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leverage trading in crypto

Leverage Trading Explained

Leverage trading in crypto makes it possible to trade a larger amount of crypto without the need to have the full amount of funds required to execute the trade. It is a risky way of trading and a potentially lethal double-edged sword that can multiply both profits and losses.

 

What is leverage?

Let’s begin by understanding what leverage is in everyday life. 

A crowbar used to open crates uses leverage to help force the crate open. 

Just using your fingers simply wouldn’t work, the same with a wrench, if you are opening a tight bolt, a wrench makes it much easier or even possible when compared to trying to do it with your bare hands. 

This leverage is the force of your hands multiplied. So, in essence, using leverage you could create a lot more force than with your bare hands alone. 

Leverage trading has been and continues to be used in equity and commodity trading. 

Traders use leverage to allow themselves the opportunity to execute larger trades without the need for the full amount of capital but rather just a fraction of it. 

In high-frequency trading, a trader could be moving in and out of stocks or commodities where even relatively small price changes, when multiplied by way of leverage, could be profitable, or of course deadly too!

So, what is leverage trading in crypto?

Now that we understand what leverage is in everyday terms, we can get a better understanding of how leverage can apply to trading. 

In the simplest terms, leverage trading could allow you to buy and trade more than you actually have the capital available for. 

Let’s say you wanted to buy and trade €10,000 of bitcoin, the important word here is trade, you are not buying the bitcoin as an investment to hold onto, you are buying it for short-term gains with the plan to sell when the price rises. 

In this case, it would be possible to buy €10,000 worth of Bitcoin for maybe a down payment of only €1,000. 

This would be based on a 10x leverage. Now if your €10,000 of bitcoin becomes €10,500 you make a cool €500 on your €1000 (excluding fees). 

A very handsome return! On the other hand, if the price of that same bitcoin drops to €9,500, you lose €500, a 50% loss. A double-edged sword if ever there was one!

How does leveraged trading work in crypto?

Continuing with the above example, let’s say we want to use leveraged trading to buy €10,000 of Bitcoin. 

The leverage is 10x to keep things simple. This means that to execute the trade we would need to deposit a margin of €1000 (1/10th of €10,000). Think of this like you are buying a house for €1,000,000 and the bank asks for a 10% deposit (€100,000) and then lends you the rest. If they need to repossess the house and the price has dropped, the initial 10% deposit can hopefully cover any difference in price and expenses.

In much the same way the exchange asks for a deposit and lends you the rest. 

The goal of course is for the price to rise, you potentially earn 10x what you could normally with €1000. As with all investing and particularly with something as volatile as crypto, things aren’t always plain sailing. So, what happens if things go south?

The deposit you put down is what is known as an initial margin

This “deposit” is known as the initial margin. 

This is what you as the trader would deposit with the exchange in order to be able to execute a leveraged trade. 

The exchange will keep the trade open so long as the initial margin covers any losses. This is how an exchange ensures that they are not financially exposed. 

It is very important to note that you are trading here and potentially all of your initial margin is at risk. 

You are not actually owning any assets. Basically, you are trading, not investing for the long term when you are buying and selling using leverage trading. 

If you get close to the edge of your margin limit, you will get what is known as a margin call.

What is a margin call?

If you’ve ever watched films like Wall Street or the TV show Billions you may have heard them talking about a margin call and looking very stressed, it’s when the brokerage is asking for more money to increase your margin or for you to liquidate some of the equity to make more cash available. 

Now of course, if you add more money, you have more time but could also sink further into a hole. 

Leveraged trading is certainly not recommended for those with a nervous disposition! If things really go south the last resort is something known as a forced liquidation.

What is forced liquidation?

A forced liquidation occurs when the initial margin no longer covers the losses in the trade.

At this moment the exchange forces the liquidation of your account closes out the trade and uses the initial margin, your deposit payment, to cover the losses. 

In most cases, forced liquidations would also incur additional costs. 

It’s really not somewhere you want to be as a trader!

Smart traders watch their positions carefully and will manually close out a trade before a margin call or forced liquidation occurs, thereby not losing their entire margin and moving on to another trade. 

Leverage trading is far away from the cosier world of passive investing!

Conclusion

Leveraged trading is not for the faint of heart or for those with a nervous disposition, however, when used correctly it can allow significantly larger returns on investment (ROI) and not require massive amounts of capital. 

In traditional markets when trading stocks or commodities, the price fluctuations can be considered tame when compared to crypto. 

This means that leverage trading in crypto is a truly wild beast and open positions need to be monitored even more closely. 

Using leverage trading is a pretty risky strategy and could mean big wins or nothing more to show for your trade than a bruised ego and a very dented bank account! 

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crypto consensus mechanism

Crypto Consensus Mechanism Explained

A consensus mechanism is a way of validating transactions and maintaining the integrity of a blockchain. It is there to stop a cryptocurrency from being manipulated or defrauded.

 

Let’s begin by looking at what a consensus mechanism is

The modern definition of the word consensus is “general agreement”. 

In crypto, a variety of consensus mechanisms are used to create a general agreement or “consensus” as to the validity of transactions on the blockchain.

Before we get into the different types of consensus blockchains or consensus mechanisms let´s take a simpler look at what consensus mechanisms actually are.

Crypto is in its essence decentralised, i.e. there is no central organisation or central bank of computers administrated by a single unified team.

If we were to look at a centralised organisation, let´s say a large corporation, they would have a central IT department with administrative access to the central servers containing all of the company data. 

In the same organisation, there would likely be a single central accounting ledger that contains all of the accounting information for that corporation. 

In that example, a handful of people would have total and complete access to the data.

We could use the example of a corporation to understand a consensus mechanism

Now, let´s imagine a decentralised scenario. 

Here the same organisation stores its company data and accounting ledger across a peer-to-peer network of independently owned computers. 

These owners offer their computing power and storage capabilities in exchange for fees. 

The two key advantages of such as system would be better resilience against downtime and data loss as the data is stored across a lot of computers just as in cloud computing and also, the corporation does not need to invest in and maintain expensive servers. 

So far so good. But now, how does the corporation trust this network of computers with its precious and sensitive data? 

What´s to stop someone from using that access for criminal purposes? Well, that´s where some form of consensus mechanism is required.

There would need to be a single system or protocol in place across the entire network that would serve to validate each entry or edit made on the single ledger spread across the network. 

This way a single person or a handful of these computer owners would not be able to join together to manipulate or defraud the system. 

This is in fact what a consensus mechanism is, a means or mechanism that provides a general level of agreement or single truth across the entire network of computers or nodes.

Let’s look at the use of case of consensus mechanisms in cryptocurrencies

As cryptocurrencies are essentially decentralised, there is no central organisation with complete control. 

Instead, the blockchain, the large network of computers is made up of perhaps hundreds of thousands of independently owned and operated computers. 

Crypto is big business and massive amounts of money are at stake as well as the credibility of cryptocurrencies themselves. 

There are two primary types of consensus mechanisms in use that we will look at, these are proof of work (PoW) and proof of stake (PoS). Proof of work is the original consensus blockchain method as used by Bitcoin and also Ethereum, however, Ethereum is likely to move to proof of stake.

The Proof of Work consensus mechanism

The proof of work consensus mechanism works on the basis of powerful computers doing complicated work in order to win the chance to add the next block to the blockchain and in return earn coins as a reward as well as some transaction fees. 

This “work” simply put is complex computational puzzle solving and this requires powerful computers and computing time which then requires quite major resources. 

