Analyzing Cryptocurrencies For The Long Run

It can be hard to determine the value of the long run.

Since its emergence in 2009, cryptocurrencies are some of the most complex assets to determine long-term returns. Here, we’ll outline how cryptocurrencies can be analyzed for the long-run.

1-How to determine the long-term value?

First, the definition of money and blockchain should be known to determine whether it’s worth investing in. Now, let’s look at these definitions:

Blockchain: blockchain is a peer-to-peer network where it’s secure, timestamped, and immutable within all parties. It’s been used to transfer value between unknown and untrusting parties within the network. To control the whole network, 51% of the computer nodes have to be controlled simultaneously.

How blockchain work

1-an anonymous user requests a transaction,

2-the transaction is represented as a block,

3-the block is broadcasted to every party in the network,

4-the network of nodes validate the transaction (the number of nodes required to validate the transaction differs on each network),

5-now a new block of data is created and added to the existing blockchain

6-the transaction is complete with its own timestamp and block number (if there was an insufficiency in a transaction, the transaction does not occur)

When all the steps were completed on a blockchain, there’s no returning back even though that’s been faulty. To fix the fault, you need to make another transaction and it’s being added on the chain if all the steps are completed. This feature prevents the double-spending problem (where the owner of a specific good gives ownership to multiple entities).

Money: according to the formal definition, money is defined as:

1-medium of exchange,

2-store of value,

3-unit of account

Depending on how the money is generated it’s been differentiated: let’s look at how they’ve been differentiated under different versions.

barter: the oldest version of trading in history. In this era, money is non-existent and there were only changes between goods and services within each other. When the transactions became more complex over time, a standard for all the goods was required to be introduced. Sovereign states have found some partially effective solutions.

commodity-backed money: in commodity-backed money, the value of the currency lies in the real value of a specific commodity. Simply, a sovereign nation could only print the money depending on their commodity reserves.

fiat money: most commonly used type of money since 1972. They depend on trust towards the sovereign state and how much it’s been used. Consequently, it allows sovereign states to print out as much money as they could.

cryptocurrencies: cryptocurrencies are money where no entity and commodity are involved. It’s only been written by code where all its properties are defined under computer nodes while using all the properties of the blockchain. Now, there are various kinds of cryptocurrencies that are pegged to an asset (they’re called stable coins).

Now to determine long-term value…

To determine whether it’s worth investing in on a long-term basis, the best way to determine the value lies in reading the whitepaper of a specific coin if possible. Then, you can look at the internet to decide whether it’s worth investing in. To sum up, you should always look at a robust ecosystem to determine the asset’s worth investing in.

According to you, what are you looking at when you analyze cryptocurrencies in the long-run? Share your thoughts and experiences in the comments section below?

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