PHASE TWO OF CRYPTO

This section gives us advanced knowledge about crypto

Table of contents

CRYPTO METRICS

Crypto Metrics are numbers that investors use to decide whether to buy, sell or hold a crypto. There are 9,000+ cryptos being actively traded across 400+ exchanges! This makes it hard to decide whether a cryptocurrency is worth investing in. If you are a serious investor, you must know about the important crypto metrics. The Basic Crypto Metrics are:

Supply Metrics

Circulating Supply is the number of coins/tokens that are circulating in the market and are in public hands. Usually, the lower this number, the higher the prices are likely to be. Examples: The circulating supply of Bitcoin (BTC) increases approx every 10 minutes as new bitcoins are generated with every block that is mined. The crypto with one of the highest circulating supplies is SHIBA INU with 394,796,000,000,000 SHIB.

Maximum supply

is the maximum number of coins/tokens that will ever exist in the lifetime of a Crypto. Examples: The maximum supply of Bitcoin (BTC) is 21 million while that of Ether (ETH) is unlimited! Total supply is the number of coins/tokens that have been already created, minus coins/tokens that have been ‘burned’. Examples: In the case of Bitcoin (BTC), the circulating supply is equal to the total supply. Binance Coin (BNB) regularly ‘burns’ coins and this helps maintain its price.

Capitalization metrics

Market Capitalization is the total market value of a Crypto's circulating supply. Market Capitalization = Circulating Supply x Current Price Historically, Bitcoin (BTC) has always had the highest market capitalization and Ethereum the second highest. If this were reversed, it would be called the Flippening. Fully Diluted Market Capitalization (FDMC) is the market capitalization if the maximum supply was in circulation. FDMC = Price x Max Supply If the maximum supply is unknown or unlimited, like in ETH, then: FDMC = Price x Total Supply If the maximum supply and total supply are both unlimited, then we can't calculate the FDMC.

volume

Volume measures how much of a crypto was traded in the last 24 hours.

Price Metrics

Open-High-Low-Close prices (OHLC) means the open, high, low, and closing prices for a crypto for a particular time period - an hour, a day, or even a year. All-time-high (ATH) is the highest price a crypto has ever reached. All-time-low (ATL) is the lowest price a crypto has ever reached. You should also check out the high & low prices over the last 24 hours, 7 days, 30 days, 90 days, and 52 weeks.

Holders' Statistics

You've probably heard of the term "whales". They are addresses that own more than 1% of the circulating supply of a crypto. Some of the important metrics related to holders of crypto are: 1. The total number of unique addresses that hold assets in the network 2. Addresses that have been active over the last 24 hours and 7 days 3. Transactions carried out by the top addresses by balance

Return on Investment

Return on Investment (ROI) measures the amount of return on a crypto investment, relative to its cost. ROI = Profit / Cost

Total value locked (TVL)

Total value locked (TVL) represents the total of all assets deposited in a Decentralised Finance protocol earning rewards, interest, new coins / tokens, fixed income, etc.

MYTH OF CRYPTO DECENTRALIZATION

A lot of people swear by the importance of decentralization in the blockchain & Crypto world. But how decentralized is Crypto? As of mid-February 2022, there are over 17,500 cryptos and the total market capitalization of Cryptos is around $1.9 trillion. Of this, the share of the top 5 cryptos by market capitalization is: The top 5 cryptos account for more than 71% of the entire crypto market! Now, let's see how decentralized the top 5 Cryptos are.

