From Zero to Crypto Hero: Mastering the Essentials of Crypto Market for Maximum Gain

As the world of finance continues to evolve, the cryptocurrency market has emerged as an innovative and potentially lucrative investment landscape. This beginner's guide will demystify the essentials of crypto investing in a clear and simple manner, providing insights into its unique characteristics, opportunities, and challenges. Whether you are a complete beginner, or you have some time in the market already and want to fill in your gaps, this article is for you.

How do we Define the Crypto Market?

The crypto market is the global ecosystem where cryptocurrencies, such as Bitcoin and Ethereum, are traded. Operating 24/7 and accessible from anywhere, the market allows people to buy, sell, and exchange digital currencies using decentralized blockchain technology. This alternative financial ecosystem offers investors new opportunities to participate in the digital economy and engage with innovative financial solutions.

Basic Terms

Before diving into the markets, here are a few essential terms that every investor should familiarize themselves with. To discover more specific topics, or learn about them more in-depth, feel free to check out the CoinBrain Dictionary section.

• Blockchain: A decentralized, digital ledger that records transactions chronologically and publicly. It serves as the underlying technology for cryptocurrencies.
• Cryptocurrency or Crypto-asset: A digital asset that uses cryptography for security and operates on a decentralized network, like Bitcoin or Ethereum.
• Fiat Currency: These are the established currencies commonly used by states (USD, EUR, etc.). The word comes from Latin, meaning to create out of nothing.
• Exchange: A platform where users can buy, sell, or trade cryptocurrencies, either for other cryptocurrencies or fiat currencies. Exchanges can be centralized (CEXs) or decentralized (DEXs).
• Wallet: A digital or physical tool that stores the public and private keys required to access, manage, and transact with cryptocurrencies.
• Public Key: An alphanumeric address that represents the destination for sending or receiving cryptocurrencies. Also known as the wallet address.
• Private Key: A secure, secret key that grants access to and control over cryptocurrency holdings. It must be kept confidential.

Market Sectors and Applications of Crypto

Decentralized Finance (DeFi)

Crypto allows for decentralized and trustless transactions working in a very different way than our traditional financial system. This is a potentially big application, as it removes intermediaries (banks/other services) from the system. The technology is not yet in a state for mass adoption but in the future, it could bring huge value by providing a fair financial system for everyone without censorship.

Stablecoins

A special class of assets that mimic the price of a traditional (Fiat) currency, typically USD. There exist both centralized and decentralized stablecoins, both having a significant use-case within the crypto ecosystem.

Centralized Finance (CeFi)

In CeFi the financial services are provided by centralized entities, such as banks or corporations. Unlike decentralized finance (DeFi), CeFi relies on intermediaries to facilitate transactions, manage funds, and provide services like lending, borrowing, or trading. While CeFi has some benefits like regulatory compliance and user-friendly platforms, it may not offer the same level of transparency and security as DeFi solutions.

Web3

A whole new market emerges in the decentralized field of Web3, which is a continuation of Web1 (read-only) and Web2 (read and participate). The Essential idea is that content (NFTs, Games, Social networks, etc.) and assets will be owned directly by people and not controlled by authorities. Web3 could bring an entirely new way of sharing and communicating on the internet. Numerous possibilities for practical applications waiting to be discovered.

GameFi

The blockchain gaming market integrates blockchain technology with video games, enabling unique features like true digital ownership of in-game assets and decentralized marketplaces for trading items. This innovative approach also allows players to earn rewards for playing, enhancing the gaming experience and creating new opportunities for users.

Gambling

Crypto gambling involves wagering digital assets in games of chance, such as online casinos or betting platforms, where the outcome is uncertain, and the potential for profit exists.

Non-fungible Tokens (NFTs)

NFTs are unique digital tokens representing ownership of a unique asset like art, music, or collectibles, making them indivisible and distinct from each other.

Meme Tokens

Meme tokens are cryptocurrencies inspired by internet memes or jokes, often characterized by their lighthearted nature and strong online communities.

AI Tokens

AI tokens are digital assets associated with projects that utilize artificial intelligence technology for various applications, such as data analysis or automation.

Social Tokens

Social tokens are cryptocurrencies that creators or influencers use to monetize their content. They are tied to the community and represent generated value over time.

Blockchain infrastructure

Blockchain infrastructure focuses on providing the underlying technology for practical applications. By improving the technology, crypto will become more beginner-friendly and accessible, ensuring seamless transactions and a smooth user experience. This category includes blockchain networks, like Ethereum, or various tools for interoperability and usability.

Why Does Crypto Exist?