On a cryptocurrency like bitcoin, the competition is fierce and the race to win the chance to add the next block means that people are investing in ever faster and more powerful computers to solve the puzzle faster. 

This investment in resources is what is intended to keep the system honest and also make it more difficult to manipulate. 

The specific details of how proof of work works is outside the scope of this article however in the simplest way, the data in each block is connected to the previous block and the previous block to the one before and so on. 

As the chain gets longer, it gets ever more difficult to manipulate the data across the entire chain. 

To do this over 51% of the computing power of the entire network would be required. 

This is not to say it’s impossible but very difficult. 

The downsides of proof of work are primarily the huge amount of computing power and therefore energy needed to solve these otherwise useless puzzles and also the time taken for each block to be added which is around 10 minutes. 

This time causes unnecessary bottlenecks, delays and ultimately costs.

Proof of Stake Consensus mechanisms

Proof of Stake uses a different system to that of proof of work in that there is no need for the same high levels of computing power, there are no complex puzzles to be solved. 

Instead, the validators as they are called have a “stake” in the system by way of cryptocurrency, think of it as a safety deposit taken by a landlord to cover against damage or non-payment. 

In a similar way, validators stake crypto and if a validator tries to defraud or manipulate the system or suffers downtime they can lose some or all of their stake. 

As it’s their money at stake they are incentivised not only to keep their transactions honest but also it is in their interest for the blockchain to be honest as they have a stake in it. 

The proof of stake consensus mechanism offers the advantages of faster transactions and also less energy use.

Conclusion

A consensus mechanism is central to blockchains and cryptocurrencies, without it, crypto simply wouldn’t work. Whilst proof of work and proof of stake are the dominant mechanisms others too are making an entry, this area is far from finished, there’s plenty more to come.

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ERC-20 Ethereum

ERC-20 Explained

ERC-20 tokens are specifically created to work on the Ethereum blockchain platform. ERC-20 is a common standard that allows ERC-20 smart contract tokens to be easily created, shared, exchanged and transferred to a compatible crypto wallet.

Ethereum arrives on the crypto scene in 2015

As the cryptocurrency world continues to evolve at a rapid pace and an ever greater number of developers and crypto entrepreneurs invent new dapps (decentralised apps) it has become increasingly important to find a way to maintain a standard level of interoperability and compatibility.

The original cryptocurrency Bitcoin is relatively basic when we look at the entire crypto world of today. 

The primary purpose of Bitcoin is the holding, sending and receiving of value in a digital world. 

When Ethereum arrived on the scene in 2015 it opened up a great deal more possibilities beyond simply being another cryptocurrency. 

Ethereum created an exciting new crypto eco-system where new decentralised applications (Dapps) and innovative use cases could be developed and the result has been, well, astounding.

How is Ethereum different from Bitcoin?

Before going into any detail about what ERC-20 is we really need to first grasp what Ethereum is and how it fits into the overall crypto world.

We have to give props to Bitcoin, the cryptocurrency that started it all. The vision being a universal, decentralised digital currency that nobody controls, this means no government, corporation or central banking organisation. 

Bitcoin fused cryptography and something called blockchain technology to provide the foundation on which Bitcoin operates. 

As with almost all new technologies, they are relatively basic when compared to later arrivals. Look at the first automobiles that arrived on the scene, whilst revolutionary and certainly paving the way for better cars, they were in relative terms of course way more basic compared to today’s cars. 

Of course, they still perform the same core function, autonomous transportation, however, cars today are way faster, more efficient and superior in just about every way. 

In the world of crypto, something similar happened and is still happening. 

Bitcoin spawned an entire industry and some bright people saw a bigger future. One of these people was Vitalik Buterin, the creator of Ethereum. 

Think of Ethereum as v2 of the automobile. Vitalik saw a use case beyond that of a digital currency and instead saw a platform or eco-system where blockchain technology and smart contracts could be put to use for an almost limitless amount of uses. 

Ethereum was born and has played a pivotal role in the world of crypto ever since and is now the second most valuable cryptocurrency after Bitcoin.

Ethereum and smart contracts

In essence, Ethereum is a blockchain that can record transactions and also a virtual machine that can produce smart contracts. Smart contracts were a game-changer in crypto!

Smart contracts are in very simple terms computer code that perform certain very specific functions whenever a predetermined action takes place. 

A very simple way to imagine a smart contract is a vending machine. The vending machine is programmed to release the specific item the user wants after they have inserted the correct amount of money. 

If the correct amount of money has been inserted the vending machine releases the product. It will also be programmed to give back the correct amount of change. 

A smart contract works in pretty much the same way. It is designed to perform certain functions when certain actions take place, for example, a person pays X in the correct amount of cryptocurrency and the smart contract releases Y to the person, like the deeds to a house or a piece of valuable artwork. 

Of course, smart contracts are way more complex but you get the general idea.

Going back to Bitcoin, there are no smart contracts. It is purely a means of storing and transferring value digitally.

Now, the two core functions of Ethereum, the blockchain and the ability to create smart contracts means that Ethereum is able to support an almost unlimited amount of dapps (decentralised apps) and this is where the ERC-20 token standard comes in very handy.

Depending on the intended use, DAPPs might create ERC-20 tokens to function as an in-game currency, points in a loyalty program, or even ownership of an actual real-world asset like gold, silver, artwork or the deeds to a property.

This is exactly what happened and before long all sorts of new tokens were invented for different purposes. 

In 2023, there are nearly 450,000 different ERC-20 tokens according to the Etherscan website

ERC-20, a standard that developers can use to ensure quick and easy compatibility

With so many ERC-20 tokens around and way more to come, a standard or framework was going to be needed before long.

During the very early days, if two different types of tokens, token A and token B wanted to work with each other, i.e. interoperate, they could each manually write their code to work with the other tokens code and token A and token B could technically work with each other. 

This was okay when there were just a handful of tokens, however, it became unmanageable pretty quickly as the number of new tokens being launched on Ethereum exploded. 

A standard was desperately needed that developers could use as a common framework.

In answer to this, the Ethereum community developed a common standard or specification called ERC-20 to which all compatible tokens must adhere and comply. ERC standards for Ethereum Request for Comment.

Before we get into the technicalities of what ERC-20 is, let’s look at a couple of simple analogies to get an understanding of why ERC-20 was needed and what it actually does in practical terms.

Let’s begin by Imagining a casino environment full of all manner of different gaming machines from different manufacturers. So far so good. 

Now imagine that when you enter the casino, you need to exchange your Euros or Dollars for 20 or 30 different types and shapes of tokens as every machine uses a different type of token. 

That would be completely impractical and frustrating. In answer to this problem, the casino would tell all the gaming machine manufacturers that in order to have their machines in the casino their machines would have to have a certain size and shape of coin so that the same coin could work across all the machines. 

When you get paid out from one machine, you can take those tokens and put them into any other machine or convert all the remaining coins back to a fiat currency at the end of the day. 

This clearly makes things a lot easier and in very simple terms this is what Ethereum created with ERC-20, a specific standard that all compatible tokens have to adhere to in order to be able to interoperate and also be easily and quickly listed on exchanges.

Another way to imagine the ERC-20 standard would be to think about how debit and credit cards work. 

We as consumers can in most cases take any brand of debit card or credit card from any bank to a store and buy whatever we need. 

Each card conforms to a standard and contains some core information. Now if every card used a completely different standard it would be chaotic in store, imagine how many different machines or systems would be needed let alone the delays and confusion. 