1. Bitcoin

Bitcoin transactions are "confirmed" by miners using a process called ‘proof of work’. Bitcoin's ‘hash rate’ is the amount of computing and processing power in the network. If malicious miners get 51% of the hashing power, they could cause devastating problems such as: According to statistics from Btc.com over the last 1 year, this is the hash rate share of the top 5 mining pools: The top 5 mining pools control 63.11% of the hash rate!
Ethereum Ethereum also runs on proof-of-work and the top 2 mining pools control over 51% of Ethereum's hash rate!
Tether (USDT) Tether (USDT) is a 100% centralized fiat-backed stablecoin issued by a Hong Kong-based company called Tether. The company keeps commercial paper and other reserves that are equal in USD value to the number of USDT in circulation.
BNB (BNB) BNB is the native token of the popular Binance Smart Chain which chooses the top 21 highest-stake nodes as validators. The minimum amount for self- delegation is 10,000 BNB. That's over $4 million! This makes the Chain highly centralized.
USD Coin (USDC) USD Coin (USDC) is a 100% centralized fiat-backed stablecoin issued by the Centre Consortium which has 2 founding members - peer-to-peer payment services company Circle, and the Coinbase cryptocurrency exchange.

CURRENCY CRYPTO

Currency Cryptos are those that can be used to buy and sell stuff (physical or virtual) or which can quickly be converted to ‘cash’. These cryptos usually have a higher Volume / Market Capitalization Ratio ratio (VMR) as compared to other Cryptos. According to me, the most important Currency Cryptos for 2022, in alphabetical order, are: Note: Fiat-pegged stablecoins, e.g. Tether (USDT), are also used as currencies but have been excluded from this list.

DAO Cryptos

A Decentralized Autonomous Organization (DAO) is like ‘an Internet-based community with a shared bank account’. You can think of it as a mutual fund where instead of a central manager, the participants decide on the investment and other decisions. DAOs exist only on a blockchain and their rules are coded in smart contracts. Since DAOs run on public blockchains, anyone can check and verify all the financial transactions made by the DAO. Members of a DAO don't have to trust each other - they have to trust the code. My favorite DAOs are:

The DAO hack

DAOs did not start off too well. The first-ever DAO was "hacked" and ultimately led to the original Ethereum network splitting into two. Surprised? Let's go back to 2016. The first DAO raised about $150 million worth of ether (ETH) through a token sale. But a hacker exploited a bug in the smart contract and siphoned out all the money! Now, logically nothing should have been done about this. Blockchains are ‘immutable’ and ‘censorship-resistant’, right? But a ‘hard fork’ was implemented. This rolled back Ethereum's history to before the hack.
This reallocated the hacked ETH to a different smart contract and allowed investors to withdraw their funds. The 'purists' hated this and that's what led to Ethereum splitting into 2 blockchains, Ethereum and Ethereum Classic.

DeFi (Decentralized Finance)

Is an umbrella term for financial applications powered by blockchain technology. The most popular DeFi Blockchains include:

Types of DeFi protocols

Algo-Stables: This includes algorithmic coins & stablecoins
Bridges: These are protocols that bridge cryptos from one blockchain network to another.
Collateralized Debt Position (CDP): These are protocols that mint their own stablecoins using collateral.
Cross Chains: These are protocols that enable interoperability between different blockchains.
Derivatives: These are Smart Contracts that get their value, risk, and basic structure from an underlying asset.
Dexes: These are protocols that enable users to swap / trade cryptos without the need for KYC.
Gaming: These are protocols that have gaming components.
Indexes: These are protocols that track the performance of a group of related assets.
Insurance: These are protocols that provide monetary protection in case an event occurs or does not occur.
Launchpad: These are protocols that launch new projects and cryptos.
Lending: These are protocols that enable users to borrow and lend cryptos.
Minting: These are protocols that enable the minting or creation of Non-Fungible Tokens (NFT).
Options: These are protocols that give you the right to buy or sell crypto at a pre-decided price.
Oracle: These are protocols that bring information from the outside to the blockchain and vice versa.
payment These are protocols that enable the payment / sending / receiving of cryptos.
Prediction Market: These are protocols that enable the wagering / betting in future events.
Privacy: These are protocols that enable the hiding of information about crypto transactions.
Currency: These are protocols that use a reserve of assets to issue and back their native cryptos.
services These are protocols that provide services to DeFi users.
Staking: These are protocols that reward users for staking their cryptos.
Synthetics: These are protocols that create tokenized derivatives that mimic the value of other assets.
Yield Aggregators: These are protocols that aggregate yield from multiple DeFi protocols.
yield These are protocols that reward users for staking or providing liquidity.

