Introduction to Cryptocurrency

What is Cryptocurrency?

Cryptocurrency is a digital asset that can be bought, sold, traded and, in some cases, used as a payment for goods. The value of cryptocurrency is derived from a supply/demand base scenario. Cryptocurrencies are volatile and cannot be priced accurately due to potentially large swings in value.

What’s the Point of Cryptocurrency?

Cryptocurrencies aim to fix the issues with traditional currency. They give the wallet owner control of their funds as the custodian. The goal is to solve real world issues. Each crypto asset is developed to improve on its predecessor. Traditional currencies have a central authority that handles the funds, whereas cryptocurrency is decentralised and operates on a distributed ledger. The ledger is the heart of crypto (blockchain). The blockchain ensures that cryptocurrency cannot be forged or double spent. It does this by ensuring that each transaction is recorded in blocks; each block is attached to the block prior, ensuring the transaction cannot be manipulated. Once a block is mined, it is added to the public ledger, where anyone can see the transactions that have taken place. Various secure methods confirm the addition of the block to the chain, the original being Proof of Work consensus, which is used on Bitcoin.

Since the advent of Bitcoin, cryptocurrency has blossomed into a great variety of different financial products. Many other cryptocurrency networks exist, such as Ethereum, Solana, Avalanche, Harmony, Polygon, Elrond, etc. Each of these networks has spawned its own decentralised exchanges, such as Uniswap and Pancake Swap. Centralised exchanges like Crypto.com and Binance have released their own cryptocurrencies too. There are many varieties of interact-to-earn coins that pay users for playing or learning on their platform. There are gambling-based cryptocurrencies and gaming-based cryptocurrencies. NFT platforms have sprung up, offering hundreds of thousands of different NFTs for sale. Users can use the bank, get debit cards, and even pay directly with cryptocurrency. There are many uses for cryptocurrency now that it is joining the mainstream.

How Many Cryptocurrencies Are There?

There are many cryptocurrencies in existence. Cryptocurrency projects can pop up and be available to purchase on the many decentralised and centralised exchanges. Currently, Bitcoin is the top cryptocurrency, followed by Ethereum. This may change in the future as each different cryptocurrency fights for dominance. Crypto markets can be viewed via various sites such as Coinmarketcap and Coingecko. Here, investors/traders can find out the prices, market cap and rank, amongst other things, of most cryptocurrencies out there. As of 18 October 2021 there were 9822 different crypto tokens listed on Coingecko; on 12th January 2022, there were 12404 - an increase of over 20% in 3 months, which shows how fast the sector is growing.

Peer to Peer

The principle that cryptocurrency was initially based on was trustless, peer-to-peer transactions without a centralised authority controlling the interactions between people and their money. Decentralised ‘currency’ is based on the blockchain. The blockchain is the decentralised ledger that stores all the transactions completed on the network. All transactions are available to view at any time; once a transaction is completed and verified, it is added to the blockchain. This system removes the need for a central authority to control and hold power over one's capital.

What are the Risks Involved with Cryptocurrency?

As with any investment, cryptocurrency comes with its risks. Scams are present within the cryptocurrency space, each crypto asset is highly volatile, and the value of each asset fluctuates drastically. Cryptocurrency is at the moment, unregulated and can be susceptible to hacking. If your crypto accounts are hacked and drained, there is no way to retrieve your funds. Wallets can be tracked, and funds can be traced, but it is only possible to tell who is behind the wallet if they have linked to a centralised exchange and the user behind the wallet has completed KYC. Therefore, you must always practise safe internet habits when interacting with cryptocurrency. Ensure your devices are protected with antivirus and ensure to use a VPN.

How to Decide Which Cryptocurrency to Buy?