Thankfully this isn´t the case and we can very easily swipe or touch the card on a machine and in the majority of cases we´re good to go due to a framework of common payment processing standards.

Now, the above are very simple examples just to demonstrate the problem and solution. Crypto tokens are way more complex than a casino coin or a debit or credit card and can perform a multitude of tasks and hold a whole host of values for different use cases from being a currency to owning a piece of art.

At its core. ERC-20 contains 3 optional and 6 mandatory rules that every token must be compliant with.

The three optional rules of ERC-20

Token Name – This is the name of the token

Symbol – This is the symbol of the token, a bit like a stock symbol like

Decimal (up to 18) – -this the divisibility of the token, 0 would mean it’s not divisible, the decimal value can basically determine how small the fractions of a token can get

The six mandatory rules of ERC-20

TotalSupply – This holds information about the total supply of the token

BalanceOf – This holds information about the account balance of the holders account

Transfer – This executes the transfer of a specific number of tokens to a specific address

TransferFrom – This executes the transfer of a specific number of tokens from a specific address

Approve – This allows a user to withdraw a certain amount of tokens from a specific account

Allowance – This allows a user to return a certain amount of tokens to a specific account

In addition to the above, these functions will trigger up to two events. This would be the transfer event that takes place whenever tokens are transferred and the approval/validation event that takes place whenever approval is required.

ERC-20 tokens have played a big part in the ICO craze and growth in the Ethereum platform of recent years

ERC-20 tokens have played a huge role in the massive amount of ICOs (initial coin offering) that have taken place over the last few years to help developers get funding for their projects. 

As ERC-20 tokens are relatively easy to create and are designed to work on the Ethereum platform they have helped to fuel the IPO boom.

What about the downsides of ERC-20?

Whilst ERC-20 has played a crucial part in the growth of the Ethereum platform and made things much easier for developers and ultimately users, ERC-20 isn’t perfect. 

There are some issues that the ERC-20 token standard does not address

One of these is that tokens could be unintentionally destroyed when they are accidentally used as payment for a smart contract application instead of correctly using ETH, the native currency of Ethereum. 

An estimated $3 million dollars of value has been lost due to this weakness. 

To resolve this problem, the Ethereum community is working on a new standard, ERC-223, however, this standard is not compatible with ERC-20, the dominant standard today so developers are still working primarily with ERC-20 until compatibility exists.

Another issue is what is known as the “batch overflow” bug that could allow an attacker to illegally potentially possess a huge amount of tokens by exploiting a weakness called the classic integer overflow issue. 

We are not going to get into this here but needless to say, it’s a potentially huge security weakness in ERC-20.

Conclusion

As with almost all industries and major technological breakthroughs, there is constant evolution, weaknesses are found, new use cases are discovered and innovation takes place every day. 

In the crypto world, the primary and not to be underestimated breakthrough was Bitcoin and the blockchain technology it uses. 

Bitcoin and blockchain technology paved the way for the likes of Ethereum where a broader use of crypto came about like DeFi (decentralised finance) and much more. 

ERC-20 is a standard that the Ethereum community introduced to provide a standardised means of compliance and ERC-20 has helped to propel Ethereum as a major crypto platform and ecosystem. 

ERC-20 isn’t without its flaws and will no doubt be superseded in time. However, for now, at least it plays a major part in facilitating the creation of compatible tokens that are easy and quick to create, transfer and hold in compatible crypto wallets. 

ERC-20 helped to fuel the ICOs that helped generate huge amounts of startup capital which in turn has helped Ethereum and the broader crypto world get to where it is today.

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FUD - fear, uncertainty and doubt

FUD – Fear, Uncertainty and Doubt Explained

FUD, which stands for Fear, Uncertainty and Doubt has inevitably made its way into daily crypto speak. As a knowledgeable crypto investor, it is well worth understanding what FUD is and what to look out for as it could save you a pretty penny!

The dangers of FUD?

As mentioned above, FUD stands for fear, uncertainty and doubt. These are, however, only words. 

It is essential that one understands what lies beneath the surface as there could be significant consequences if FUD is not correctly recognised. 

Ultimately fear, uncertainty and doubt can very easily lead to chaos, panic and confusion, not an ideal environment for investing or business in general. 

FUD by way of spreading false, misleading or negative information could very easily derail an otherwise sound project or tempt an investor to sell coins or tokens early out of panic and thus lose out on potentially bigger profits further down the road.

So what is FUD exactly beyond just the words?

FUD can be something quite innocent borne out of genuine ignorance or intentional when used in a sinister way by people or organisations with an agenda to push. 

Those that push FUD are better known in crypto circles as ´FUDsters´.

In the still largely unregulated world of crypto where a huge amount of volatility and money-making potential exists, there will be individuals and organisations that may want to influence events and drive prices down to make bigger profits. 

There could be a rival organisation, a disgruntled employee, or an unhappy customer who wants to see a project’s demise. It could even be an individual or organisation that doesn’t want to see the broader world of crypto grow in prominence and could spread misinformation to discredit the world of crypto itself. 

Then there are those mega influential people like Elon Musk who have a love-hate relationship with crypto and whose actions and statements can have a very dramatic effect on the coin in question or even the entire crypto ecosystem.

FUD is not new, it has been around for a while!

FUD; fear, uncertainty and doubt have no doubt been in use in one way or another since we were first able to communicate. 

A person, group or organisation could spread false rumours, doubts or fears to give momentum to their own agenda or to get a rival out of the way. 

Politicians and businesses have been successfully employing this neat little trick for a very long time. 

The IT industry has used FUD with great effect, a few IT heavyweights using FUD have apparently included Microsoft, IBM and Apple during their formative years where much like the crypto world of today, the burgeoning information technology sector was up for grabs. 

Dirty tricks and misinformation were sometimes used to push a particular agenda or to discredit the young upstarts nipping at the heels of the bigger players. 

A very common playbook!

Let’s look at a few examples to see how FUD could be used in crypto

Starting with the innocent/genuine ignorance use case it’s pretty easy to understand. 

A person hears something third-hand and starts talking or writing about it without any real knowledge or evidence. 

They believe it to be true and start to spread the word via social media or crypto forums. 

This can be quite dangerous, especially in the world we live in, where potentially false information can be spread easily and rapidly without the need for editorial verification.

As crypto is still very much in its infancy and largely unregulated, it is somewhat of a free for all and every person and his or her dog can chime in with their opinion, correctly, or completely falsely. 

Therefore, it is important to do some homework and verify multiple credible sources of information before believing what you read or hear. 

Basically, don’t just accept a rumour or information at face value unless you can really trust the source.

A few typical examples of crypto FUD include;

  • Bitcoin is just a big Ponzi scheme waiting to burst
  • Bitcoin and other cryptocurrencies don’t actually have any real value
  • There is no real use case for crypto, I don’t see the point
  • Governments will soon ban crypto and it’s game over
  • Crypto mining is bad for the environment due to the intense power usage
  • Cryptocurrencies help to facilitate crime and cyberattacks

How to avoid falling into the FUD trap!

If you read or hear that maybe a token you hold is a scam, get onto it fast to try to verify the information from multiple reputable sources, catching it early could save you a lot of money and heartache. 

At the same time though, if the information is indeed false you don’t want to sell early and miss out on potentially bigger profits.

If you hear or read something negative don’t simply accept it as truth no matter how well-spun it is, take the time to look into it and make your mind up based on the information you have gathered yourself.

The internet is full of information, good and bad, reliable and unreliable. Use the wealth of information at your fingertips to be better informed and make wiser decisions.

