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Equity Tokens vs Security Tokens

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Equity Tokens vs Security Tokens

Learning the differences between equity tokens vs security tokens is a smart way to better your overall crypto investment strategy. While most crypto investors are familiar with traditional utility tokens such as Ethereum, both security, and equity tokens are fairly new to the space. These tokens vary from utility tokens in many different ways.

Protect Your Investment

Different tokens have different legal regulations. Currently, equity, debt, and security tokens fall under standard securities transaction laws, whereas, utility, currency, and asset tokens do not require SEC approval. Let’s take a moment to examine some key differences between equity tokens vs security tokens.

Know the Difference – Security Tokens

According to the SEC, one can perform the “Howey Test” to determine if a token falls under securities regulations. The Howie test is a series of questions that include:

  • Did You Invest Money?
  • Do You Expect Profit?
  • Did You Invest in a Common Enterprise?
  • Are Profits dependent on a Third-parties Effort?

If you answer yes to these questions, you are investing in a security token. Security token holders do not have any ownership rights to the entity they invested in. Instead, they are guaranteed a percentage of the profits generated from the entity. Security tokens come in many forms:

  • Securities
  • Digital Mutual Funds
  • Digital ETFs
  • Non-equity Investments Against Capital

Additionally, security tokens cannot be transferred without meeting certain regulations. These regulations include AML and KYC requirements. This makes security tokens less liquidable than their utility token counterparts that can be traded anonymously.

Notable Security Token Platforms

There are a number of notable security token platforms operating in the cryptospace today. Polymath, Securitize, and Harbor are three of the most established platforms available today. Each offers enterprise users an easy option to issue and maintain security tokens.

Security Token Protocols

Security tokens contain their regulatory compliance directly within their protocol. By including these regulations in the tokens smart contract, security token issuers can guarantee their product remains compliant throughout all stages of its lifecycle. Below are the most popular security token protocols currently in use.

ERC-1400 / ERC-1404

The ERC-1400 entered the market in December 2018. This protocol is the brainchild of Polymath’s development team and Stephane Gosselin. Develops knew that if they could utilize a varied ERC-20 protocol that this would allow for the greatest amount of interoperability within the market. The ERC-20 protocol is by far the most widely used utility token issuance standard available.

Stephane Gosselin via SlidesLive

Stephane Gosselin via SlidesLive

The team sought to create a security token standard that could function on the Ethereum blockchain. Additionally, the team wanted a protocol that contained no partitions. Today, the ERC-1400 standard is used by many firms globally.

ST-20 – Polymath

Polymath took their concept a step further when they created the ST-20 protocol. The ST-20 token standard functions similar to the ERC-1400 but with one main advantage, ST-20 tokens are able to remain compliant when traded on decentralized exchanges (DEX). Polymath proved this theory earlier in the month via a test with the DEX Loopring.

DS-Token – Securitize

The DS-token standard is the brainchild of the popular token issuance platform Securitize. Securitize utilizes a Compliance Service to ensure that their tokens are handled in a legal manner. The tokens must get approval from this on-chain registry to verify investor status before executing any trades. This means all DS-token holders have an identifying hash.

Secondary Compliance

Secondary market compliance continues to be a hot button topic in the industry. Just this month, the DTCC released a paper outlining how these secondary market concerns need to be addressed to ensure fair market practices. Currently, the DTCC is the third-party custodial exchange for traditional securities markets. The firm replaced the old paper transfer methods used in the 1970s.  Last year, the DTCC handled over four-quadrillion in securities transactions in the US alone.

Equity Tokens

Equity tokens function more like a traditional stock asset. In other words, equity token holders possess some form of ownership in their investments. Their tokens represent how much ownership percentage they actually have. In most instances, equity tokens represent a third-party asset, property, or venture. Equity tokens come in many forms:

  • Stocks
  • Futures
  • Options Contracts
  • Tokenized Real Estate
  • Tokenized Ventures

Equity tokens continue to see the most use in real estate crowdfunding platforms such as Atlant. These platforms allow investors to spread their funds more freely across the market. Real estate equity tokens represent a share of ownership in a particular property. This strategy enables investors to join multiple investments with less capital. Additionally, these platforms lower the entry bar for real estate investments and facilitate more market activity.

