CHAPTER-2: BASIC CONCEPTS OF CRYPTOCURRENCY

What is crypto currency?

Cryptocurrency is a digital payment system that doesn't rely on banks to verify transactions. It's a
peer-to-peer system that can enable anyone anywhere to send and receive payments. When you
transfer cryptocurrency funds, the transactions are recorded in a public ledger. Cryptocurrency is
stored in digital wallets.

Purpose of crypto currency

The main point of cryptocurrency is to fix the problems of traditional currencies by putting the
power and responsibility in the currency holders' hands. All of the cryptocurrencies adhere to the
5 properties and 3 functions of money. They each also attempt to solve one or more real-world
problems.

Why was it created?

It was created in the wake of the 2008 global financial crisis as a way for people to control their
money themselves, without having to rely on companies, banks, or governments and their fees
and controls.

History of Cryptocurrency

Cryptocurrency existed as a theoretical construct long before the first digital alternative
currencies debuted. Early cryptocurrency proponents shared the goal of applying cutting-edge
mathematical and computer science principles to solve what they perceived as practical and
political shortcomings of “traditional” fiat currencies.

Before Bitcoin

• Cryptocurrency’s technical foundations date back to the early 1980s when an American
cryptographer named David Chaum invented a “blinding” algorithm that remains central
to modern web-based encryption. The algorithm allowed for secure, unalterable
 information exchanges between parties, laying the groundwork for future electronic
currency transfers.
• About 15 years later, an accomplished software engineer named Wei Dai published a
white paper on b-money, a virtual currency architecture that included many of the basic
components of modern cryptocurrencies, such as complex anonymity protections and
decentralization.
• However, b-money was never deployed as a means of exchange.
• The late 1990s and early 2000s saw the rise of more conventional digital finance
intermediaries. Chief among them was PayPal, which made Tesla founder and noted
cryptocurrency advocate Elon Musk’s first fortune and proved to be a harbinger of
today’s mobile payment technologies that have exploded in popularity over the past 10
years. But no true cryptocurrency emerged until the late 2000s when Bitcoin came onto
the scene.

Bitcoin and the Modern Cryptocurrency Boom

Bitcoin is widely regarded as the first modern cryptocurrency — the first publicly used means of
exchange to combine decentralized control, user anonymity, record-keeping via a blockchain,
and built-in scarcity.

• It was first outlined in a 2008 white paper published by Satoshi Nakamoto, a

pseudonymous person or group.
• In early 2009, Nakamoto released Bitcoin to the public, and a group of enthusiastic
supporters began exchanging and mining the currency.
• By late 2010, the first of what would eventually be dozens of similar cryptocurrencies —
including popular alternatives like Litecoin — began appearing. The first public Bitcoin
exchanges appeared around this time as well.
• In late 2012, WordPress became the first major merchant to accept payment in Bitcoin.
Others, including online electronics retailer Newegg.com, Expedia, Microsoft, and Tesla
followed. Countless merchants now view the world’s most popular cryptocurrency as a
legitimate payment method.
• And new cryptocurrency applications take root with impressive frequency,
Cryptomaniaks has a great look at the fast-growing world of cryptocurrency sports
 betting sites as just one example. Although few cryptocurrencies other than Bitcoin are
widely accepted for merchant payments, increasingly active exchanges allow holders to
exchange them for Bitcoin or fiat currencies — providing critical liquidity and flexibility.
Since the late 2010s, big business and institutional investors have closely watched what
they call the “crypto space” too.
• Facebook’s closely guarded Libra project could be the first true cryptocurrency
alternative to fiat currencies, although its growing pains suggest that true parity remains
well in the future.