Conclusion

As the old adage goes, “if it’s too good to be true, it probably is”, well, FUD is of a similar flavour, if something doesn’t quite smell right it’s worth taking a closer look before making any major decisions.

In summary, It would be wise to understand the subtext of any information you have received, do some homework of your own, read between the lines and try to understand any possible motives behind the statements. 

Sometimes, a piece of information may well save you from financial harm, e.g. being alerted to a scam.  It’s well worth keeping an open mind but don’t just accept what you hear without question, remember FUD, fear, uncertainty and doubt are three very powerful words that could just as easily harm you or help you!

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crypto hash power

Hash Power Explained

The hash power or hash rate is the combined computing power of a cryptocurrency network or the computational power of a mining rig on a crypto network that is solving cryptocurrency Proof of Work hashing algorithms.

Hash functions are a key part of, not only cryptocurrency protocols but also security systems within information technology as a whole. 

The “crypto” in cryptocurrency actually comes from the cryptography used in cryptocurrencies to make them secure. 

It’s how Bitcoin came about in the first place. 

Cryptography has been in use for many years outside of cryptocurrencies for highly secure authentication and encryption protocols.

In crypto, SHA256 is used to generate secure hash algorithms. Secure Hash Algorithm 256 (SHA256) was developed by the US government’s National Security Agency (NSA) to convert text of any length into a fixed-size string of 256 bits or 32 bytes. 

If the NSA developed and uses it, it ought to be pretty secure!

What is hash power?

Using SHA256, the sentence What is hash power? would look like:

DE7FC392151F1CB99BD751A959A3C6AB630A8EC7D51672654743F3786D089601

Now imagine, your password being the above, pretty hard to crack and way harder to guess than say the name of your favourite pet, 123456 or even password. 

Yes, a surprisingly large amount of people actually use 123456 or password as their password!

To crack the hash code above on the other hand would take a lot of time and computing power which brings us nicely to how crypto mining works and how hash power fits into the picture

Crypto mining and hash power

In crypto, bitcoin and other cryptocurrencies often use a process called proof of work (PoW) in order to earn crypto in exchange for solving complex computational problems. 

Solving these complex computational problems uses a lot of computing power. 

Miners try to solve these problems in exchange for a reward of a certain amount of coins such as bitcoin. 

Each hash that is created is totally random and generally impossible to predict, it can easily take millions of guesses (hashes) before the correct hash is guessed and the lucky miner wins the right to fill the next block and add it to the blockchain. 

At this point, a block reward of freshly minted coins is awarded to the successful miner as well as any corresponding fee payments attached to the transactions that are stored in that particular block.

How is the hash rate or hash power measured?

The amount of computation power used by a crypto network or a mining rig is called hash rate or hash power. The hash rate/hash power is the computational power used per second when mining. 

In other words, it is the speed of mining and is measured in units of hash/second. To be precise, it’s exactly how many calculations can be performed per second.

Computers or mining rigs with a high hash rate or high hash power are highly efficient and are able to process a lot of data in a single second. 

If we were to look at Bitcoin as an example, the hash rate/hash power would relate to the number of instances hash values are calculated for proof of work every second.

Hash power units are usually measured as follows:

k – kilo or 1,000 hash calculations per second

M – mega or 1 million hash calculations per second

G – giga or 1 billion hash calculations per second

T – terra or 1 trillion hash calculations per second

The hash power of an individual device is a key metric for measuring the potential profitability of a mining rig as it can help to determine the possibility of finding a good hash that is able to generate a mining reward. 

More hashes successfully found equals more rewards. As mining gets ever more competitive, more powerful rigs are needed in order to win the right to the next block.

Using auto manufacturing as a way to understand hash power

An easy way to make sense of hash power or hash rate could be to use auto manufacturing as an example. 

The number of cars produced by a factory per day could be like the hash calculation per second, instead, here it´s the number of finished cars per day. 

A large-scale, highly automated and highly efficient car manufacturing plant could churn out a lot of cars per day, using Volkswagen as an example that would be over 26,000 cars per day. 

On the contrary, a highly specialised and small car manufacturer like Morgan could maybe produce only 3 cars per day. 

Using these examples Volkswagen would have a way bigger hash power than Morgan due to its investment in sophisticated robotics and efficient production lines and will produce way bigger results/output. 

Not only would Volkswagen produce more output it will no doubt be way more efficient in terms of the resources required to build a single car thus being more profitable per unit. 

In crypto mining, a large and highly efficient rig with a large hash power would be capable of a way larger number of hash calculations per second compared to a very small mining rig.

Hash power and security

Continuing with the auto manufacturing example, the total hash power of a cryptocurrency like Bitcoin also relates to the security of a network, the higher the hash power, the greater the difficulty for hackers to infiltrate and manipulate the system. 

In much the same way, it’s way more difficult for an outsider to bring down a huge corporation like Volkswagen due to its huge resources, but much much easier to bring down a smaller player. 

For an attacker to hack, say Bitcoin, let’s call it the Volkswagen of crypto, they would need to overcome the total hash power of the entire network, this is almost impossible, however, a very small network with a low hash power would potentially be more vulnerable. 

In crypto as well, bigger is certainly better!

Conclusion

In summary, the hash power or hash rate is very important in crypto, both in terms of efficiency and potential profitability and also in terms of security for the crypto network as a whole. 

As competition increases, mining rigs need to be ever more powerful in order to be able to win the hashes that will, in turn, reward them with valuable coins and the security of the entire network needs to be rock solid in order to attract more users and increase transactions.

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crypto mainnet and testnet sandbox environment

Mainnet Explained

A mainnet is an independent and live blockchain that carries out the task of transferring digital currency from senders to receivers via its own network and using its own unique technology and protocol.

What is a mainnet?

In essence, every single blockchain project has what is called a mainnet. A mainnet effectively carries out the task of transferring digital currency from senders to recipients. 

A mainnet is working software that is accessible by real users for real crypto transactions. Think of it as a live website or app that you might use to access and use your online banking facilities.

There is usually also a testnet

There is however also a testnet, which is as the name suggests, a test network, something akin to a sandbox in the software world where developers can test their system without using real crypto. 

An example of this in everyday use could be Paypal. Paypal is used by millions of people worldwide to process and send money, this is their “mainnet”. 

Paypal also provides a sandbox environment for developers where they can test their payment systems before going live, their “testnet”. 

In much the same way in the crypto world, the mainnet is like live Paypal where you can send and receive real money and the testnet is like Paypals´ sandbox environment which allows developers to test their systems before going live.

As a prospective crypto investor, it’s well worth understanding where the developers are with the progress of their mainnet. 

If we were to look at this from the perspective of investors in the traditional business world the existence or progress of a mainnet could be as follows:

A project without a testnet or a mainnet, the highest level of risk

This is effectively just an idea, a concept without anything tangible to show. 

Continuing with the Paypal example above, it´s like say Elon Musk and Peter Thiel talking about this amazing new company they are planning to start that will revolutionise the transfer of money and it’s going to be called Paypal. 

In this example the risk factor is at its highest, there is no proof that they can build it, if it will indeed work or whether it will gain popularity (these guys were not rich and well known back then!). 

In much the same way in crypto, it´s like a bunch of people talking about a cool new project they want to develop to solve X problem or to disrupt Y but there’s currently nothing to actually see or play with. 

There are cases where ICOs (initial coin offerings) take place based purely on concepts and whitepapers, the funding from the resulting ICO is then used to develop the mainnet. 