Equity Tokens vs Security Tokens Standards

Currently, equity tokens share the same protocols as security tokens, but in the near future, you can expect to see equity token specific standards emerge. For the time being, security token protocols can perform all the necessary functions required by equity tokens. Additionally, ERC-based equity tokens gain a bit more interoperability when compared to what a future equity token standard might include.

Notable Equity Token Projects

One of the most publicized equity token projects entered the market in October 2018 under the name Media Shower. The Media Shower platform enables companies to create and issue equity tokens. Speaking on the venture, Media Shower’s CEO, John Hargrave explained how the concept opens the doors for new investment opportunities on all levels.

SEC vs ICO

The SEC started cracking down on the ICO market in 2017 after it revealed that it believed that most offerings were really tokenized securities. Failure to seek SEC approval when dealing with security tokens can result in hefty fines and even jail time. Since that time, there have been multiple highly publicized cases, with many currently underway.

In most instances, the SEC went after these firms for selling securities illegally. Company officials paid fines and were forced to return investors funds. In one instance, a company by the name of Gladius was able to avoid major fines by self-reporting their ICO. Consequently, the firm returned all investor funds as part of the deal.

Equity vs Security Tokens – Brothers from Another Mother

Each token type provides you with a unique investment opportunity. Be sure to consider your options fully. Also, always keep in mind that both equity and security tokens require approval prior to any transactions. These requirements can affect your ability to trade these tokens in the secondary market.

More to Come

For now, the cryptospace continues to grow as the advantages of blockchain technology continue to be better understood by traditional investment firms. You can expect to see more standards and token types emerge as these trends continue.

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David Hamilton is a full-time journalist and a long-time bitcoinist. He specializes in writing articles on the blockchain. His articles have been published in multiple bitcoin publications including Bitcoinlightning.com

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What are Dapps (Decentralized Applications)?

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What are Dapps

Decentralized applications (Dapps) continue to change the world around us in remarkable ways. These new-age programs provide users with more functionality and security than ever. Additionally, these applications feature a robust design that is meant to leverage the decentralized nature of blockchain technology. As such, these programs run on a blockchain or P2P network of computers instead of a single computer.

Dapps in-depth

When you think of a traditional software program like MSWord, it’s important to understand that the protocol resides on a single computer system. Even if you are using the online version, the actual software is operated by a central organization, in this case, Microsoft. Consequently, Microsoft has full control over the application and its use.

This control provides the group with full authority over the app. Importantly, centralized apps, such as Facebook, require this style of structuring to function correctly. The organization plays a pivotal role in these software systems. If it was attacked, damaged, or removed for any reason, the system would fail to operate.

Dapp Characteristics

While Dapps can come in all shapes and sizes, they all share some common factors. Firstly, all Dapps are decentralized. Decentralization implies that all the application’s operations must be stored on a public blockchain. Next, Dapps incentivize users to participate in their network. In most instances, these incentives include payment via some form of cryptocurrency. It’s very common for the application to create a native utility token to facilitate this process.

Dapps Create New Business Opportunities

Dapps Create New Business Opportunities

Paramountly, Dapps utilize some form of a consensus mechanism to ensure the validity of the network. In a consensus mechanism, the network’s participants act as validators. They are also known as nodes or miners because they receive a reward for their efforts, like mining for gold. Nodes are who validates new transactions. Additionally, one of the nodes eventually is who gets to add the next “block” to the “chain” of transactions.  Ideally, a Dapp will also feature an open-source protocol.

Dapps and P2P Networks

All Dapps run on either a P2P network or a blockchain network. A P2P network is a network that allows users to exchange data and services directly.  In the case of websites, you can think of streaming websites such as Popcorn Time. When users enter the Popcorn Time P2P Tor network they receive access to a variety of other users who are offering downloads. The user then chooses which user to download the data from and a direct connection is established between the two parties.

Blockchain P2P

In a blockchain network, there is no central point of control. There is no company that ensures the blockchain is running correctly. Instead, every computer on the network works together to secure the network.  In most instances, the software is open source. Open-source software is generally more secure because it allows the community o test its capabilities. In this way, blockchain technology creates a truly decentralized experience for participants.