When choosing a cryptocurrency to invest in, it is important to understand exactly what the specific crypto asset does. Investors must conduct their own research and not rely on what they are being told or advised by someone else. They may just want to unload their tokens onto somebody else. Always be a sceptic and carry out due diligence. This can be done via reading the associated whitepaper. This will give investors an understanding of the project and allow them to decide whether it is worth investing money in the asset. It is important to remember investing only what they are willing to lose.

What Drives the Prices of Cryptocurrency?

Different circumstances can affect the price of crypto. Media attention is one reason why coins see a fluctuation in price. Positive news in the media about a specific cryptocurrency can cause an influx of new investors, causing the project's price to increase. This gives an advantage to early investors as they could then sell their investment and take profit. Negative news can also have a negative impact on the price of the crypto asset, for example, news that affects all crypto assets, such as the introduction of stringent regulations or the banning of cryptocurrency in certain countries. This has the potential to affect the entire crypto space drastically. Likewise, positive news, such as the adoption of Bitcoin as legal tender, has the potential to positively affect the entire space as it gains credibility.

Cryptocurrency and Individuals Behaviour

Each cryptocurrency is influenced by a variety of factors. One common reason for bullish momentum in a project's price could be the announcement of good news, new services, collaborations and project updates. This could drive an influx of new investors to a project, driving up the price of the crypto asset. On the other hand, bearish momentum could occur due to bad news or issues which arise within the project, such as delay in the release of a product or the breakdown of a strategic partnership. These could drive the price of a cryptocurrency down. 

Within the cryptocurrency sector, human bias has little to no impact on large-cap cryptocurrency. This is due to thousands of people being involved, so biases will cancel each other out. 

Herding behaviour is common within the cryptocurrency space. This behaviour is when individuals act as part of a group, not as individual people. This means they will make decisions that, if given the opportunity to do so alone, would not. Social pressure to conform to the ‘decision’ made by the ‘group’ in order to be accepted can sway an investor's decision making. Individuals within the herd can find it hard to believe a large group of people could be wrong, and in doing so make decisions under pressure against their own better judgement. 

Within the crypto space as well as the traditional space there are different types of investors and investment strategies. They vary between optimists, pessimists, negative traders and positive traders. When making any investment decision, users should not be sucked in to conform to anything other than what their own due diligence tells them. Investment decisions should be made by yourself based on the information compiled. 

Scams and How to Avoid Them

Things to look out for when investing in cryptocurrency are projects which offer high guaranteed returns. Crypto is highly volatile and nothing can be guaranteed. Care should be taken when heavy marketing and promotional offers are pushed, in some cases scam projects will heavily promote their coin for immediate market awareness. This gains traction and investors buy into the project, pumping the coin price. Projects then unload large quantities of tokens on unsuspecting investors, which drives down the price of the token. A more 'legitimate' coin offering won’t necessarily need to advertise and expand so quickly on launch. Legitimate crypto projects grow and expand over time from adoption by investors who believe the project has potential and the underlying technology is positive.

Non-existent team members may also be a red flag. Team members of projects usually show their faces. This gives confidence and credibility to potential investors looking to invest in the project. Further links to their social media accounts, such as LinkedIn profiles, are another way of building trust. Furthermore, project participants may become well known for building successful projects. If they then move on to build a new project, it lends further credibility to the new company, whereas anonymous projects lack accountability, as the project could be shut down with no repercussions and no traceability of the team. 

The white paper should be readily available for any trustworthy crypto project. This is the location of the public information which will allow you to understand exactly what the project plans to do, its use case, schedule for completion and any future plans. If there is no white paper, stay clear, as this identifies projects that do not have a clear business plan, so the chance of failure is increased. Finally, most legitimate projects will have active social media accounts, Telegram groups and potentially discord servers. If investors have any questions, these are excellent places to voice them, as you can view the project's community whilst also getting any answers you require.