This happened in the early days of the internet, more on that later.

A project with a testnet but no mainnet, less risky but no guarantee it will be popular

In this situation, code has been written and the technology can be demonstrated in a test environment. 

This reduces the risk somewhat and investors can be a little more confident about their prospects. 

In this situation, the Paypal developers have created the code and a demo system to show prospective investors and partners but have yet to open it to the public for real-world transactions. 

In crypto it is very much the same thing, the project code is written and is available for testing on their testnet but is yet to go live. 

There is no proof yet of how it will perform in the live crypto world but at least the project team can demonstrate the ability to build the technology and show that transactions will be possible.

A project with a mainnet and a testnet, much less risky, there is proof of use or perhaps a lack of use!

This is now a real project with live users, the rubber has hit the tarmac so to speak. 

Prospective investors and partners can see that the project has indeed been built and people are actually using it or of course, the contrary could be true. Nobody or very few people are using it and maybe it’s not a wise investment or viable project after all. 

As projects progress, the mainnet and testnet are key, the mainnet is of course where real transactions are happening in the live world and the testnet is being used to test new features or updates before they are deployed to the mainnet. 

The real deal versus a prototype. Testnets continue to be important as projects develop as this is where the developers can develop and test new features and updates before making them live on their mainnet.

Conclusion

In summary, just as in the traditional business world and startup companies, it’s important and useful to be able to separate ideas from working products. 

The risk-reward factors can be quite different. 

So, as a potential crypto investor, take a look into where they are with the progress of their mainnet. 

Naturally, as the risk reduces so does the opportunity for huge gains. Getting in right at the beginning before the mainnet exists could deliver the biggest gains but also big losses. 

On the other hand, investing in a project with a working mainnet could be enough to give you the confidence to invest. Currently, the crypto world is in its infancy and the potential opportunities are huge, it is indeed still possible to raise money based just on an idea. 

Well, at the end of the ‘90s at the beginning of the internet boom, just having a dotcom at the end of a name could be enough to raise huge amounts of money. 

Nowadays as the internet has matured it’s very difficult if not virtually impossible to raise large amounts of money based on just a domain name or idea. 

No doubt, crypto will follow the same path in the years to come. But, for now, at least, it’s all possible and huge fortunes can still very much be made or lost in crypto land whether a mainnet yet exists or is a brilliant idea waiting to happen.

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IDO-initial dex offering crypto exchange

IDO – Initial Dex Offering Explained

An initial DEX offering (IDO) is a decentralised fundraising and bootstrapping method for crypto startups that is growing in popularity. It is in some ways a natural successor to the initial coin offering (ICO) or the initial exchange offering (IEO) that have been hugely popular in recent years.

The crypto world is still very much in its infancy, highly experimental and constantly evolving. 

As in the world of traditional business and especially startups, new crypto projects need to raise capital to fund the development and marketing of their tokens and services. 

One of the original and biggest funding methods has been initial coin offerings (ICOs), something akin to an initial public offering (IPO) in the traditional business world. 

ICOs certainly helped the likes of crypto giant Ethereum get going in their early days. 

Next came the initial exchange offering (IEO) which is a centralised form of crypto fundraising and of course, now we have the initial DEX offering (IDO), a new type of decentralised funding process used mainly by DeFi crypto startups at the moment. 

Below we briefly talk about ICOs and IEOs to help you get a better idea of what each one does and hopefully help you to make better sense of what IDO crypto is in relative terms.

 

Initial coin offerings (ICOs)

Initial coin offerings (ICO) provide a means for aspiring crypto projects to raise money directly via the organisations creating the new tokens/services. 

In an initial coin offering, there is no central body to verify the legitimacy of a project. The founders of the project would typically produce a whitepaper, something similar to a pitch deck, business plan or prospectus in the traditional business world and they would sell their tokens directly to people who think the idea is good and want to get in early.

In the traditional business world, it would be a little bit like a startup directly approaching investors and offering them shares in their company.

Investors wanting to get in early would take a risk and become investors/shareholders only here they hold tokens and not shares. 

It is important to note that, unlike IPOs, initial coin offers (ICOs) are not regulated and therefore even more risky. 

Whilst a huge amount of funding has come about via initial coin offerings there have also been a huge amount of frauds, scams and poor performers. 

This is due in part to the fact that just about anybody can issue an ICO. In recent years the initial coin offering has been getting less popular, paving the way for the Initial Exchange Offering and most recently the Initial Dex Offering.

 

Initial exchange offerings (IEOs)

This leads us nicely to initial exchange offerings (IEO), they are also unregulated, however, there is a central organisation in place (an exchange) such as Binance, Kucoin or  Huobi that performs some due diligence on the project before allowing the IEO and offers tokens to its existing user base. 

This of course makes things a bit safer for early investors. Aside from the due diligence or whitelisting process, another advantage of the IEO is the increased probability that a token will be listed on said exchange.

In comparison, with an ICO there is no certainty that a token will get listed at all and there is no independent due diligence. 

At least with an IEO, if an exchange is performing an IEO there is a more than fair chance that the token is going to get listed on the exchange and increase the chances of success and importantly, gain instant liquidity.

 

Unlike ICOs and IEOs, tokens are released after the IDO

Now, let’s move on to the IDO. In both of the above examples, the initial coin offering and the initial exchange offering, tokens are sold prior to the listing. Initial DEX offerings are different. They are sold and issued after.

 

Initial DEX offerings, what are they?

Now that you have a bit of background info and understanding of what ICOs and IEOs are it´s easier to understand what an initial DEX offering is and how it is different. 

Let’s get into IDOs and what they do.

Initial DEX offerings are in contrast decentralised and are instead promoted by specialised platforms called launchpads. 

This is one of the fundamental differences between the IEO and IDO, the IEO is a centralised exchange whereas the IDO uses a decentralised exchange but is promoted by a 3rd party launchpad. 

IDOs also tend to raise relatively smaller amounts when compared to ICOs. The ICO would be similar to a company going public via an IPO and raising a huge amount of money whereas an IDO could be similar to a company raising a few million via crowdfunding.

So, you could think of IDO launchpads like crowdfunding platforms such as Kickstarter but for crypto and instead of the IDO taking place entirely on the crowdfunding platform, it takes place on a decentralised platform. 

If a crypto project would like to raise capital they can approach a launchpad like PolkaStarter or Dao Pad. 

The beauty is that launchpads are gatekeepers and decide who can promote a project and promote an IDO on their platforms and therefore they need to ensure quality and credibility. 

For investors looking to get in really early, these launchpads and IDOs provide quite a nice and perhaps slightly safer vehicle when compared to the ICO. 

Additionally, IDOs are relatively less expensive and also make it a little easier for smaller investors to get in early. They also tend to be less expensive for the project operators in terms of fees.

 

How do initial DEX offers (IDO) work?

Unlike with ICOs and IEOs, IDO-issued tokens are not pre-sold, instead, prospective investors create a sort of IOU within a pool by contributing their funds in the form of crypto, say BTC or Eth. 

In other words, they pay for their tokens in advance. Once the IDO has been completed the tokens are issued and this event is called a Token Generation Event (TGE). 

Usually, within a matter of hours, they are instantly liquid when they are listed on a decentralised exchange such as Uniswap.

Uniswap is popular as currently the majority of projects are built on Ethereum and their tokens are based on the ERC20 protocol standard. 

Still, not all the action is taking place on say Uniswap/Ethereum. 