Dapps vs. Regular Apps

To put the power of Dapps in perspective, let’s imagine that you just placed a post for your new political book on Facebook. However, when you go back to check on the stats for your post just a few hours later, you realize the post was removed because your book’s content violated Facebook’s new terms of service.

In its centralized network, Facebook is the entity in control of the network. In other words, they are the king of the content provided. If they deem that what you have to say doesn’t fit into their narrative, they have every right to kick you out of the platform. The same way you could ask someone to leave your home if you disapproved of their conduct.

Dapps function much differently. If Facebook is like your home, think of Dapps as a public park. There is no central governing authority to tell you that your post must go. In fact, due to the immutable nature of blockchain technology, your post about your book will never come down.

Dapps Enter the Scene

The first Dapp to enter the market with success was Bitcoin. As such, Bitcoin is a self-sustaining public ledger. It is immutable and decentralized. Even more important, is the fact that Bitcoin entered the market as a direct response to the centralization experienced within the traditional financial sector.

Ethereum Changed the Game

If Bitcoin lit the Dapp candle, Ethereum poured gas on it. Ethereum’s whitepaper states that this cryptocurrency is a “protocol for building decentralized applications.” Every aspect of Ethereum’s network focuses on reducing development time, improving security, and ensuring scalability.

Ethereum Whitepaper

Ethereum Whitepaper

Ethereum changed the Dapp game forever. This unique platform introduced a new programming language specifically to simplify Dapp programming. Additionally, Ethereum developers can utilize the Turing-complete Ethereum Virtual Machine (EVM) to create smart contracts in minutes.

Brave New Browser

Today Ethereum Dapps dominate the market. Applications such as the Brave New Browser utilize ERC-20 compliant tokens to accomplish some amazing things. In the case of the next-generation browser Brave, users receive BAT tokens for their participation. Brave users actually receive payment for their data. Additionally, they gain far more control over their information. Users can decide who, when, and what to share. In this way, the Dapp Brave is revolutionizing what it means to surf the net.

STORJ

In another perfect example of the added capabilities that Dapps bring to the market, the platform STORJ allows users to rent out their unused computer space. The application helps users and those seeking more storage meet up and exchange services. In the end, one party receives computer storage capabilities at a fraction of the normal market costs, while the other party earns cryptocurrency for providing the space.

Dapps Potential

The future potential for Dapps is undeniable. Every week, new and exciting projects emerge in the market. As such, you should expect to continue to see these protocols integrated into every business sector over the coming years.

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Bitcoin Trading Part 2 – Understanding Charts

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Bitcoin Trading Part 2 - Understanding Charts

Learning how to read crypto charts is an essential skill for anyone interested in trading Bitcoin successfully. At first glance, trading charts can seem like a foreign language. All the confusing lines, shapes, and colors can make it seem very intimidating for beginners. Additionally, learning technical analysis requires that you begin to learn the jargon associated with trading.

Luckily, crypto trading is very similar to stocks. In fact, the only real difference is the asset. Both assets utilize the same fundamentals. You can study up on some of the greatest stock traders in the world, and you will give yourself an amazing edge in the market.

Remember, trading isn’t about being different. It’s about understanding the psychology of the market. In other words, you don’t need to reinvent the wheel. At first, you will see more success by following the path of established traders that have practiced this skill for years.  The great news is that once you understand how to trade Bitcoin, you can trade a vast array of assets classes.

Step one on your journey to becoming the ultimate Bitcoin trader is to get familiar with the basics of trading. You will need to familiarize yourself with the key theories and terminology used today. You will also want to have a firm understanding of different chart types and pattern recognition.

Luckily, in terms of trading, market history has a tendency to repeat itself. Consequently, analysis allows you to recognize these trends and use them to make an informed decision on the market movements of the future.

Dow Theory

The Dow Theory is a strategy developed by Charles H. Dow., hence its name. Dow, along with Edward Jones and Charles Bergstresser, founded Dow Jones & Company, Inc. The trio went on to develop the Dow Jones Industrial Average in 1896.

Charles Henry Dow - Trading Bitcoin Part 2

Charles Henry Dow – Trading Bitcoin Part 2

The Dow Theory provides you with valuable insight into market movements. It states that the market price takes everything into consideration. Every factor including outside developments and all prior, current, and future details combine to establish the market value of an asset.