Common Scams

Investment of Business Opportunity Scams

These scams usually start with an unsolicited offer which lures you into a website created to scam you from the get go. Once on the site, investors are encouraged to invest with the promise of 'quick returns'. Usually, the sites have 'celebrity' endorsements and fake testimonials from well-known people. Once investors complete a transaction on the site, the promised 'quick returns' never materialise, leading to a loss of your capital. If the offer seems too good to be true, it usually is.

Imposter or Impersonation Scams

An imposter scam is when someone poses as a trusted source who convinces unsuspecting victims to complete a cryptocurrency transaction. These could come under the disguise of governmental authority figures, credit card providers and even banks. Investors  will be approached via email and requested to follow certain instructions to make a payment in cryptocurrency. It should be noted that banks and governments will never request immediate payment of cryptocurrencies.

If the website address does not begin with https (some browsers may flag them as malicious), it is most likely a scam. An urgent payment to a crypto address from someone purporting to be in a position of authority is a big red flag. If in doubt, contact the bank or local authority directly and do not send any funds.

Blackmail or extortion

Blackmail or extortion is when investors receive an email that states the sender has information that may compromise your person. The blackmailer will request payment to be made or they will leak the information they have. This kind of scam can be scary but do not engage with the blackmailer or pay the ransom. Preserve all the communication and immediately contact the police. 

Social media scams 

Social media scams are conducted through all social media platforms. Fake profiles are made and promote opportunities with large gains. Influencers on social media will also be paid to promote these opportunities, the influencer may be unaware of the malicious intent of these coins. The influencer will promote a 'new cryptocurrency opportunity’ and encourage users to sign up or invest in it, as it has massive upside potential. The key to avoiding this scam is to DYOR before investing in anything. Ensure you read the project's whitepaper, and if there is no whitepaper, do not invest! If it all looks legit, be aware it is expensive to market a coin heavily; there isn’t a bottomless pit of money, and when it runs out, the sudden lack of exposure may negatively affect the price.

Giveaway scams 

Often flaunted by fake influencers giving away crypto. Typically scammers take the form of 'If you deposit money in ‘X’ token to this address, I will send ‘Y’ to your address'. These scams will take your crypto and run. Investors will never see the capital again. These scams are typically promoted by fake celebrities or influencer profiles asking to deposit a small amount of a well known cryptocurrency in return for a large amount to be sent further down the line. Ensure to check for unverified accounts and remember if it sounds too good to be true, it probably is! 

Phishing scams

Phishing scams occur via email or private messages. Scammers will attempt to gain vital information such as log in details and private key details. Phishing scams may pose as authority figures from either an exchange or a wallet providing company to gain these details. They may also provide links for cloned websites that will steal your details the moment you log in through them. They may also offer fake ICO events as means to steal this information. It is imperative to check that the sources are legitimate before proceeding in communications such as these. Major exchanges will have 24/7 customer support to cross-check information. If the platform does not have high levels of customer support, be cautious and reject the information requests.

It is important to never share your seed phrase or private key with a third party. These should be for the sole use of yourself. Always double check any emails received and ensure they are legit before completing anything on them. Red flags include poor grammar and spelling, unusual formatting and slightly misspelt hyperlinks.

Crypto gambling scams

Crypto gambling scams have a few different ways of operating. As with phishing scams, fake links and cloned websites can steal private information. Scammers can also set up their sites with eye-catching initial offers and bonuses, tempting investors into depositing on their site. Once the money is on the site, it will act much like a legitimate crypto gambling site, allowing users to place and win bets. The scam comes in when users cannot withdraw funds from the site. The scammers may request further funds to release the winnings, but it is unlikely that the funds will ever be released. The server may end up disappearing along with any money deposited on the site and the personal details of all the users. When using crypto gambling sites, always check the site is verified; check reviews from other users on the site, as this will give an indication of whether it is a trusted, reliable site. If users decide to put money on the site, ensure to send a small amount of funds as a ‘test’ transaction before sending any large amounts in case they get trapped there.