Other blockchains are growing in popularity including Polkadot, Binance Smart Chain (BSC) and Solana. 

Some projects prefer to launch their tokens on blockchains such as these to avoid the high network fees on Ethereum. 

In this case, the token would be listed on native exchanges such as BSC´s PancakeSwap as an example.

 

A new trend, multiple launchpads and multi-chain IDOs

As IDOs evolve, there is a trend developing towards projects launching on multiple launchpads in order to be on more blockchains and thus attract a wider range of investors. 

For example, a project could perform an IDO on an Ethereum-based platform and another or maybe even on several other platforms built on Polkadot, Solana or Binance Smart Chain as examples. 

Users can then choose where they would like to participate and the project improves its chances of a successful raise.

 

The instant and powerful marketing and community-building effect of IDOs

One of the major benefits of IDO crypto projects is the almost instant marketing and community-building effect. 

As in the traditional business world, if nobody knows about your startup it’s difficult to successfully raise money or grow. 

Think of crowdfunding campaigns on platforms like Kickstarter or Seedr, the successful ones almost always have a fair amount of marketing / PR / social media running behind the scenes drumming up awareness of their crowdfunding campaign. Something similar happens in IDOs but in a slightly different way.

Due to demand for IDO tokens tending to be high, the launchpad platforms can only allow a limited number of users to participants and as a result can only provide a very limited size allocation, typically only a few hundred dollars worth each. This process is called whitelisting.

 

Whitelisting and participation in IDOs

To this end, every single IDO out there goes through an extensive whitelisting process that narrows down the participants to a supported maximum. 

To be eligible for being whitelisted, users often need to perform various marketing tasks, which can typically include joining the projects Telegram chat, retweeting and commenting on a projects tweets and also liking a project on its social media platforms. 

This can rapidly elevate awareness of a project and community growth which can not only help a successful IDO fundraise but also help the project to more rapidly gain traction. 

It is not uncommon to see a future IDO project gathering over 100,000 followers on Twitter and as many people in their Telegram groups in just a matter of days. This is in itself pretty phenomenal.

Another whitelisting criteria can be for users to hold a certain amount of tokens that are native to the launchpad´s platform itself. 

As an example, the IDO platform PolkaStarter has two pools, one is open to everyone and the other is only for the participation of POLS holders. 

Naturally, the competition for allocations is considerably less. 

As IDOs are getting increasingly popular it is becoming clearly beneficial to be a token holder in the launchpad and have a better chance of getting in on the hottest new crypto projects. 

In many cases, the number of native tokens you hold in the launchpad can help to increase your probability of getting an allocation and also the size.

 

Conclusion

In summary, the IDO is the latest evolution in crypto fundraising and is perhaps in many ways an improvement on its predecessors, the ICO and IEO. 

Crypto is a rapidly changing landscape and this rate of rapid change, evolution and adoption of new techniques, projects and methods can make crypto very exciting indeed. 

The IDO is something that investors should certainly be aware of and can potentially offer access to promising early-stage crypto projects that are independently vetted, the IDO can be especially beneficial for smaller investors if they are able to get in on IDO projects in time and all being well, benefit from the rapid growth that will hopefully follow.

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auroracoin

Auroracoin Explained

Auroracoin (AUR) was launched on January 24th 2014 as an Icelandic peer-to-peer cryptocurrency, Iceland’s alternative to Bitcoin and the Icelandic krona. Quick side note, Auroracoin shouldn’t be confused with the cryptocurrency token Aurora (AUA).

Auroracoin and Bitcoin share the same mysterious origins

Much like Bitcoin where the creator or creators are to this day unknown, the original creator or creators of Auroracoin are also a mystery and go only by the pseudonym Baldur Friggjar Óðinsson. 

Additionally, exactly as with Bitcoin, the total supply of Auroracoin was limited to 21 million coins at inception.

It is understood that Auroracoin was created as an alternative to the government-controlled currency, the Icelandic Krona following the 2008 financial crisis and federal government-backed bank bailouts. 

Additionally, to restrict the outflow of capital the Icelandic government implemented controls that prevented its citizens from moving foreign currency out of the country. 

The second reason was to present an alternative digital currency where the unlimited printing of money was not possible due to the 21 million coin limit and thus reduce or perhaps even eliminate inflationary effects prevalent in most government-issued fiat currencies.

Auroracoin was seen as an answer to financial frustration in Iceland after the 2008 financial crash

The creators of Auroracoin said: “People in Iceland have, for the past five years, been forced to turn over all foreign currency earned to the Central Bank of Iceland. This means that the people are not entirely free to engage in international trade. They are not free to invest in businesses abroad. The arbitrary use of power this entails and the unsustainable debt of the Icelandic government has created uncertainty and risk in all aspects of commerce and the overall effect of government restrictions on the local economy was crippling”.

It has been suggested that Iceland could be seen as the ideal breeding ground for a virtual digital currency due to the limited use of cash, high adoption of electronic finance and an unusually high level of interest in Bitcoin within Icelandic society. 

If you add to this the long-term instability of the Icelandic krona and the foreign exchange controls enforced on citizens it’s easy to see how Iceland could be an ideal environment for a decentralised digital currency such as Auroracoin.

The big Auroracoin “airdrop” in 2014

Initially, half of the total 21 million Auroracoins were pre-mined and allocated for the entire population of Iceland, with some 330,000 Icelandic citizens living in Iceland. 

In what was a first of its kind, a national ID-enforced airdrop began with phase 1 on 25th March 2014 whereby 31.8 Auroracoins were allocated per individual claimant. 

This was followed by two further phases that concluded in 2015 with 318 and 636 Auroracoins available per claimant. 

From these 10.5 million pre-mined Auroracoins, around 40% were claimed, 10% of the coins were gifted to the Auroracoin foundation (M1 fund) and 50% of the pre-mined Auroracoins were verifiably and permanently destroyed or in crypto terms, burned by being sent to the special burning address AURburnAURburnAURburnAURburn7eS4Rf.

In 2016 there was a hard fork to a multi-algorithm proof of work (PoW) code change resulting in a block time change from 10 minutes to 61 seconds thus massively improving transaction speeds. 

There was also an increase in the maximum number of coins to 23.3 million which was adjusted to 17.97 million after 5.345 million Auroracoins were burned.

Auroracoin was based on Litecoin’s proof of work algorithm

Auroracoin was originally based on Litecoin with a script proof of work (PoW) algorithm which relies on a system of miners solving highly complex mathematical puzzles known as hashes. This is the same consensus system used by Bitcoin and currently also Ethereum although this is due to change. On 8th March 2016, a new codebase was released using a multi-algo architecture based on DigiByte, pioneered by Myriadcoin.

Auroracoins value reached a high of $1 billion during the build-up to its launch on the back of rumours that Auroracoin was backed by the government of Iceland. 

However, the airdrop resulted in a massive selloff causing the plummeting of Auroracoin down to just $20 million. 

Auroracoin was viewed by many as a failure or even a scam

For many observers, Auroracoin has been seen as a failed experiment and has also been referred to as a scam. 

This “failure” amongst other things led to the project sitting on the back burner for a period of time until a new team from the Aurora Foundation took over in 2016. 

This team took on the challenge of developing the infrastructure including cryptocurrency wallets and trading exchanges for the coin.

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web3 the new technological wave

Web3 and DeFi, the next big technological wave!

The crypto juggernaut is gathering speed and at a breakneck pace. What was once the sole domain of crypto enthusiasts is now entering the mainstream with a vengeance. 