February 9, 2011 for the first time in history, one bitcoin was priced at the same rate as
the US dollar,

5 April, 2011 the Polish bitmarket.eu market was established

June 2, 2011 1 BTC was valued at $10,
November 19, 2013 1 BTC was valued at $ 1,000
July 2013 the billionaires, the Winklevoss brothers entered the bitcoin market,
March 25, 2013 Denmark exempted bitcoin sales from tax
September 20, 2013 bitcoin was recognized as a fully-fledged private
currency in Germany,

February 28, 2014 2014 the demise of the largest bitcoin exchange, Mt. Gox,

Regulation of cryptocurrencies

Regulation Worldwide:
• Starting from Japan (as an example of the most far-reaching regulation), one can point to
the rapid evolution of the Japanese regulators' approach. Starting from the recognition of
crypto currency as a means of payment, but not yet as the currency introduced by the act
on payment services of 25 May 2016, until the adoption in April 2018 of new regulations
fully recognizing crypto currencies as legal tender. What is more, the Japanese Central
Bank began work on creating its own digital currency, whose working name is J-Coin.
 • However, there is a contrast. For example, in China there is a ban on making crypto
currencies, yet Bangladesh and Nepal, by introducing the relevant regulations, have
penalized the marketing of Crypto currencies. In Bangladesh the use of crypto currencies
is currently regarded as a violation of the provisions on money laundering and is punishable
by imprisonment of up to 12 years. In Nepal, after introducing changes prohibiting the
circulation of crypts, the first detentions for such activities have taken place.
• As yet many countries have no regulations on this matter and, in principle, are considering
which party to address in relation to cryptocurrencies. For example, in Europe so far, no
country has banned trading in cryptocurrencies, however many countries are preparing the
appropriate law because they are aware of the facts that point to the rapid growth of
transactions in cryptocurrencies.
• Most countries see this as primarily a threat to the system, which would have taken on the
role of management, with the obvious opportunity to influence the financial and economic
phenomena.
• Perhaps a system in which there is no supervision of specific organizations due to a change
in rules is a good direction of the development. However, this is certainly not a
cryptocurrency system where one person can play such a role
• Currently the most popular cryptocurrency in the world is bitcoin. It has the highest market
capitalization and the highest rate, and often when discussing this topic, cryptocurrencies
are used as a flagship example. The most popular cryptocurrency in the world, bitcoin, was
created in 2008 and its creator is not known.
• Almost simultaneously, three IT specialists (King, Oksman, and Bry) patented solutions
similar to those on which the bitcoin system was based, thus we see that bitcoin is ten
years old.

Regulation In India:

• India become one of the few countries to tax digital assets like cryptocurrencies and NFTs
when finance minister Nirmala Sitharaman announced a 30% tax on transfer of such assets
in the Budget. Though the FM said taxing an asset does not bring legitimacy.
 • The Budget announcements mean that income from any transfer of crypto, even gifts,
would attract a 30% tax. In addition, investors cannot get any deductions and won’t be
allowed to set off losses from transfer of such asset against any other income.

How Cryptocurrencies Work

It’s true that the source codes and technical controls that support and secure cryptocurrencies are
highly complex. However, laypeople are more than capable of understanding the basic concepts
and becoming informed cryptocurrency users. Several concepts govern cryptocurrencies’ values,
security, and integrity.

Cryptography

• Cryptocurrencies use cryptographic protocols, or extremely complex code systems that

encrypt sensitive data transfers, to secure their units of exchange.
• Cryptocurrency developers build these protocols on advanced mathematics and computer
engineering principles that render them virtually impossible to break, and thus to
duplicate or counterfeit the protected currencies.
• These protocols also mask the identities of cryptocurrency users, making transactions and
fund flows difficult to attribute to specific individuals or groups.

Blockchain Technology

• A cryptocurrency’s blockchain is the master public ledger that records and stores all prior
transactions and activity, validating ownership of all units of the currency at any given
point in time.
• As the record of a cryptocurrency’s entire transaction history to date, a blockchain has a
finite length — containing a finite number of transactions — that increases over time.
• Identical copies of the blockchain are stored in every node of the cryptocurrency’s
software network — the network of decentralized server farms, run by computer-savvy
 individuals or groups of individuals known as miners, that continually record and
authenticate cryptocurrency transactions.
• A cryptocurrency transaction technically isn’t finalized until it’s added to the blockchain,
which usually occurs within minutes. Once the transaction is finalized, it’s usually
irreversible.
• Unlike traditional payment processors, such as PayPal and credit cards, most
cryptocurrencies have no built-in refund or chargeback functions, although some newer
cryptocurrencies have rudimentary refund features.
• During the lag time between the transaction’s initiation and finalization, the units aren’t
available for use by either party. Instead, they’re held in a sort of escrow — limbo, for all
intents and purposes.
• The blockchain thus prevents double-spending, or the manipulation of cryptocurrency
code to allow the same currency units to be duplicated and sent to multiple recipients.