This theory means that as an experienced trader you must be able to monitor multiple variables in the market. You will learn to understand the current, past, and future demands of your asset community. This learning must come from a constant gathering of information and market news. You should always pay special attention to any future regulations.

The Dow Theory means that all price movements are not random at all, quite the opposite. Price movements follow larger trends. These trends can be broken into two categories – short and long term trends.

Bitcoin Market Analysis

In technical market analysis, you focus on a coin’s price specifically. This strategy requires you to utilize technical indicators and ignore outside variables contributing to the price. In this way, you are able to remove emotion from your decisions.

6 Tenets of Dow Theory

3 Market Movements

Main Movement – The main movement is the major trend currently underway. This trend is going to encompass years of market activity. For example, the main movement in Bitcoin is bullish if you look at the complete trading history of the asset. However, it’s important to understand that the main movement can be either bearish or bullish depending on the time frame included in your analysis.

Medium Swing – A medium swing is a secondary market reaction. This reaction can last for up to three months. Medium swings include price retraces. A retrace is when Bitcoin’s market movement begins to return to its original state prior to the market activity. In most instances, a retrace will return to 30% – 60% of the original market value.

Short Swing – Short swings are daily price fluctuations. A short swing can last up to a month in some scenarios. These minor movements occur due to market speculation. As such, Bitcoin experiences short swings throughout the week on a regular basis.

3 Market Phases

Accumulation

The accumulation phase occurs when knowledgeable investors receive some sort of valuable information that relates to them a significant change in market conditions. This information could include knowledge acquired from inside the company or from other avenues that could affect the market. In either case, the results are the same. These investors begin buying or selling their assets in a bid to position for the news.

Notably, this phase is difficult to detect as the market movements are minimal. The reason for the miniscule market adjustments is that the majority of investors are not privy to the information the first movers received. Since only a small number of people have access to this information, these sales go unnoticed amongst the daily trading volume.

Absorption

Absorption occurs when the general public begins to take notice of the market trend emerging. This participation leads to more market activity. Consequently, more investors jump on board the movement. Eventually, this scenario leads to speculation fueled by FOMO (fear of missing out).

Here is where emotions play a major role in dictating the market’s behavior. If the market is tanking, investors will get scared and panic sell their Bitcoin further fueling the price drop. Opposingly, if Bitcoin’s value begins to rise steeply, a rush of new investors enter the market attempting to catch the next bull run.

Distribution

In this phase, early investors begin to reintroduce their accumulated holdings to the public. These investors already realized a profit and now they are exiting their positions before the trend reverses. This exit causes the emergence of a swing that creates a price retrace in the market. Untrained investors are left with the holdings of those that were ahead of the trend.

Markets Discount News Immediately

The market reacts instantaneously to all information regarding an asset. This reaction encompasses all the data surrounding the investment. The value of your asset reflects the sum of all the hopes, fears, and expectations of all the market. News such as future regulations, major institutional adoption, and the introduction of new financial products all play a major role in the pricing of Bitcoin.

Mt.Gox Investor After 650,000 BTC Go Missing

Mt.Gox Investor After 650,000 BTC Go Missing

Additionally, non-Bitcoin related issues can affect the price of your asset. Occurrences such as major elections can cast doubt on the stability of an asset in the future. This scenario is especially true when speaking with new unregulated assets such as Bitcoin. Also, major events such as war, natural disasters, or pandemics affect the market value of assets as well.

Volume Confirms Trends

The volume of an asset is the amount of market activity it experiences. In the case of a bull trend, you should notice jumps in the trading volume. This price raise should correspond with a spike in market volume. When you see price jumps without corresponding upticks in volume, it’s usually a sign of what’s known as a pump. In a pump, large investors manipulate the price of an asset using their weight to initiate price trends.

Trends Continue Until the Market Shifts

This rule states that a market in motion will remain in motion until a trend reversal occurs. Basically, if you notice a large scale trend, you can expect that the trend will continue until you notice the start of another accumulation period by educated investors.