Gaming & Metaverse cryptos

The metaverse is a ‘parallel digital universe’ where you can create your own digital avatar and work, travel, learn, play, and party! The best way to understand the Metaverse is by watching these movies - Ready Player One, Avatar, and Wreck-it Ralph. The Metaverse is actually quite an old concept. My first experience with it was using ‘Second Life’ in the early 2000s. The band ‘Duran Duran’ performed a concert in the Second Life virtual world in 2006. According to me, the most important Gaming & Metaverse Cryptos for 2022, in alphabetical order, are:

Web 3.0 cryptos

web 1.0 was the first generation of the World Wide Web from the early 1990s to around 2004. During this stage, most websites were static. These websites were created by businesses and "consumed" by users like you and me. Web 2.0 is the current second generation of the World Wide Web. A large amount of content is user-generated e.g. social media content, blogs, vlogs, etc. Most of this data is controlled and monetized by large companies like Google, and Meta (Facebook). Web 3.0 is the latest generation of the World Wide Web and its focus is on decentralization. Web 3.0 applications and services would increasingly be powered by blockchains, crypto-assets (fungible and non-fungible), artificial intelligence, and metaverses. Web 3.0 is expected to provide personalized content and also enable people to control their own data. The top Web 3.0 cryptos According to me, the most important Web 3.0 Cryptos for 2022, in alphabetical order, are:
1. Arweave (AR)
2. Audius (AUDIO)
3. Basic Attention Token(BAT)
4. Chainlink (LINK)
5. Filecoin (FIL)
6. Helium (HNT)
7. Livepeer (LPT)
8. Siacoin (SC)
9. The Graph (GRT)
10. Theta (THETA)

Decentralized Exchanges (DEXs)

There are 2 easy ways to trade crypto - Centralized Exchanges (CEX) and Decentralized Exchanges (DEX). Centralized Exchanges (CEX)
A CEX requires users to complete a KYC process. It authenticates you using your username, password, and email / SMS OTP (one time password). Once you are logged into your account, you can transfer fiat (rupees, dollars, etc.) to your account and use it to buy crypto. Similarly, you can sell the crypto and get the fiat into your bank account. Remember that in a CEX, the crypto is not in your ‘wallet’. It’s in the exchange’s wallet. Decentralized Exchanges (DEX)
A DEX, on the other hand, doesn’t require KYC completion. You can connect using your wallet (e.g. Metamask) and swap / trade crypto. The crypto remains in your wallet. According to me, the most important DEXs, in alphabetical order, are:
1. Balancer (BAL)
2. Curve (CRV)
3. PancakeSwap (CAKE)
4. SushiSwap (SUSHI)
5. Uniswap (UNI)

Non-Fungible Tokens (NFTs)

Consider the balance in your mobile wallet (say Rs. 10,000). Is there any difference between each of these rupees? No, there isn’t. So we can say that this digital money is “fungible” - every rupee is exactly the same as another rupee. Is every 500-rupee note identical in value? Most people would say yes. But it’s not! An older 500-rupee note is worth zero – remember demonetization? So, we can say that physical currency notes are “non-fungible”. To understand what a non-fungible token (NFT) is, let’s take an example. Sanya is an artist who creates a bunch of manga ink on paper drawings. She sells them online as well as at a physical art gallery. But she can sell each drawing only once because, hey, it’s a physical drawing. She can also create multiple reprints and sell them. Each reprint is identical. So if there are very few official reprints, the price can be high. If there are many reprints the price will be very low. That’s the law of scarcity at work. We are usually ready to pay more for things that are rare.

But how would a buyer know how many reprints are in existence? That’s where NFTs come in. Sanya can release digital copies of her drawings on the blockchain in the form of non-fungible cryptocurrencies. Because of the blockchain’s inherent transparency, any buyer can see how many digital copies are actually in circulation. And anyone can see who owns how many digital copies. Wait, there’s more. When you “buy” a digital version of a manga from an artist you only get the right to use it for personal viewing. That’s because the artist holds the copyright over the manga. But in an NFT, the artist can grant you special licenses e.g. the right to print the manga on t-shirts and make money by selling those t-shirts. Now, isn’t that cool? started off with CryptoKitties - a game centered around breedable, collectible, virtual cats. According to the official project website, "Each cat is one-of-a-kind and 100% owned by you; it cannot be replicated, taken away, or destroyed".