Pump and dump scams

Really low cap altcoins can be used for pump and dump schemes. The scheme leader will begin to load up on the coin when it is at low market cap levels. At this point, the coin is cheap and large token purchases can easily pump the price up. Once the pump and dumpers have reached their target quantity, they will promote the coin heavily. As it is low cap the sudden influx of token purchases will greatly influence the price. Once the coin has hit the scammer's target, they will dump their coins, generating a huge profit and leaving everyone else with bags worth a fraction of what they paid for them.

Project developers and early stage investors can also run a pump and dump scam. The developers may sell off a proportion of tokens for the project to an early stage investor or keep a large portion for themselves. Once the project launches and gains traction, the developers or investors dump the remaining tokens, running away with the profits after launch. These kinds of scams can be avoided by issuing lock ups on early stage investor coins meaning they are unable to dump their holdings, as they are either all locked up or they are on a slow release schedule, which encourages HODLing of the coins.

Things to Consider When Investing

Do not get caught up in the hype.

Take your time to learn what the cryptocurrency you are investing in is.

Ensure you read the cryptocurrency whitepaper.

The more effort you put in, the more you will get out. Most people entering the space for a quick 10x will find themselves disappointed.

The whitepaper should be read fully, it will provide all the information on the project and what the developers intend to do. The whitepaper should include a timetable and the specifics of what the team expects the project to deliver. Some whitepapers do not contain specific information about the project, which could be seen as negative by potential investors. The purpose of the whitepaper is to give any investor a clear picture of the project's intentions. If the whitepaper comes across as misleading this may be an indication to stay clear of the project.

Timing is one of the most important aspects of investing in cryptocurrency. The highly volatile cryptocurrency market causes large fluctuations in an asset's price. Cryptocurrencies such as Bitcoin tend to follow certain price patterns, thus catching the price at the bottom and riding to the top is the ideal situation, but this is not always possible and is not easy. News of hacks or price manipulation from whales can cause sudden and large swings in valuation, making timing the bottom even harder.

Surround yourself in the crypto community: join crypto Telegram groups, network with people in the crypto space, and interact with projects online. These tactics allow investors to speak with like-minded individuals in an area where opinions and ideas can be traded easily. This can grant a view from the other side, stopping investors from getting entrenched in a certain philosophy. Being part of the community will lead to other opportunities like early information, giveaways and access to 24/7 support for any queries surrounding any investment.

Tokenomics is also important when it comes to investing. Users don’t want to put their capital into a project which has poor tokenomics as it leads the project to dump. Things to take into account are the total and circulating supply of the tokens, the unlock schedule for pre-sale and seed rounds and the percentage allocation of initial tokens.

Unlock schedules are important as pre-sale and seed investors can purchase heavily discounted tokens in exchange for early investment money. These tokens are usually locked for a set period with unlocking schedules that unlock fixed quantities at regular periods. There is a chance that seed investors would dump all their tokens upon release as they likely will be in a heavy profit. Furthermore, projects with fast unlock schedules may dump harder as more tokens get unlocked faster.

Social media activity is one way projects promote their token. From here, investors can see the community size and the amount of engagement the project is generating. Social media is an excellent way to keep in touch with anything that the project has coming out. The larger and more involved the community is, the more valuable the coin should get. A strong community is imperative to have a high performing coin.

The high volatility of the crypto assets can affect how the coins are looked upon. Checking a coin's price is an important step to consider. Coins with lower market caps are more prone to pump and dump scams, and the illiquidity could leave potential investors with assets that they cannot sell easily. When Bitcoins price increases, altcoins usually drop in price. This is due to investors taking profit from altcoins and putting them into Bitcoin. 

The total supply indicates the total amount of coins that can enter the market. The circulating supply refers to the number of coins in circulation at the current time. These figures are essential when trying to figure out the value of the crypto project. Projects with a lower total supply are seen as more valuable, as there is a limited or smaller supply that can enter the market.