Decentralized Control

• Inherent in blockchain technology is the principle of decentralized control.

• Cryptocurrencies’ supply and value are controlled by the activities of their users and
highly complex protocols built into their governing codes, not the conscious decisions of
central banks or other regulatory authorities.
• In particular, the activities of miners — cryptocurrency users who leverage vast amounts
of computing power to record transactions, receiving newly created cryptocurrency units
and transaction fees paid by other users in return — are critical to currencies’ stability
and smooth function.

Private Keys

• Every cryptocurrency holder has a private key that authenticates their identity and allows
them to exchange units. Users can make up their own private keys, which are formatted
as whole numbers up to 78 digits long, or use a random number generator to create one.
 • Once they have a key, they can obtain and spend cryptocurrency. Without the key, the
holder can’t spend or convert their cryptocurrency — rendering their holdings worthless
unless and until the key is recovered.
• While this is a critical security feature that reduces theft and unauthorized use, it’s also
draconian. Losing your private key is the digital asset equivalent of throwing a wad of
cash into a trash incinerator.
• Although you can create another private key and start accumulating cryptocurrency
again, you can’t recover the holdings protected by your old, lost key.
• Savvy cryptocurrency users are therefore maniacally protective of their private keys,
typically storing them in multiple digital locations — although generally not Internet-
connected, for security purposes — and on paper or in other physical form.

Cryptocurrency Wallets

• Cryptocurrency users have wallets with unique information that confirms them as the
owners of their units.
• Whereas private keys confirm the authenticity of a cryptocurrency transaction, wallets
lessen the risk of theft for units that aren’t being used.
• Wallets used by cryptocurrency exchanges are somewhat vulnerable to hacking. For
instance, Japan-based Bitcoin exchange Mt. Gox shut down and declared bankruptcy a
few years back after hackers systematically relieved it of more than $450 million in
Bitcoin exchanged over its servers.
• Wallets can be stored on the cloud, an internal hard drive, or an external storage device.
Regardless of how a wallet is stored, at least one backup is strongly recommended.
• Note that backing up a wallet doesn’t duplicate the actual cryptocurrency units, merely
the record of their existence and current ownership.

Miners

• Miners serve as record-keepers for cryptocurrency communities, and indirect arbiters of

the currencies’ value.
• Using vast amounts of computing power, often manifested in private server farms owned
by mining collectives that comprise dozens of individuals, miners use highly technical
methods to verify the completeness, accuracy, and security of currencies’ blockchains.
• The scope of the operation is not unlike the search for new prime numbers, which also
requires tremendous amounts of computing power.
• Miners’ work periodically creates new copies of the blockchain, adding recent,
previously unverified transactions that aren’t included in any previous blockchain copy
— effectively completing those transactions.
• Each addition is known as a block. Blocks consist of all transactions executed since the
last new copy of the blockchain was created.
• The term “miners” relates to the fact that miners’ work literally creates wealth in the form
of brand-new cryptocurrency units.
• In fact, every newly created blockchain copy comes with a two-part monetary reward: a
fixed number of newly minted (“mined”) cryptocurrency units, and a variable number of
existing units collected from optional transaction fees — typically less than 1% of the
transaction value — paid by buyers.
• Worth noting: Once upon a time, cryptocurrency mining was a potentially lucrative side
business for those with the resources to invest in power- and hardware-intensive mining
operations.
• Today, it’s impractical for hobbyists without thousands of dollars to invest in
professional-grade mining equipment. If your aim is simply to supplement your regular
income, plenty of freelance gigs offer better returns.
• Although transaction fees don’t accrue to sellers, miners are permitted to prioritize fee-
loaded transactions ahead of fee-free transactions when creating new blocks, even if the
fee-free transactions came first in time.
• This gives sellers an incentive to charge transaction fees, since they get paid faster by
doing so, and so it’s fairly common for cryptocurrency transactions to come with fees.
• Although it’s theoretically possible for a new blockchain copy’s previously unverified
transactions to be entirely fee-free, this almost never happens in practice.
• Through instructions in their source codes, cryptocurrencies automatically adjust to the
amount of mining power working to create new blockchain copies — copies become
 more difficult to create as mining power increases and easier to create as mining power
decreases. The goal is to keep the average interval between new blockchain creations
steady at a predetermined level. Bitcoin’s is 10 minutes, for instance.