NFTs can be divided into these 5 categories:

1: Digital art

A number of NFTs in Category 1 are plagiarized works, fake collections, spam, and frauds. And then there are rug-pulls. And wash trading - illegally inflated trade volumes by constant buying & selling within a group. OpenSea, the most popular NFT marketplace has a tool for free minting of NFTs. The platform has admitted that 80% of these NFTs are plagiarized works, fake collections, and spam. Another platform called DeviantArt has issued 80,000 fraud alerts in a few months.

Another platform called LooksRare is plagued with wash trading. That's when people illegally inflate trade volume and value by buying & selling NFTs within a group. Do you remember the $69 million Beeple NFT that started off the NFT hype cycle? The buyer, MetaKovan is actually a business partner of Beeple. A research study recently analyzed 6.1 million trades of 4.7 million NFTs since 2017. They found that 10% of traders accounted for 90% of all NFT transactions. This group trades 97% of all NFTs at least once. Many NFT projects turn out to be multi-million dollar "rug pulls". That's when anonymous founders vanish with the investors' money. Examples include the Evolved Apes NFT project, the Big Daddy Ape Club, and Blockverse. Then there are ridiculous projects that promise to give you ownership of a color. You read that right. Ownership of a color. They even promise you royalties every time someone uses your color.

Category 2: Collectibles

Austria was the first country to offer "Crypto stamps" - physical postage stamps that have a "digital twin" or NFT on the blockchain. The stamp comes with an NFC chip that contains a cryptographic key. The chip can be read with a NFC-enabled smartphone. Other countries working on such collectibles are Switzerland and Gibralter. I am very bullish on this category of NFTs. Category 3: In-game / Metaverse assets This category relates to in-game assets, metaverse assets such as avatars, skins, weapons, and virtual real estate.. Many top brands such as Gucci and Nike, are also issuing NFTs in this category. Some of the best Crypto projects in this category are - Axie Infinity (AXS), Decentraland (MANA), Enjin Coin (ENJ), Gala (GALA), and The Sandbox (SAND). You can learn more about them in my article on the Top Gaming and Metaverse Cryptos for 2022. I am bullish on this category of NFTs.

Category 4: NFT Domains

Blockchain or NFT domains look like regular domains but are very different. They are smart contracts written on a public blockchain. The biggest advantage is the fact that they are ‘owned’ and not ‘rented’. What I like best about NFT domains is that there is no renewal fees. Regular domains have to be renewed every year. Blockchain domains can be purchased with a one-time registration fee and you never have to pay for renewals again. The disadvantage is that they cannot be used directly in a regular browser. This causes a huge level of friction and that is why they are not very popular as of now. These domains can be used as universal usernames across apps and websites, website URLs, and payment address for wallets. Some of the popular domains include .crypto, .coin, .bitcoin, .nft, and .dao I am bullish on this category of NFTs.

Category 5: Wrapped NFTs

Wrapped NFTs are also called Wrapped Assets and are blockchain tokens pegged to or collateralized by assets such as coffee, gold, fiat currency, debt instruments, real estate, etc. They are called ‘wrapped’ assets or tokens because the original asset is put in a ‘wrapper’ or ‘digital vault’ that enables the wrapped version to be traded on a blockchain. I am very bullish on this category of NFTs.

How to value Cryptos

Valuation of Cryptos is my absolute favorite area of study and research. There are 11 types of Crypto Assets and you must not use the same valuation method for all of them. To understand the subjective and mathematical models that I use, watch this 23-minute video that covers:

Valuation of DeFi Blockchains

Let’s dive a little deeper into valuation of DeFi Blockchains. I think that the most important metric for a DeFi Blockchain is Total Value Locked (TVL). This is the total amount of assets ‘locked’ or secured in a DeFi blockchain.

