Cryptos (Bitcoin, Ripple, Ethereum, Litecoin) have had a roller coaster ride in the last few weeks. The price of most cryptos have dropped significantly. However, if you are planning to invest in crypto for its long-term potential and not just for a short-term windfall, it is important to understand the various factors that contribute to the current valuation of cryptocurrencies.
With this in mind, I will be exploring crypto exchange rates from a broad perspective. The first thing to understand is that purchasing crypto does not mean that you own part of these digital assets. Instead, your purchase is just like getting a loan from a broker. You exchange your fiat currency (US dollars or Australian dollars) for crypto coins.
The second thing to understand is that there are three main factors that drive cryptocurrency prices: demand and supply, volatility and sentiment. Demand comes from two sources: buyers wanting better returns on their investments and fear of missing out on the next big thing.
Supply is driven by developer activity and miner activity. Developers are building new projects on top of existing cryptos; miners are creating new cryptos by solving mathematical problems using “hash” algorithms and mining them to create blocks of blockchain data.
Supply can also be affected by government regulation
Crypto prices are like gold prices or stock markets. They aren’t like anything else. You can’t make money just by speculating in crypto, and you can’t get rich by investing in crypto. But if you understand the basics of crypto, it is possible to earn money from it if you are willing to learn how.
Here’s a quick guide to what the three main ways of making money with crypto actually are.
Dumping: If you don’t know what this means, then this blog is not for you. To understand why dumping exists, you have to start thinking about how different sorts of currencies compete with each other. The most important thing to know about any exchange rate is how many people want it and how many people have it. If there are millions of people who want some particular crypto and only a few who have it, then the price will go up.
This isn’t quite right: there are other things that affect the price besides demand, including supply and speculation. But demand is the most important thing, so when we talk about “dumping” we mean dumping on demand (to make someone else want it more).
There is a whole industry devoted to giving people basic advice about choosing the best cryto exchange to invest in. But it’s hard to know what they’re talking about. What are the best “exchanges” for making crytos? The prices at which you buy and sell them? The rates of exchange between them?
The problem with “best” is that you can’t measure it, and even if you could, it’s not something anyone needs to be told. Cryptos have no value unless someone thinks they do. A good way of measuring that is by asking people who are using crytos what they think their value will be. That is how prices are set.
Crypto currencies are a great way to make money. If you have the right knowledge you can see huge returns in the short term. That’s what I’ve done. After getting into crypto investing, it became clear that there is no sure-fire way to do this. Sure, you can use a strategy and make money, but if that strategy changes in the future, you’ll be out of luck. People will be buying into whatever your strategy was yesterday. This is why I lead with this analogy:
If you are a teacher and you want to get rich, it doesn’t matter what your strategy is; you’ll get fired for incompetence. Likewise if you are trying to build an investment strategy using crypto currencies: the market will change tomorrow, and your money will be gone.
So I don’t advise anyone to try this at home because there is no guarantee of success in doing so. However, I do believe that cryptocurrencies are going to be big in the future. To learn more about cryptos and how they work, check out my blog: http://bitcoinsalmanac.blogspot.com/
These days, many people are interested in Bitcoin, the first decentralized cryptocurrency. But if you’re thinking of buying some, or setting up a trust to buy it for children in future, it’s probably worth understanding the basics first.
Or maybe even two or three basics. The general idea is that a cryptocurrency is money that can be moved around in the same way as any other kind of money. It means that instead of exchanging things for money at a bank or a payment system like PayPal, you could trade them instead with anyone else using the same system — so you could use Bitcoin to pay your friend for lunch but still keep some for yourself.
But there is more to it than that. Cryptocurrencies also have some characteristics that make them different from ordinary money: they have no physical form (although they do have digital representations), and they involve cryptography (the science of secret codes). So when you move it around, it’s not really moving anything physical; and when you transfer ownership of it, you’re not really transferring possessions. Anybody who thinks he can put those things together in his mind without getting the wrong idea might like to read this article on why Bitcoins are not actually currency.
The trouble with cryptocurrencies is not that they are in some sense “fake”, but rather that they are in some sense “real”. Some people think of cryptocurrencies as a kind of money, and if you think of money as a debt, then cryptocurrency is indeed fake. But if money is instead an IOU, then crypto currencies are at least as real as government-issued fiat currencies.
Cryptocurrencies have been described variously as a bubble, a pyramid scheme or just a fad. And yet the price of Bitcoin has risen by over 1,000% since the beginning of 2017, and prices for other major cryptos have risen even more. In fact it has become difficult to ignore them.
When I was a kid, my dad used to take me to see the Red Sox play in Boston. He had season tickets, and he’d take me to the games even when we couldn’t afford the price of admission.
I don’t remember if it was that year or the next that we went back to Fenway Park after a snowstorm had closed roads and gotten us on a bus from out of town. When we got into the stadium, I asked him about the expensive price of tickets for us. “Oh,” he said, “those are for people who can really afford them.”
I remember thinking, “What’s so special about those tickets?”
He thought a minute and then said, “If you pay more than you have to, you get more than you pay for.”