Unfortunately, it can be very difficult to successfully determine when a trend reversal is underway. The market will always have small and medium swings. These movements can make it extremely tricky to verify if a movement is actually the start of a reversal. A careful evaluation of all outside trading factors can help you to make the right choice in these situations

Bitcoin Technical Analysis

Technical analysis requires you to utilize a combination of tools to predict if the price of Bitcoin will rise or fall. Importantly, technical analysis provides you with more insight into the market. Consequently, the better you are at it, the more success you will have trading. Here are some key concepts you need to understand to simplify your technical analysis.

Bitcoin Chart Time Frames

You need to understand the timeframe windows and how their use will affect your analysis’s results. These are the most popular time frames available on Bitcoin exchanges today

  • 15 Min
  • Hourly
  •  4-Hour Chart
  •  Daily Chart

The time -frame you use depends heavily on your trading style. For example, if you are a day trader, you will use hourly, all the way down to the minute trading window. The reason for this decision is simple. You need the most up-to-date information because you are conducting micro trades.

Bitcoin Day Trading

Day traders can open and close their trading position in minutes. Additionally, they can trade continuously throughout the day. Some traders make 50+ trades a day. For these actions, you need up to the minute analysis.

Bitcoin Long-Term Traders

The situation is reversed for long term traders. These traders prefer to hold their position for months and even years. In some cases such as with HODLers (hold on for dear life), they may never intend to sell their Bitcoin holdings.

Long term traders depend on long term trends. These traders need to examine months of data at the same time to get a better overview of the larger trends. It does long term traders no service to examine the smaller fluctuations in the market. In fact, it can be counterproductive as it could cause the trader to second guess their decision.

Bitcoin Market Cap

You only need to be involved in the crypto market for ten minutes before you hear someone mention “market cap.” The Bitcoin market cap is the total amount of coins in circulation X the price of each coin currently. Consequently, the market cap tells you a lot about a particular asset.

Market Cap via CoinMarketCap

Market Cap via CoinMarketCap

You can examine the market cap to gain a deeper insight into the stability of an asset. Websites such as CoinMarketCap.com provide you with real-time analytics in the form of a line chart. You can use these charts to spot trends in the market. In the case of Bitcoin, you will notice that over the last 9 years the asset has gained considerable value.

Bitcoin Candlestick Charts

Candlestick charts are the most popular style of chart used in the crypto space today. At first, these charts can seem as strange as the controls of an alien spacecraft to the untrained eye. However, it only takes a few minutes to understand these remarkable trading tools.

Candlestick Chart - Binance Trading Window

Candlestick Chart – Binance Trading Window

Candlestick charts provide you with a plethora of information at just a glance. You will notice the red and green candlesticks are laid in succession. Importantly, each candle shows you the price movement of an asset over the selected timeframe.

How to Read Bitcoin Candle Sticks

Candlestick charts provide you with everything you need to know to understand the current state of the market value of an asset. You can see the opening and closing prices, the daily high and low, and you can decide on what time intervals you what this information displayed.

A green candlestick indicates that Bitcoin closed higher for the time period than its opening value. Anytime you see a red candle, it indicates there were some losses incurred by the asset. In this way, it’s easy to monitor market activity, even from your phone.

In most candles, you will notice there’s a body. Where the main body of the candle begins is the opening price for the day. If the candle is green, the opening price will be the bottom of the candle body. If the candle is red, the body’s top will let you know the opening price.

You will notice that the top or bottom always lines up with the proceeding candle in the chart. This alignment represents the close and opening of the next trading day. This time can varies depedning on the trading interval you choose.

Shadows

There are also small lines sticking out from the top and bottom of the candle. These lines are known as shadows. Shadows represent the high and low for the day. In this way, you can ascertain an incredible amount of information from a candlestick chart in seconds.

This data can then help you to make a timely investment decision. Certain candles can indicate the start of trends. Consequently, an entire terminology has emerged surrounding these indicators. Here are the most common candlestick indicators you will see when trading Bitcoin.

Candlestick Cheat Sheet - Jbmarwood

Candlestick Cheat Sheet – Jbmarwood

Hammer

A hammer candle can indicate a bullish reversal is about to occur. The candle shows that when the market opened, sellers forced the price to drop steeply. This downward pressure was met with stronger buying pressure. This pressure resulted in a shift in momentum.