Finite Supply

• Although mining periodically produces new cryptocurrency units, most cryptocurrencies

are designed to have a finite supply — a key guarantor of value.
• Generally, this means miners receive fewer new units per new block as time goes on.
Eventually, miners will only receive transaction fees for their work, although this has yet
to happen in practice and may not for some time.
• If current trends continue, observers predict that the last Bitcoin unit will be mined
sometime in the mid-22nd century, for instance — not exactly around the corner.
• Cryptocurrencies’ finite supply makes them inherently deflationary, more akin to gold
and other precious metals — of which there are finite supplies — than fiat currencies that
central banks can, in theory, produce unlimited supplies of.

Cryptocurrency Exchanges

• Many lesser-used cryptocurrencies can only be exchanged through private, peer-to-peer

transfers, meaning they’re not very liquid and are hard to value relative to other
currencies — both crypto- and fiat.
• More popular cryptocurrencies, such as Bitcoin and Ripple, trade on special secondary
exchanges similar to forex exchanges for fiat currencies. (The now-defunct Mt. Gox is
one example of an exchange.)
• These platforms allow holders to exchange their cryptocurrency holdings for major fiat
currencies like the U.S. dollar and euro, and for other cryptocurrencies, including less-
popular currencies. In return for their services, they take a small cut of each transaction’s
value — usually less than 1%.
 • Importantly, cryptocurrencies can be exchanged for fiat currencies in special online
markets, meaning each has a variable exchange rate with major world currencies, such as
the U.S. dollar, British pound, European euro, and Japanese yen.
• Cryptocurrency exchanges play a valuable role in creating liquid markets for popular
cryptocurrencies and setting their value relative to traditional currencies. You can even
trade cryptocurrency derivatives on certain crypto exchanges or track broad-based
cryptocurrency portfolios in crypto indexes.
• However, exchange pricing can still be extremely volatile. For example, Bitcoin’s U.S.
dollar exchange rate fell by more than 50% in the wake of Mt. Gox’s collapse, then
increased roughly tenfold during 2017 as cryptocurrency demand exploded.
• And cryptocurrency exchanges are somewhat vulnerable to hacking, representing the
most common venue for digital currency theft by hackers and cybercriminals like those
responsible for taking down Mt. Gox.

Cryptocurrency Examples

Cryptocurrency usage has exploded since Bitcoin’s release. Although exact active currency
numbers fluctuate and individual currencies’ values are highly volatile, the overall market value
of all active cryptocurrencies is generally trending upward. At any given time, hundreds of
cryptocurrencies trade actively.

The cryptocurrencies described here are marked by stable adoption, robust user activity, and
relatively high market capitalization (greater than $10 million, in most cases, although valuations
are of course subject to change):

1. Bitcoin

• Bitcoin is the world’s most widely used cryptocurrency and is generally credited with
bringing the movement into the mainstream.
 • Its market cap and individual unit value consistently dwarf (by a factor of 10 or more)
that of the next most popular cryptocurrency. Bitcoin has a programmed supply limit of
21 million Bitcoin.
• Bitcoin is increasingly viewed as a legitimate means of exchange. Many well-known
companies accept Bitcoin payments, although most partner with an exchange to convert
Bitcoin into U.S. dollars before receiving their funds.

2. Ethereum

• Launched in 2015, Ethereum (ETH) is the second most popular cryptocurrency and, on
most days, the second most valuable after Bitcoin.
• Ethereum makes some noteworthy improvements to Bitcoin’s basic architecture. In
particular, it utilizes “smart contracts” that enforce the performance of a given
transaction, compel parties not to renege on their agreements, and contain mechanisms
for refunds should one party violate the agreement.
• Although “smart contracts” represent an important move toward addressing the lack of
chargebacks and refunds in cryptocurrencies, it remains to be seen whether they’re
enough to solve the problem completely. Still, they’re at least partly responsible for
Ethereum’s success.

