bills and receive additional coins as an incentive to secure the collateral through staking or mining.
Popular blockchain currencies include:
- BNB Smart Chain (BNB)
- Cardano (ADA)
- Ethereum (ETH)
- Polkadot (DOT)
- Polygon (MATIC)
Tokens. Decentralized programs built on these blockchains offer tokens rather than currencies for trading.
The possible use of tokens is limitless and is dictated only by the operation and development of the project. Common use cases for tokens include network governance and voting rights, trading or earning discounts, and access to exclusive platform features.
Popular blockchain tokens include:
- ApeCoin (APE)
- Filecoin (FIL)
- Trust Wallet Token (TWT)
- UNISWAP (UNI)
While every project has a use and intended purpose for its currency or token, it is important to understand what this use is and how it can affect the price of the asset.
Recognizing the opportunity
Many investors operate under the default strategy: buy Bitcoin and Ethereum during bear markets and altcoins during bull runs.
This strategy makes sense, given that Bitcoin and Ethereum are the largest cryptocurrencies by market cap and are less volatile than lower-cap altcoins. However, in some cases better bear market alternatives have proven.
Recently Market data The current bear cycle shows that exchange tokens are holding the lead, outperforming Bitcoin and Ethereum. This includes both centralized exchange tokens such as GateToken (GT) and KuCoin Token (KCS) and decentralized exchange (DEX) tokens such as Aave (AAVE) and Pancake Swap (CAKE).
The relatively positive performance of this niche is primarily due to the use of tokens in offering trade discounts and incentives in a never-sleeping market.
Other recent notable themes include DeFi Summer and the Layer-1/Layer-2 Blockchain Race.
Throughout the bull run of 2020 to 2021, many DeFi projects saw exponential growth and delivered +1,000% returns to early investors. Traders have taken advantage of the high yields offered by these platforms. As a result, the total value (TVL) in DeFi rose to more than $150 billion.
While this is very positive for DeFi, it has significantly affected Ethereum as the leading blockchain supporting DeFi protocols.
The number of decentralized applications (dApps) built on the Ethereum blockchain has caused network congestion, high gas prices, and slow transaction processing times, leading to the rise of smart contract-compatible Ethereum alternatives.
Traders chose to explore other blockchains such as Avalanche (AVAX), Kadena (KDA) and Near Protocol (NEAR) in an attempt to take advantage of the rising yield rates and drastically reduced fees, driving the prices of these coins higher.
Recognizing an opportunity at the right time is profitable in crypto and is usually not a difficult task.
Tools, incl Types of CoinMarketCap, DeFi TVL by DeFiLlama And Lunar CrushIt helps filter through the noise and helps you figure out what’s trending and why.
Find market movers and take advantage of what’s hot to diversify your portfolio at the right time – play-to-earn games, NFTs, layer-2 chains or any other crypto sub-niche.
The views and opinions expressed herein are those of the author and those of Nasdaq, Inc.