Importantly, the momentum was pushed back down a slight bit, but not before the day closed. Hammers are easy to spot because they contain a shadow that is sometimes 3x as long as the body of the candle. Hammers let you know that buyers are in the market and they are controlling the price action for the day.

Falling Star

The falling star candle is the opposite of the hammer candle. When you see these candles it means that the buyers had control of the market when the day opened but before the close, their gains were erased by strong bearish pressure. In turn, you can predict that more selling pressure is entering the market. Falling stars have very small lower shadows with the upper shadow accounting for the majority of the candle.

Bullish Engulfing Pattern

A bullish engulfing pattern again signifies that buying pressure is strong in the market. In this 2-candle pattern, you see that the sellers forced the price down the day prior. The following day, sellers regained control and dwarfed the losses the bears introduced the day prior. This pattern shows a bearish candle followed by a larger bullish candle.

Bearish Engulfing Pattern

Reversely, the bearish engulfing pattern lets you know that sellers are entering the market in droves. The first candle in this pattern will show gains from the day prior. The next candle in this pattern will reverse the gains and show even stronger losses.

Morning Star

A morning star pattern utilizes three candles to determine market trends. A morning star is a bullish reversal pattern that shows a struggle ensuing between buyers and sellers. On day one, you see that sellers had full control over the market. This sales pressure was countered on day two and reversed on day three.

Evening Star

The evening star pattern is the opposite of a morning star. Here you see that buyers get exhausted after two days of pressure. On day one, the buyers were able to control the price. On day two there advancements were met with equal pressure and by day three, they lost control of the market. You can easily spot star trends because they have no body because the pressure on both sides of the market was equal. The morning star candle indicates that sellers are now in the backseat and bulls are in control. Evening Stars show that bears run the market currently.

Relative Strength Index

The Relative Strength Index (RSI) is a mathematical formula used to measure the current of the market.  The formula takes the strength and speed of a market’s price movements and compares them to others that occurred previously. The formula reads as:

RSI = 100 – (100/(1-RS))

By comparing the current and past market fluctuations, as well as the magnitude of recent gains to recent losses, the RSI attempts to establish if an asset is overbought or undervalued. An overbought asset will usually depreciate in the near future. An undervalued asset will go up in price as its intrinsic value is realized.

RSI - Investopedia

RSI – Investopedia

RSI Disclaimer

As with any charting tool, the RSI is not 100% accurate, no trading tool is. This means that you must use this tool in conjunction with other indicators to improve your results. RSI indicators are prone to false buy and false sell signals. These can occur when there is a pump or flash sale in the Bitcoin market.

Reading the RSI

The RSI chart shows a line graph that ranges from 0 to 100. A score of 70+ indicates an overbought asset. This indication could signal a price drop. Reversely, a score of 30 demonstrates an undervalued asset. This score means there is a good chance the asset could experience a price rise.

Bitcoin Support and Resistance Lines

RSI is important but it’s not the only tool that you use to trade Bitcoin. You will also want to understand support and resistance lines. Think of these invisible barriers as predetermined levels of the price of an asset at which trend reversal usually occurs.

Determining support and resistance levels is easy. Just look for points on the chart that you see multiple touches of price without a breakthrough of the level. Whenever the asset meets these barriers it is either pushed away or it breaks through to the next support/resistance levels. When a support level is broken, it indicates that the market has reversed its flow. Additionally, support levels can help you to determine where the price of Bitcoin might bounce back.

For example, if Bitcoin has a support level at $8500, it will be harder for Bitcoin to increase past this price if it’s below that level. This is what’s known as a resistance level. If Bitcoin was over the price of this level, it would then serve as a support line. When the line is definitely broken, it signals major market movements.

Bitcoin Market Psychology

Successful traders need to grasps the main psychology of the market to remain effective. Understanding the minds of other traders helps you to better predict how the market will reflect certain developments such as new regulations. There are three main types of trading psychologies at work in the market today.

The first type of trading psychology is that of long traders. These are individuals that buy their assets and plan to hold them until the price rises at a much later date. At that point, they will resell their assets and take their profits. You also have traders who go “short”. These are traders that expect Bitcoin’s price to fall in the future. These traders often incorporate other financial instruments such as leveraged futures to maximize their profits. Lastly, you have your average trader. This is the trader who doesn’t have the insight to make a determination of the market’s fluctuations. This category contains most new traders.