3. Litecoin

• Released in 2011, Litecoin (LTC) uses the same basic structure as Bitcoin. Key
differences include a higher programmed supply limit (84 million units) and a shorter
target blockchain creation time (2.5 minutes).
• The encryption algorithm is slightly different as well. Litecoin is often the second- or
third-most popular cryptocurrency by market capitalization.
4. Ripple

• Released in 2012, Ripple (XRP) is noted for a “consensus ledger” system that
dramatically speeds up transaction confirmation and blockchain creation times — there’s
no formal target time, but the average is every few seconds.
• Ripple is also more easily converted than other cryptocurrencies with an in-house
currency exchange that can convert Ripple units into U.S. dollars, yen, euros, and other
common currencies.
• However, critics have noted that Ripple’s network and code are more susceptible to
manipulation by sophisticated hackers and may not offer the same anonymity protections
as Bitcoin-derived cryptocurrencies.

5. Dogecoin

• Dogecoin (DOGE), denoted by its immediately recognizable Shiba Inu mascot, is a

variation on Litecoin.
• It has a shorter blockchain creation time (one minute) and a vastly greater number of
coins in circulation — the creators’ target of 100 billion units mined by July 2015 was
met, and there’s a supply limit of 5.2 billion units mined every year thereafter, with no
known supply limit.
• Dogecoin is thus notable as an experiment in “inflationary cryptocurrency,” and experts
are watching it closely to see how its long-term value trajectory differs from that of other
cryptocurrencies.
The factor affecting crypto price

• Cryptocurrency is the new craze for retailers and investors. But one factor about digital
currencies always worry investors — volatility. Cryptocurrencies have witnessed massive
hikes and drops in value, and that can push any diligent crypto fan into deep thought. But
what exactly impacts the value of cryptocurrencies? What are the factors that affect the
values? Let us discuss points that we need to keep in mind before investing in a
cryptocurrency.

Demand

• Cryptocurrency, though not tactile and visible like fiat currency, is quite similar in usage.
Both the currencies draw their importance in society from their acceptance and usage
among people as an exchange medium. That brings us to the first factor that determines
cryptocurrency's value —demand. As the usability of a coin increases, its demand rises,
which, in turn, increases the coin's value. This has been one of the important reasons why
major cryptocurrencies have appreciated in value in the last few years.

Node count

• This refers to a number of active wallets with respect to a cryptocurrency that can be
found on the internet or the homepage of the currency. This is also a factor to determine
whether a coin can overcome market crises.

Production cost

• Of course, there are production costs incurred when mining crypto coins. The direct costs
and the costs of resources that have gone into the mining of the coin determine its value.
Higher the production costs, the higher the coin's value.

Mass adoption

• This follows from the first point. The greater the number of takers, the greater will be the
value of a crypto coin. That's because, unlike fiat currency, which is produced by national
 mints in huge numbers, crypto coins are generated in very limited amounts. This is an
important factor to help determine cryptocurrency value.

Blockchain

• Prudent investors weigh the security as well as future prospects provided by blockchains
to zero in on a particular cryptocurrency. Beginners may go for the ones that provide
maximum security to their coins. However, professional investors look for the future
potential of blockchain technologies.
 CHAPTER-3: DERIVATIVE TRADING IN CRYPTOCURRENCY

What is derivative trading?

• A derivative is a contract or product whose value is determined by an underlying asset.

Currencies, exchange rates, commodities, stocks, and the rate of interest are all examples
of derivative assets. The buyer and seller of such contracts have directly opposed
predictions for the future trading price. To earn profit, both parties’ wager on the
underlying assets’ future value.

What is derivative trading in crypto?

• The underlying asset in crypto derivatives trading can be any cryptocurrency token. Two
parties that enter into a financial contract speculate on the cryptocurrency’s price on a
future date. During the first phase of the contract, the sides agree on a selling/buying
price for the cryptocurrency on a specific day, regardless of the market price.

How big is the derivative market in crypto?

• According to Token insight’s Cryptocurrency Derivatives Exchange Industry Report, the

cryptocurrency derivatives market’s trading volume for the third quarter of 2020 was
$2.7 trillion, based on data from 42 exchanges. This marks a 25.1% increase from the
previous quarter and a year-on-year 159.4% increase from the third quarter of 2019,
demonstrating the enormous growth in crypto-derivatives over the last years.
What are the most popular types of derivatives in crypto?

