Crypto Q&A #1 (Mining, Fees, Fundamentals)
Coin Field Guide Answers Crypto Questions
Happy Monday crypto-curious!
We’re trying something new with the Coin Field Guide. We’ll be releasing newsletters in a Q&A format. Each edition will feature 3-5 questions by our subscribers. We’ll do our best to answer each question in a few paragraphs. We’ll then link to a resource for readers interested in a deeper dive.
You can ask questions publicly in the comments or send your queries to email@example.com. Now let’s get to it!
Subscriber from Maryland:
What does it mean to mine cryptocurrency?
Banks are traditionally responsible for processing transactions. They make sure a transaction is valid, authorized, and balances are accurately updated. In the crypto world, there are no banks. Miners take on the responsibility of helping confirm transactions. In exchange for validating a batch (block) of transactions, they are rewarded in cryptocurrency.
The process (protocol) of mining varies depending on the cryptocurrency. Bitcoin uses a process called proof-of-work (POW) and Ethereum will soon use a process called proof-of-stake (POS). If you are interested in learning more, read this article by Coinbase: What is "proof of work" and "proof of stake"?
Lina from Colorado:
Is mining an essential part of crypto?
It is possible that cryptocurrencies could eventually phase out mining. In the immediate future, mining will continue to be a big part of major cryptocurrencies. The good news is that mining protocols are becoming increasingly more energy-efficient and environmentally friendly. The days of Bitcoin pumping an obscene amount of CO2 into the atmosphere, to power a small number of transactions are numbered.
One example of a crypto-like technology that doesn’t include mining is GUN. It is a peer-to-peer database built into your browser. A friend, Mark Nadal, is developing the tech and we actually used it to power part of our infrastructure at Hackernoon.
Felice from Portugal asks:
What are the actual costs of transferring/trading cryptos?
Platform costs: Each platform has their own fees for the services they provide. Before you start trading heavily, it is smart to do a fees comparison of the exchanges so you know exactly what you will be charged when you start buying/trading/selling. Check out this site for a detailed comparison of the exchanges
Liquidation costs: these are fees that you can incur when you liquidate your currency into Fiat (government-backed currency).
Transfer costs: these are fees that you can incur when you transfer your currency out of the platform and into a digital wallet or another platform.
Transaction Costs: also known as trading fees, these are usually calculated as a flat rate fee by trade, or as a percentage of your 30-day volume.
Taxes: the IRS treats cryptocurrencies like property and therefore you must report it on your taxes. In fact, the 1040 tax form has been updated with a few questions about cryptocurrency! To determine how much you will have to report, you will have to figure out your capital gains/losses. Here is a great resource from the IRS that can help you determine how much of Zé Povinho’s hard-earned crypto the US government wants to take through taxes.
Justin from California:
How are you reviewing coins using fundamental analysis? I'm always interested to hear what metrics/data points investors are using.
I believe investing in coins should be a lot like investing in startups. Instead of viewing a coin as a commodity or a currency, I think about coins as a technology. With that frame of reference, it’s easier to think about the fundamentals and understand what drives value long term. Here are a few things I care about:
Utility: For me, a coin has to be more than just a store of value. It has to provide a viable solution to a real-world problem. Some coins have obscure solutions to obscure problems. Other coins have grand visions along with vague roadmaps to go from here to there. If the value prop isn’t strong, it should be a major negative signal.
Developer Experience: Many coins can be thought of as platforms that other organizations rely on to deliver their own solutions to the world. If a coin has a thriving developer community, it’s a very positive signal.
Brand: Quantifying the value of a brand is really difficult but if a brand is not going to appeal to developers or users, it has to be a negative signal.
Investors should also care about things like vision, the founding team, security, and momentum. Think about the attributes you care about and come up with a reliable system to track and quantify those attributes. With that, it’s easier to compare coin A vs coin B.
Check out Flipside Crypto and their Fundamental Crypto Assets Score (FCAS) to learn more about crypto fundamentals.