Bitcoin Trading – A New Skill to Master

Now that you have a firm understanding of the key components in trading Bitcoin, you are ready to start your trading adventure.

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What is Blockchain Technology?

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What is Blockchain Technology?

Its been almost ten years since Satoshi Nakamoto first introduced Blockchain technology to the world in his 2008 Bitcoin Whitepaper. Since that time, these revolutionary networks have gained popularity in both the corporate and governmental sectors. This growth is easily explained when you consider that blockchain technology provides the world with some unique advantages that were previously unimaginable. Consequently, today, you can find blockchain technology in nearly every sector of the global economy.

What is Blockchain Technology?

A blockchain is a network of computers that share a distributed ledger across all network participants (nodes). This strategy is far different than say, fiat currencies that originate from a centralized authority figure. Importantly, this ledger keeps an unbroken chain of transactions since the birth of the network. This “chain” of transactions grows larger as new “blocks” of transactions are approved and added to it.

Bitcoin Whitepaper

Bitcoin Whitepaper

In order to approve new transactions, each node works together with others to validate new blocks. Additionally, the nodes also validate the current state of the entire blockchain. In order for a new block of transactions to be added to the blockchain, they must receive approval from 51% of the network’s nodes. Nodes are also referred to as miners. In this manner, blockchain networks are decentralized networks that provide unmatched security to the world of digital assets.

Security via Decentralization

Decentralization is an important aspect of blockchain technology because it makes these revolutionary ledgers immutable and unalterable. In fact, since there is no centralized attack vector, hacking a blockchain is nearly impossible. The larger the blockchain network, the more secure the data on it remains.

For example, let’s look at the world’s largest blockchain, Bitcoin. Currently, the Bitcoin blockchain has over 10,000 active nodes located across the globe. This distribution means that in order for an attacker to alter even just one tiny piece of information on the blockchain, they would need to successfully hack 5,000+ computers at once.

While this task may not be impossible for the quantum computers of the future, it’s so unprofitable that it makes no sense to even attempt such a monumental task. Additionally, on top of successfully hacking 5000+ computers at once, an attacker would also need a supercomputer to recalculate the new blockchain transactions in time to introduce them into the network. It would literally be more affordable to create a new cryptocurrency from scratch.

Consensus Mechanisms

One of the reasons why blockchain networks are so secure is the integration of consensus mechanisms. Consensus mechanisms are cryptographic protocols that leverage the participants of a blockchain network in securing its data. In the case of Bitcoin, the Proof-of-Work (PoW) consensus mechanism is used.

Proof-of-Work (PoW)

The Proof-of-Work consensus mechanism was revolutionary to the world of cryptography when it was first introduced years prior by Adam Back in his Hashcash whitepaper. In the concept, Back describes the integration of a mathematical equation to the network’s security protocols. In this way, every computer can show “proof” of their work securing the network.

Miner Rewards

It’s important to understand that nodes receive a reward for their mining efforts. These rewards adjust automatically depending on the network’s difficulty and value. In the case of Bitcoin, miners originally received 50 Bitcoin for their efforts. Today, this seems like fortune, but back in 2009, Bitcoin was only worth pennies. As the value of the token rises and the network goes, the mining rewards shrink. Today, Bitcoin miners receive 6.5 BTC if they add the next block to the chain.

SHA-256

Notably, every node validates and secures the blockchain, but only one gets to add the next block of transactions to the network. To determine who the next miner is that gets to add this block, every computer competes in a mathematical race to figure out the PoW equation. In the case of Bitcoin, the equation is known as SHA-256. Importantly, the first SHA algorithm dates back to Hashcash. This early version of the equation was known as SHA-1.

Bitcoin Consensus Mechanism - SHA-256 - Blockchain Technology

Bitcoin Consensus Mechanism – SHA-256 – Blockchain Technology

Notably, the SHA-256 equation is so difficult that it’s easier and more efficient for your computer to just make random guesses rather than attempting to figure out the equation directly. The answer to the equation must begin with a predetermined amount of 0s. In the Bitcoin blockchain, the equation’s answer must start with four zeros. However, if the network’s congestion rises, so does the difficulty of these equations. This difficulty adjusts by the addition of another zero at the beginning of the required SHA-256 answer.