Crypto derivatives can be of the following types, depending on the conditions of a contract:

• Futures: A futures contract is a legal agreement between two parties to purchase or sell
an underlying asset at a specified price and date in the future. The contract is directly
executed on a regulated exchange.
• Options: A trader with an options contract has the choice, but not the duty, to purchase
or sell an underlying asset at a defined future date and price.
• Perpetual contracts: Unlike futures or options, perpetual contracts have no expiration or
settlement date. Under some circumstances (e.g., the account holds certain amount of a
crypto etc.), traders can keep their positions open indefinitely.
• Swaps: A swap is a contract between two parties to exchange cash flows at a later date
according to a pre-determined formula. They are OTC (over-the-counter) contracts,
similar to forwards, and are not traded on exchanges.

What are some derivative trading features?

• Auto Deleveraging (ADL): When a position cannot be liquidated at a price that is better
than the bankruptcy price and there is insufficient insurance to cover the contract loss,
your crypto exchange’s ADL system will automatically deleverage an opposing position
from a designated trader in the case of liquidation.
• Stop/Loss Take Profit: Allows traders to specify the floor and ceiling prices for an
order, allowing them to exit the market automatically when conditions are favorable.
• Partial Close Orders: Permits traders to take partial gains while continuing to benefit
from the growing market by partially closing their orders.
• Insurance Funds: Even if their holdings fall below the maintenance margin level, it
helps traders preserve their funds from auto-deleveraging.
Where to trade crypto derivatives?

• Derivatives in cryptocurrency can be traded on both centralized and decentralized

exchange platforms. Cryptocurrency derivatives exchange can be used by exchange
owners to reach out to additional investors. A crypto derivative trading platform is more
flexible than spot margin trading and gives you access to markets that would otherwise be
inaccessible to you.

What are the advantages of using derivatives?

• Low transaction costs: Since derivative contracts are risk management instruments, they
help to reduce market transaction costs. As a result, as compared to other securities such
as spot trading, the cost of transaction in derivative trading is cheaper.
• Used in risk management: The price of the underlying crypto coin/token has a direct
relationship with the value of a derivative contract. As a result, derivatives are utilized to
mitigate the risks associated with fluctuating underlying asset prices. Mr A, for example,
purchases a derivative contract whose value swings in the opposite direction of the crypto
coin/token he owns. He’ll be able to offset losses in the underlying crypto coin/token
with gains from the derivatives.
• Market efficiency: Derivative trading entails the practice of arbitrage, which is critical
for ensuring that the market finds equilibrium and that the prices of the underlying assets
are accurate.
• Determines an underlying asset’s price: Derivative contracts are frequently used to
determine the price of an underlying asset.
• Risk may be transferred: Derivatives allow investors, corporations, and other parties to
shift risk to others.
What are the disadvantages of using derivatives?

• High risk: Derivative contracts are extremely volatile due to the fast fluctuation in the
value of underlying crypto coins/tokens. As a result, traders run the danger of losing a lot
of money.
• Speculative: Derivative contracts are frequently employed as speculative instruments.
Because of the significant risk involved and the unpredictability of their value swings,
speculative investments sometimes result in large losses.
 CHAPTER-4: INITIAL COIN OFFERING (ICO)

What Is an Initial Coin Offering (ICO)?

• An initial coin offering (ICO) is the cryptocurrency industry’s equivalent to an initial

public offering (IPO). A company looking to raise money to create a new coin, app, or
service launches an ICO as a way to raise funds.
• Interested investors can buy into the offering and receive a new cryptocurrency token
issued by the company. This token may have some utility in using the product or service
the company is offering, or it may just represent a stake in the company or project.