It seems that nowadays everybody is talking about crypto and itching to get in on the action. 

In particular, the focus and excitement is in the explosive areas of Web3 and DeFi. 

In this article, we are going to look at some of the fundamentals and longer-term investment opportunities presented by the major technological shifts taking place in the world of web3 and Defi.

It’s 2009 and Bitcoin arrives on the scene

It all began in 2009 with the arrival of Bitcoin, a revolutionary decentralised digital currency without geographical barriers or any form of central government control. 

The pioneering blockchain technology running under the covers planted the seeds for where we are today. 

Bitcoin itself is still purely a means of holding and transferring value, much like a traditional fiat currency like the dollar or euro or a valuable commodity such as gold. 

Bitcoin does not serve any other extended purpose. The arrival of Bitcoin however introduced a breakthrough technology, the blockchain which has opened up a multitude of possibilities that have the ability to disrupt virtually every industry and in particular finance. 

Welcome to DeFi and Web3…

From its earliest beginnings, the crypto world has evolved at rapid speed and has in recent years spawned an entirely new industry known as decentralised finance or DeFi for short. 

DeFi mainly runs on the second largest cryptocurrency network, Ethereum. Ethereum has gone from being a cryptocurrency like Bitcoin to becoming a broader ecosystem for DeFi projects mainly due to the availability of smart contracts. 

Smart contracts are agreements or contracts written in software that are not open to interpretation, discussion or adjustment. 

They execute exactly as per the instructions written into the smart contract and provide an ideal instrument on which to build sophisticated businesses in a trustless environment. 

In DeFi a smart contract sits in the middle as the authority, as opposed to a centralised institution as is typical in traditional finance and most other businesses.

What is Web3?

Web1 was the original bare-bones internet, simple, informational websites mainly. You can get a taste of Web1 by looking at ancient search engines like Lycos, hotbot and webcrawler that are still lurking around on the internet.

Web2 was commerce-driven and spawned the internet giants we all know today, Google, Amazon, Expedia, Facebook and so on. 

Web3 is the new kid in town and one that is creating quite a ruckus. 

Web3 has the potential to truly shake up and revolutionise the world we live in, create entirely new industries and potentially level the playing field, especially in finance. 

In essence, Web3 is the next major evolution of the internet, one that is decentralised and based on peer-to-peer technologies such as public blockchains. 

Take an organisation like Amazon, which is a centralised profit-driven Web2 business, it provides a centralised platform and infrastructure on which things can be bought and sold on the internet. 

In a Web3 world, there is no centralised Amazon, but rather a highly sophisticated blockchain technology using smart contracts that provide the software protocols and required levels of security needed to enable transactions without requiring a physical intermediary. Sorry, Jeff Bezos!

This Web3 model is extending into banking, trading, insurance and more. Just as there was an explosion in commerce-driven websites during the Web2 phase, we are seeing the same again with Web3 and this is presenting investors and novices alike with opportunities to get in early on the Web3 superstars of tomorrow.

Investing in protocols and the fat protocol thesis

Below every significant technology there are usually key protocols. There has been a fundamental shift in the way protocols are being monetised. 

Our current web technology is dependent on protocols like TCP/IP and HTTP and billions of emails rely on POP/IMAP protocols to enable sending and receiving. 

The crucial protocols that have enabled much of the technology we rely on today have been in effect given away for free by the developers who generously created them on an open-source basis. 

They are free to use and exploit and exploited they have been without a shadow of a doubt and one can argue with good effect. Imagine if every email cost money! (more on that later..)

Thin protocols/fat applications vs fat protocols/thin applications

In Web2, there are what are known as thin protocols and fat applications where the vast majority of the value is in the applications built on top of the protocols, think Google, Amazon and Facebook running on top of the core internet protocols. 

The value in Web2 is on the application side, not the protocol side. 

In Web3 this has fundamentally changed and has been flipped around, the protocol is fat and where the bulk of the value is and the applications running on top are on the thin side. 

Bitcoin’s creators cleverly invented a protocol and system that has an inherent value system and which rewards its participants at the core. 

If we were to look at POP3/IMAP, commonly used to send and receive millions if not billions of emails every day there is no financial reward. 

This on the one hand is great as emails remain free, but those that developed this essential protocol did not make a fortune from it. 

As a crypto investor, investing in protocols should be considered in addition to investing in the individual applications that are running on top of the protocols, a fundamental difference when compared to Web2. 

The name of the game is to be able to identify and invest in the protocols and applications of the future. 

There is something called the fat protocol thesis which says that the total value of all the apps running on top of a protocol such as Ethereum will never exceed the total market value of Ethereum. 

Thus according to this theory, Ethereum should continue to grow in value as the ecosystem it supports grows. 

The fat protocol thesis seems to be holding and provides a reasonable rationale on which to invest in protocols/blockchains for the longer term.

Web3 is the gold rush of the 21st century

One can liken the current Web3 boom to that of the famous gold rush of the 1800s. 

The pursuit then was gold and attracted hundreds of thousands of prospectors to California and South Africa. 

In a similar way, DeFi has exploded onto the scene with almost limitless possibilities, unlike gold however which is limited in quantity, DeFi projects are virtually limitless in scope.

However, not all projects will succeed and could be as useless as a hole in the ground so the secret is to know which tokens to pick and invest in and that isn’t easy even for seasoned crypto investors. 

Web3 money markets and how to earn a passive income from DeFi

Speculation is not the only way to profit in the crypto world. 

Just as with traditional financial markets, it’s also possible to earn a modest passive income by putting crypto assets to work. 

With interest rates still at a historical low there is a need for ways in which one can earn a reasonable passive income in DeFi from crypto assets by way of yield farming, staking, becoming a liquidity provider and through the lending of crypto. 

In very simple terms one can use their crypto assets to earn income in the form of fees or interest rather than profit from the growth of the underlying Web3 asset.

Conclusion

In the simplest terms, imagine having the chance to invest in Amazon, Facebook and Google when they were first starting out. Sadly, that boat has already sailed, however, the next generation of Amazon, Facebook, and Google are on the sidelines, fueling up and ready to make an impact. Just as with the web2 era, only a handful will become major players, the challenge is figuring out who the future DeFi and Web3 giants might be and get in on the action early!

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crypto arbitrage

Crypto Arbitrage explained

Cryptocurrencies have grown into a mainstream phenomenon. As with virtually all types of global commodities, opportunities exist to make money but lose it as well.

Bitcoin may not be as well established as other trading assets, but it does have the advantage of being ‘open’ 24 hours a day, 365 days a year and is perhaps a little more accessible to everyday people. 

Bitcoin is global and not bound by borders or national restrictions. Bitcoin and other crypto can also be found on multiple exchanges across the globe whereas traditional assets are much more limited, although generally more robust for trading purposes. 

From futures trading, leverage and margin, to simply buying and holding, people entering into the cryptocurrency space are always looking for sure-fire ways to make their cryptocurrency grow, even beyond what its famed volatility will allow for. 

This is where crypto arbitrage comes in. Due to the volatile nature of cryptocurrencies like Bitcoin, traders can take advantage of price discrepancies across multiple global exchanges. 

Seeing as there are so many crypto exchanges and even more buyers and sellers across these markets, there will undoubtedly come a time when the price of Bitcoin is different from one market to another producing the perfect opportunity for crypto arbitrage. 

So what exactly is crypto arbitrage, and is it as easy as buying low in one place and selling high somewhere else? 

What is Crypto Arbitrage?