Similarly to traditional commodities such as gold, there are costs that are associated with the creation and introduction of these digital assets into the market. These random guesses utilize intense computational power. This power equates to real-world costs such as electricity bills. Studies have shown that securing the Bitcoin network can use more electricity than required by entire countries. Luckily, over 80% of Bitcoin’s power consumption comes from renewable sources such as solar or hydroelectric.  This cost of mining also adds measurable value to each Bitcoin.

Miners

As Bitcoin began to gain in profitability,  its network’s computing power expanded significantly. In the beginning, nodes, also known as miners, could mine for Bitcoin using nothing more than your home PC. Eventually, miners realized that graphic cards were far better at the repetitive guessing required to figure out the SHA-256 algorithm. This led to a computational race in the market.

ASIC

Eventually, large blockchain firms such as Bitmain introduced Application Specific Integrated Circuit (ASIC) miners into the equation. These purpose-built miners were thousands of times more efficient at guessing the SHA-256 algorithm than the GPUs and CPUs before them. Consequently, their introduction created a scenario in which the average miner now needed to invest thousands in mining equipment to stay relevant.

Mining Pools

Luckily, some creative minds in the field began to think of ways to level the playing field out again. They developed “mining pools.” A mining pool is a network of miners that all share computational power for the common goal of mining blockchain transactions. Importantly, mining pool participants receive a percentage of the reward based on their contributions to the network’s overall hash (computational power).

Importantly, over the last three years, there has been a push to move away from power-hungry consensus mechanisms such as PoW. This desire to secure blockchains in a more efficient manner has led to the development of some truly unique consensus mechanisms in the sector.

Proof-of-Stake (PoS)

The Proof-of-Stake mechanism does away with the difficult mathematical algorithms and instead utilizes a more psychological approach to securing the network. In a PoS blockchain, users don’t need to compete mathematically to add the next block to the blockchain. Instead, PoS users “stake” their coins via network wallets to secure the network. The way staking works is simple.

Keeping a certain amount of coins in your wallet allows you to participate in transaction validations. The more coins you stake, the more likely the chances are you get to add the next block of transactions to the network. In most PoS systems, a miner from those with the most tokens staked at the time receives the chance to add the blocks.

The advantages of a PoS consensus mechanism are immediately evident. For one, you don’t need to pour tons of resources into your network to keep it safe. Additionally, since nodes are chosen based on their amount of staked coins, there is never a scenario in which a node gains anything from validating incorrect transactions. Basically, a hacker would have to fully invest in the cryptocurrency prior to attacking the network. In this way, PoS systems create a huge deterrent to attackers.

The Future of Blockchain Technology

Blockchain technology has come a long way from its early days as a means to secure cryptocurrency networks. Today, blockchain technology has numerous uses across every type of industry imaginable. Specifically, blockchain programs have impacted the logistical, financial, and data security sectors in a major way.

Blockchain Technology Logistics

Blockchain logistical systems are more efficient and cost-effective to operate than traditional paper-based models. In fact, the immutable and unalterable nature of blockchain tech makes it ideally suited to logistical tasks. Soon, you may be able to ascertain much more information regarding the creation and delivery of your products thanks to these new-age systems emerging.

Blockchain Logistics

Blockchain Logistics via GlobalTranz

Fundraising

Blockchain technology has also altered the way in which businesses raise funds. In a traditional corporate crowdfunding strategy such as an IPO, companies must balance between cost-effectiveness and participation. The inability to process smaller transactions meant that for the longest time, companies had to turn away potential investors. Nowadays, blockchain technology enables businesses to easily automate these procedures via smart contracts.

Smart Contracts

Smart Contracts feature preprogrammed protocols that execute when they receive a certain amount of cryptocurrency sent to their address. These contracts live on the blockchain and enable remarkable functionality. For example, in the case of fundraising, a smart contract can automate processes such as the approval of investors and the distribution of funds.

Blockchain Technology Today

You can expect to see further expansion of the blockchain sector in the coming months as more governments and institutions explore its benefits. For now, the blockchain revolution is well underway.

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