Cryptocurrencies are misunderstood by the general population. A lot of people now know about Bitcoin although remember it’s involvement in the criminal underworld and the dark web’s infamous silk road. Elon musk has brought Dogecoin to the centre of attention as of late but a little digging beneath the surface reveals it’s use case isn’t that great and it’s total supply isn’t capped.
A use case is the use of the coin or ‘token’. Bitcoin’s use case is a store of value and an anonymous transfer of liquidity. Bitcoin combines the benefits of storing gold without the hassle of actually storing kilos of gold in a safe place. The bitcoins can be stored safely in a digital wallet on your smartphone, computer or hard drive and can be transferred safely and quickly to other wallets using the internet.
Ethereum’s use case is more complex in that ‘smart contracts’ (instructions) can be written into the code of Ethereum. Decentralized applications can be created on the Ethereum Network. ERC20 Tokens are cryptocurrencies which run on the Ethereum network and each have their own use case. Axion for example is a ERC20 token, meaning it runs on top of the Ethereum network, it’s use case is that it is a CD (certificate of deposit); you time-lock axion tokens to generate returns on your money. The longer you lock the tokens up the higher your returns.
Binance has a use case similar to Ethereum but the fees for using the BINANCE network are currently a lot lower the the Ethereum network’s fees. Fees are paid to Miners. The people who use their computers to verify transactions and keep the network running using either PoW (proof of work) or PoS (proof of stake). Anyone can become an Ethereum miner, Bitcoin miner or any other network miner and miners range from regular people using home computers to companies with warehouses full of high powered computers. You are paid in accordance with the computational power you provide the network.
The price of a coin or ‘token’ is calculated similar to many other things we buy and sell. When people get into cryptocurrency to make money, the price of a coin takes up most of the attention and the factors which determine the price often get overlooked. I’m talking about supply and demand. How much you want a coin and how many coins there are determines the price we end up paying. The better the use case the more desirable the coin. The lower the number of coins the more desirable the coin. Polkadot and Cardano are two cryptocurrencies with really good use cases and similar Market Caps. But as of today one ADA (cardano) is worth $1.44 and one DOT (polkadot) is worth $42.76. Why? Because there are 45 billion ADA, and 1.07 billion DOT. Almost 44x more ADA in circulation. This is why Dot is valued almost 30x more than ADA.
Go to coingecko.com and take a look at the market cap chart. You’ll see a loose correlation between the circulating supply and the price of the coins. The less coins in circulation usually means a relatively more expensive coin.
As more coins are minted/mined (created) the value of each individual coin decreases. This is called inflation and some developer teams choose to combat this by burning (destroying) tokens, making them deflationary. Other coins such as Bitcoin have a predetermined fixed cap on the amount of coins which can be mined. For bitcoin this is 21 million and when the 21 millionth coin is mined no more will be produced. We are at roughly 89% of the total cap for bitcoin in circulation with 2 million more still to be mined.
The growth of Bitcoin’s price over the last 10 years has lead to speculation in other newer cryptocurrencies. This speculation and FOMO (fear of missing out) creates high levels of volatility with prices pumping to all time highs and dumping with crashes of 50+% regularly. Volatility means the risk goes up, big price fluctuations create chances for big gains and big losses. Both are regularly scheduled viewing in the world of cryptocurrency trading and gains of 1000% aren’t uncommon.
Stable coins combat this. Their price remains stable because it’s backed by real assets. USD Coin is backed 1:1 by the US Dollar. When a coin is bought a dollar is sold. When a coin is sold a dollar is bought. This keeps the price of the coin stable and it’s use case is that it is less volatile than traditional cryptocurrencies and provides a way of transforming cryptocurrency gains into fiat easily.
The more I learn about cryptocurrencies the more I realise this new frontier has a lot more going on than meets the eye. There are many people and teams trying to create a positive impact on the world; and they’re succeeding. Whether creating a viable, easily stored currency to citizens of countries struggling with inflation. It gives citizens a way of managing their own finances anonymously in countries lead by dictatorships and countries struggling with warring factions and untrustworthy governments. Bitcoin itself was famously created as a trust-less currency which cuts out the need for third party involvement and the regulations and commissions that often come with them.
There are also many charlatans with no more of a motive than making fast, easy money by conning people out of their hard earned or not so hard earned cash. ICOs (initial coin offerings) became infamous because anybody can produce a white paper, with a road map of plans for the project. A great use case and a vision to change the world for the better. Speculation creates FOMO and many of these ICOs raised decent amounts of capital, we’re talking millions, raised the price of the coin sometimes 1000% in the months after. Then it turns out the founders held over 50+% of the circulating supply and sold them for a hefty profit. Crashing the price of the coin and slipping off into the night anonymously and never to be seen again. Investors are then left holding the remaining coins until they eventually go to zero. This is very common and this should always be in the back of your mind with an un-established project.
Using a blockchain explorer such as blockchain.com ethplorer.io bscscan.com allows you to see the percentage of circulating supply of a coin held in individual wallets although it’s worth noting these are sometimes developer funds and institutional wallets no person has access to.
They say London was the place to live in 1800 and New York was the place to live in 1900. Is California the place to live in 2000? Maybe Tokyo or Hong Kong? Or is our modern day American Frontier, Wild West, online, in the world of crypto currencies?