Simply put, arbitrage is when a person purchases an asset in one place and sells it in another to profit from a slight deviation in price between markets. 

As an example, if 1 BTC costs $30,000 on Binance but it’s currently also trading at $30,100 on Kraken, there is a $100 opportunity for arbitrage.

In this instance, if you purchase your Bitcoin on Binance and hopefully sell it quickly enough on Kraken you’ll make a $100 profit — easy enough, right? 

Unfortunately, while the mechanics are as easy as that, there is a lot more to consider before jumping fully into crypto arbitrage as a sure way to make quick profits. 

How crypto arbitrage works

As explained above, crypto arbitrage is looking for the same asset selling at different prices and taking advantage of that. 

There are mainly two types of crypto arbitrage: Arbitrage between exchanges and Arbitrage within the exchange.

The former is the most basic way to make crypto arbitrage work for you as different exchanges will have slightly different markets. However, with arbitrage between exchanges, some variations help you take advantage of price differences. 

Once you have identified the two exchanges you want to play off each other, it is time to enact the trades to make a profit. However, one also needs to be aware of the workings that can cause issues in trying to be profitable. 

It takes around 15-20 minutes for major coins to confirm the transaction. If the market price drops within this time frame, you may run a risk of generating less arbitrage profits. 

Factors like geographic location, time of day, and even different news cycles can all move the price of a coin within those 15-20 minutes and destroy your hopes of being successful in an arbitrage trade. 

Can crypto arbitrage be profitable?

Arbitrage is a well-known and established practice in the world of finance. It can be profitable. However, it will require dedication and persistence to succeed. 

Crypto arbitrages are usually quite small. You can earn profits from market differences, from about 0.2 – 2.5% ($10 to $100) every day. If you focus on around ten such spreads every day, you could make upwards of a thousand dollars per week.

However, you need to know what you are doing, and you have to be prepared with the right tools and platforms. 

If you are a day crypto trader, and there is not much market movement, you can always earn some profit from arbitrage. 

If you are persistent and quick to take action on profitable opportunities, it is possible to earn a decent profit from arbitrage. 

It will generally be a factor of just how much money you are able to put to work. Making 2% off of 500€ is nowhere near the same as 2% off of €1 million!

Crypto arbitrage comes down to awareness and speed. It is up to you to recognise the differences across various exchanges, and you need to access multiple listings at once, given that cryptocurrency exchanges operate 24/7/365, it can be very time-consuming.

Pros and Cons of Crypto Arbitrage

As with everything, there are certain pros and cons to crypto arbitrage, and a lot of it depends on you as a trader and what knowledge and access you have. 

There are indeed a lot of pros to crypto arbitrage, but it is not as simple as it sounds and many things need to be considered before jumping in. 

Pros of Crypto Arbitrage

Quick Profits

Because you can buy at one exchange and sell at another in a matter of minutes, the potential for profit in crypto arbitrage is fast. This is much quicker than traditional trading where you buy and hold cryptocurrency to sell at a later date.

A Wide Range of Opportunities

The cryptocurrency space is bursting with new markets, coins and exchanges and all of this gives rise to new potential avenues for crypto arbitrage. 

According to Coindesk, there are more than 391 cryptocurrency exchanges in the world today and these will all have a slightly different price for different cryptos.

The Crypto Market is Growing

Because crypto is still very much in its infancy and has not been totally adopted or accepted, it is not a mature and steady space. 

Due to this, there is quite a bit of irregularity, disjointing, and lack of information transfer between exchanges. There are also a fewer number of crypto traders than in the traditional markets, and thus less competition in the market, which leads to potential price differentials.

Cryptocurrencies are Incredibly Volatile

While volatility is often frowned upon in investing circles, it is the one aspect of crypto that makes it so enticing to risk-takers and traders. 

For crypto arbitrage, it also means more opportunities as there can be huge price changes between exchanges and this makes for a more lively opportunity for bigger arbitrages.

The Cons of Crypto Arbitrage

Anti-Money Laundering Rules and Restrictions

While not really a con, and quite acceptable with crypto, using multiple exchanges will often call for you to adhere to the KYC regulations that are in place. This will involve things like potentially holding a bank account in the same country where the exchange is based

Fees

This can be quite a hidden barrier for arbitrage. Because users are operating with often small profits, any fees for trading crypto, withdrawal fees, network fees or exchange fees, can impact the profitability of arbitrage, or could even lead to a loss. 

High Start-Up Capital

In order to really profit from crypto arbitrage, and make it worthwhile with the tiny profit margins there is a need for a relatively large amount of trading capital to make it worthwhile. 

Withdrawal Limits

With large trades and bigger capital amounts, there also comes an issue of withdrawal limits. Exchanges can have set limits for traders which means you may not be able to get the access you want to your profits right away. 

Slow Transactions

Crypto transactions are also susceptible to market volatility in terms of their speed and accessibility.  When the markets are on the move, the best time for arbitrage, it is not uncommon to have slower transactions, or even downtime on exchanges which could hurt profits. 

 

Things to Know and to Watch Out For

Understanding the pros and cons of crypto arbitrage will help you decide if this is the right option for you, but if you do decide to go down this route, there are a few more things to watch out for. 

A number of pitfalls can trap unsuspecting traders.

Similar Sounding Coins

The cryptocurrency space is large and constantly expanding. New coins are being created and brought to market all the time and they can often have similar-sounding names which can trick traders. 

A good example of this is the project ‘SIA’ which is an application for decentralized cloud storage solution and its symbol is very close to another project called ‘SAI’.

Even when it comes to the different coin tickers there can be issues — such as $HNC (HellenicCoin) and $HNC (Huncoin), or ($BTCS) Bitcoin Scrypt and ($BTCS) Bitcoin Silver.

Scam Coins And “Pump & Dump” Schemes

While the cryptocurrency space is certainly getting better and more regulated, there are still instances where people are being scammed out of their money. 

Many coins can come to the market with the express purpose of stealing money from investors. If you arbitrage such coins, you could get burnt. The same thing happens with pump and dump schemes where projects purposefully inflate the price of their coins only to sell high and collapse the market; this can also be devastating for arbitrage. 

A Lack of Trading Volume

Often when looking for arbitrage opportunities, you may be led to smaller, lesser-known coins with good potential for arbitrage. 

However, these coins can also lack trading volume. This can hamper large trades of the coin and lead to serious consequences such as delisting. You could avoid running into that issue by keeping an eye on the exchange order book and making sure that you see transactions happening or not.

Is Crypto Arbitrage Worth It?

Having considered all of the above, it is time to decide if crypto arbitrage is actually worth pursuing. Certainly, it is a viable opportunity, especially in the cryptocurrency space, but what needs to be understood is that it is not a silver bullet for making easy money. 

Buying a coin low, moving it across to where its price is higher, and selling it on to collect a profit sounds easy, but there are many considerations that need to be looked at. 

Dealing with crypto is still challenging and often lacks an easy user interface. More than that, the lack of full regulation means there are issues surrounding scams and schemes. 

Besides all of that, crypto arbitrage can be difficult to master and requires a lot of prior knowledge and experience, not to mention a decent amount of starting capital to ensure viable profits and some good coding chops if you are hoping to do it on a decent scale because if you are doing it manually, you are not going to be efficient. 

Crypto arbitrage is certainly an option to make money but to be successful it requires access to capital, hard work, a tolerance for risk and a thirst for knowledge. If you’re prepared to put in the work and have some skills it could prove profitable.

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