The fundamental idea of why crypto was created is to provide freedom and liberty with cryptography and censorship-resistant tools. It puts ownership, privacy, and security into the hands of its users, who may do with it whatever they please.

Crypto is by definition decentralized, which means no single party should have the power to influence the whole network. The power of using the network lies in collective consensus and transparency. 

This kind of decentralization is achieved by collectively agreeing on a current state of blockchain, with everyone having the right to change it. That means everyone can transact freely without censorship and the need for third parties (custodians).

Crypto Assets

For the most straightforward explanation, we will divide cryptocurrencies into three main subclasses. Each one behaves differently in the market and is suitable for different investment goals.

Bitcoin (BTC)

Launched in 2009, Bitcoin is the pioneer of the crypto market and remains the most valuable and widely recognized digital currency. It was designed primarily as a digital alternative to traditional currency, offering decentralized, peer-to-peer transactions with lower fees and increased privacy.

Bitcoin is also sometimes dubbed as a store of value (“Digital gold”) because of its limited supply and high security. There will exist a maximum of 21 million BTC in circulation, making it eventually a deflationary asset similar to gold.

In order to verify transactions on the Bitcoin network, a special class of participants called “Miners” solve complex cryptographic functions and are rewarded for their work with newly generated (mined) BTC.

Ethereum (ETH) and Ethereum-based Chains

Developed in 2015, Ethereum is a blockchain platform that enables the creation of smart contracts and decentralized applications (dApps). Smart contracts are pieces of code written on the blockchain, which are executed upon certain conditions. Because they are placed on the blockchain, they cannot be changed or modified afterward.

The native asset of the Ethereum network, Ether (ETH), is used for transferring value within smart contracts and dApps. It is also crucial for paying transaction fees on the Ethereum network (gas fees). Part of this gas fee is used to reward Validators, who make sure all transactions on the network are legit.

Apart from the main Ethereum network, there exist so-called “EVM compatible chains”, which work in a similar way as Ethereum and often have similar applications on them. The purpose of these chains is to offer slightly different technology (Avalanche, BNB), or help scale Ethereum (Arbitrum, Polygon)

Altcoins

All the other projects except Bitcoin and Ethereum are marked as altcoins. These altcoins tend to be more experimental and serve various purposes. They often contain the newest technological advancements in the field of crypto (high speed, new types of apps, etc.), but tend to be quite volatile and risky. Trading altcoins provides the biggest opportunities for potential gain but also carries the biggest risks.

Layer 1s - Have their own chain (Avalanche, Cosmos, Near, Monero, etc.). This chain may or may not be EVM-compatible.

Layer 2s - Do not have their own chain and are built on top of an existing chain, typically Ethereum (Arbitrum, Optimism, ZkSync, etc.)

What Determines the Price and Why Does it Change?

Cryptocurrency prices change based on factors like how many people want to buy or sell them, how people feel about the market, new technology updates, government rules, and global economic events. 

All buy and sell orders are written down in the orderbook, which is like a live list that shows how many people want to buy or sell a cryptocurrency at different prices. This helps traders make decisions about when to trade.

You can trade cryptocurrencies on various centralized exchanges (CEXs), like Binance, Coinbase, and Kraken. Or decentralized exchanges (DEXs), like Uniswap, Curve, PancakeSwap, and Balancer.

There are a lot of psychological aspects that relate to the price of cryptocurrencies, especially when the price is not doing as planned. A particularly common one is FOMO - the Fear of Missing out.

Stablecoins and Pegged Assets

Those are assets that do not have a price of their own but instead are meant to track another asset (usually crypto-unrelated). Stablecoins (USDC, USDT, DAI) specifically track the price of fiat currencies like USD, EUR, and so on. Other projects seek to track the prices of commodities, like precious metals (Paxos Gold).

Pegged assets traditionally play a significant role for investors, because they serve as a hedge against the volatility of crypto. However, there are a few distinct problems with pegged assets, making them somewhat risky. Learn more about pegged assets here.

What about NFTs?

NFTs (Non-Fungible Tokens) serve as a unique representation of a crypto-asset. They are not interchangeable with each other, like for example, 2 BTCs are. This unique information can be attached usually with a picture, but also a music piece, ticket, or other assets. NFTs live on various blockchains like Ethereum, Solana, or Polygon.

Similarly to fungible tokens, the price of NFTs can go up and down, posing an opportunity for many traders and speculators.

Legitimate Ways to Earn on Crypto

Investing and Holding

Probably the safest way to enter and stay within the crypto market is by holding quality projects over longer periods of time, hoping they will rise in value. Bitcoin of all cryptocurrencies has the biggest tradition of long-term holding (commonly referred to as HODLing). Investors usually rely on strong fundamental characteristics and deflationary tokenomic.