To get the Mcap / TVL Ratio (MTR), we start with the Circulating Supply of the native token of the Blockchain e.g. ETH in the case of the Ethereum Mainnet. The Circulating Supply is the number of coins/tokens in public hands. Multiplying the Circulating Supply with the Current Price gives us the Market Capitalization (Mcap). Mcap / TVL Ratio (MTR) is calculated by dividing the Mcap by the TVL. I consider 3 to be the ideal MTR for a DeFi blockchain. If a blockchain’s MTR is above 3, it is overvalued and if it is below 3, it is undervalued. Valuing the native token of a DeFi Blockchain is a 2-step process.
Step 1:
Multiply the TVL of the Blockchain by 3. This is the ideal market capitalization of the blockchain.
Step 2:
Divide the market capitalization by the circulating supply of the native token of the blockchain. This is the ideal price. Let’s take an example. As of today (15 February 2022), the TVL of the Ethereum Mainnet is $ 124.84 billion. So its ideal Mcap would be = $124.84 billion x 3 = $ 374.52 billion The circulating supply of ETH is 119,586,846 ETH. So the ideal price of ETH would be = 374.52 billion / 119,586,846 = $ 3131.78 That means at the current price of $3,041.60, ETH is slightly undervalued.

Ways to benefit from crypto

Airdrops

An airdrop is a marketing activity by a new crypto project. A small amount of crypto is sent out for "free" to increase awareness. It's not entirely "free" as you may need to do some promotional work like retweeting a post, sharing a link with your network, etc. If you want to bypass this work, you can signup for automated services.

Crypto Affiliate Programs

Most Crypto exchanges, trading platforms, and wallet services offer commissions if you refer new customers to them. All you need to do is signup for a referral code and then share links to your social networks.

Learn Crypto - Earn Crypto

Some Cryptos pay you to learn about them. This is great because you are getting paid to learn interesting stuff! All you need to do is watch some videos, take a quiz, and get rewarded in the crypto you have just learned about.

Play to Earn games

Did you know that you can get free Crypto just by playing blockchain-based games? Some of the top Play to Earn games are Decentraland (MANA), The Sandbox (SAND), Axie Infinity (AXS), and Gala (GALA).

HODL

HODL is an acronym for ‘Hold on for Dear Life’. Most bitcoin investors I know fall under this category. So while they don't ‘book’ profits, their net worth can skyrocket or crash depending upon crypto prices. You really need to be a ‘believer’ and a long-term player for this.

Dividends

Some crypto exchanges pay dividends similar to how companies pay dividends to shareholders. An example is KuCoin, a crypto exchange that pays 50% of all trading fees as dividends to Kucoin Shares (KCS) holders.

Staking

Bitcoin uses ‘mining’ to validate transactions. This costs a huge amount of electricity and computational power. Many other cryptos e.g. Solana, Terra, Cardano use a more eco-friendly way of validating transactions - proof of stake. This requires you to temporarily ‘lock’ your crypto in a wallet or exchange. Example: You could earn an annual return of 92.25% by staking The Graph (GRT). You can check out the staking rewards for various cryptos at StakingRewards.

Lend cryptos

You can lend your crypto and earn interest. Examples: The annual interest on Bitcoin is currently 4.75% while that on Tether (USDT) is 12.51%.

Provide liquidity

Providing liquidity on Decentralised Finance (DeFi) platforms is an excellent, though slightly complex, way of profiting from crypto. You can get started with Uniswap, an automated liquidity protocol for Ethereum tokens. Each liquidity pool has a smart contract to enable swapping tokens and adding liquidity.

Bug bounties

Many projects pay serious money if you find bugs in their platform/code. This requires a ton of ‘hacking’ talent.

Day trading

People gamble on a lot of things - horse races, dog races, lotteries, and even cockroach races! In fact, there are many ‘prediction markets’ out there for gamblers. Well, day traders gamble on cryptos. This is probably the riskiest and most stressful way to try to make money.

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