This approach is recently also common with Ethereum, as it has established itself over a period of many years as a high-quality and solid platform. Lesser than altcoins, which are usually traded within shorter time frames due to high volatility.

Trading/Speculation

Very popular approach, especially among uneducated newcomers in the market. It involves making more trades in shorter periods of time, typically days, weeks, or even months. The idea is to open and exit positions within an exactly defined price range and eventually generate big profits in a shorter time frame. 

Traders use many tools to analyze the market from various perspectives (technical and fundamental analysis) to ensure the odds are on their side. To be profitable, trading requires vast capital, quality data sources, and years of unprofitable experience. It is important to say that a strong majority of traders (more than 80 %) stay unprofitable, or even in a loss.

Speculation, on the other hand, is an approach based much more in believe in a specific project, rather than data-based informed decisions. Historically, speculations have led both to tremendous losses and gains. There is really not much of a difference between speculation and traditional gambling.

Mining

Cryptocurrency mining involves powerful computers solving complex cryptographic functions to validate transactions on a blockchain network (typically BTC). Miners earn new cryptocurrency units as rewards, making it a legitimate way to make money. 

However, mining has become more centralized and dominated by specialized companies with advanced hardware and cheap electricity. For beginners, entering the mining scene today can be challenging and expensive, as it requires significant investment and expertise.

DeFi (Decentralized Finance)

Decentralized Finance, or DeFi, is a growing area within the cryptocurrency space that offers various legitimate ways for users to make money. These opportunities are built on blockchain technology and operate without traditional financial intermediaries like banks. Here are some popular methods to earn in DeFi, explained in beginner-friendly terms:

1. Lending: You can lend your cryptocurrencies to borrowers on DeFi lending platforms like Aave or Compound. In return, you earn interest on the assets you lend out. The interest rates are usually determined by supply and demand for a specific cryptocurrency.
2. Staking: Some DeFi platforms use a Proof of Stake (PoS) consensus mechanism, allowing you to "stake" your cryptocurrencies by locking them in a wallet or on the platform. In return, you receive rewards for helping to secure the network. Staking rewards are typically paid in the platform's native token.
3. Yield Farming: Yield farming involves depositing your cryptocurrencies into DeFi platforms that offer attractive interest rates. These platforms often use your deposits to provide liquidity for other users, and you receive a portion of the fees generated as a reward. The returns on yield farming can vary and may require more active management than lending or staking.

Risks and Security - How to Stay Safe

Market Risks

The Crypto market is famous for its volatility, which is significant even in comparison with stocks. This kind of volatility can be a two-way sword - an experienced trader may benefit from the market swings to make profits, whereas newcomers usually surrender to their emotions and buy or sell at exactly the wrong time.

To add on top of volatility, the value of some projects may actually go to zero, therefore it is important to make quality research and invest only in projects that you understand and believe in.

Unregulated and Dynamic environment

Another specific element of crypto is its high concentration of scams and fraudulent projects. They typically thrive in the unregulated and experimental environment, where many people don't know exactly what they are doing.

Recognizing a fraudulent project may be difficult because scammers constantly come up with new ways to trick people. However, with a basic knowledge of crypto-economics (tokenomics) and markets, you will be able to spot certain common patterns.

Technical Risks

Being in a relatively early development stage, the crypto ecosystem has certain technical challenges that are being figured out on the go, but they can sometimes end in unexpected losses for users. We are talking mainly about:

• Hacks and Security Breaches: As with every new technology, crypto is not fully bullet-proof, meaning that hacks or breaches of platforms do happen from time to time. However, every one of these unfortunate incidents helps to strengthen the system as a whole, repairing one loophole by one.
• User mistakes: The user experience of various crypto-services can be quite beginner-unfriendly, sometimes leading to unintentional loss of funds with erroneous actions (wrong address, network, unsafe storage of coins). Never store your coins on centralized exchanges, always use hardware wallets!
• Smart contract bugs: Similarly to hacks, bugs are the result of rapid innovation. Poorly written code may also pose inconveniences for users. It is important to use time-verified platforms with audited code to prevent these problems

The Bottom Line

To become successful, it is not only necessary to gather information on crypto in general but to know yourself and how you respond emotionally to various situations. Emotions can also be a significant part of the market and are one of the reasons that the majority of people end up in a loss.

We have learned the basics of what the crypto market is, how it works and what are its implications for traders and investors. However, there is much more to learn within each section of this article, as we have only scratched the surface. Follow the links for more in-depth articles to learn more about how to become a knowledgeable and possibly profitable crypto investor.