How an Initial Coin Offering (ICO) Works

• When a cryptocurrency startup wants to raise money through ICO, it usually creates a
whitepaper that outlines what the project is about, the need the project will fulfill upon
completion, how much money is needed, how many of the virtual tokens the founders
will keep, what type of money will be accepted, and how long the ICO campaign will run
for.
• During the ICO campaign, enthusiasts and supporters of the project buy some of the
project’s tokens with fiat or digital currency. These coins are referred to the buyers as
tokens and are similar to shares of a company sold to investors during an IPO.
• The benefit of the ICO is that early-stage technology companies are able to access the
capital for development and growth long before traditional methods of funding are
typically available.
• ICOs are generally only available for technology companies. There are numerous reasons
for this. Most notably, it generally takes a technology driven company to undertake the
steps of creating and selling the digital currency.
• The companies must build or intend to build a technology platform or service to issue
tokens. The tokens represent value on the future platform. There is a finite number of
coins (I.e., the company will not issue more coins in the future, so the value of the coins
rises as the value of the company issuing (and backing) the coins rises.
 ▪ Investors in ICOs are generally technology investors. They want to purchase these coins
at an early stage of development in hopes of cashing in when the coins rise in value.
Investing in the tokens very early in the company’s development (generally before the
company has even fully created its value offering) has the potential for major gains.

How are Coins Sold?

• The issuing company uses a technology platform that it has created or is in the process of
creating to initial sell, transfer, and store the offered coins. Companies carrying out the initial
coin offering generally take one of two approaches to building a platform for the offering. They
either contract (code) a platform from scratch or employ the technology contained in existing
platforms. The software used to build a virtual currency platform, such as Bitcoin and Ethereum,
is often open source and available to anyone for free. A computer coder with an understanding of
how the platform operates can make modifications to the system to accommodate the specifics of
the coin offering.

Why are Coins Valuable?

• The coin purchasers either desire to use the coins on the platform that is being
constructed, or believe that others will value the coins highly in the future as the value of the
services or platform rise. The company will generally authorize a fixed number of coins, so as to
create a sense of scarcity. During the initial coin offering, the coins are generally sold at a set
price. The coins will later be traded on a virtual currency exchange or via direct trade between
coin holders accessing the initial distribution platform. Naturally, the startup maintains control of
a large number of coins in hopes that the value will increase as demand increases.

How Do You Get Purchasers?

• The coin holder generally does not receive any equity or ownership percentage of the
issuing company. There are some exceptions to this fact, but the majority of offerings do not
entail an equity stake. The difficult part is convincing people to purchase the coin under the
assumption that it has value and will ultimately rise in value. The company will generally sell the
coins in exchange for a virtual currency. The coins have a stated value that the purchasers must
pay.

How to determine Market Cap?

• Market cap = Total Circulating Supply * Price of each coin.

• Let us examine a use case. If Coin A has 200,000 coins circulating on the market with
each one worth 3$, the market cap of the crypto would be 200, 000*3=$600,000. In the same
way, if Coin B has 100,000 in circulation with each worth $4, the market would be 100,000*4 =
$400,000
• Even though the price of Coin B is individually higher, the total value of Coin A appears
much more than Coin B. Thus, the index of the coin market cap is a better way to indicate the

true price of a crypto currency.

 CHAPTER-5: SWOT ANALYSIS

SWOT analysis

Strength

• Government and banks are corrupt and can easily lock you out of your money but it's
harder for them to take your bitcoins
• It is perceived as being anonymous although in practice it's difficult to remain
anonymous as a user.
• It is distributed so no central authority can control your coins.
• It went up a huge amount in the past.
• You can transfer it to people.
• Large governments and institutions are using them to avoid sanctions.
• People trust in the bitcoin technology more than they trust their bank and country's fiscal
policies.

Weakness

• It has no inherent value.

• You can get hacked and permanently lose your coins.
• The network can only handle a limited number of transactions.
• Bitcoin is an environmental catastrophe because of the electricity and computers wasted
on it.
• The FBI at one point was one of the largest holders of bitcoins because they took so
many criminal's bitcoins. The "rubber-hose" attack works quite well against bitcoin
security.
• Coins are initially distributed to early adopters causing uncertainty around valuation.
Opportunities
• It can keep on going up because of a bubble.
• The community can lower the price of transferring a bitcoin by fixing the technology and
forking the chain.
• The community can fix the environmental issue associated with the huge amounts of
energy by bitcoin miners by switching technologies and forking the chain.
• Mainstream currencies can crash resulting in people running to bitcoin as something not
tied to the economic sanity of their country.
• Instability in the world will make people seek out bitcoins as a way of hiding and
protecting their wealth.

Threats
• It is not backed by any government
• People will find a better way to transfer money that costs nothing and that is less prone to
hacking.
• The huge amount of illegal activity associated with bitcoin will stop people from using it.
• The huge environmental impact of bitcoin will stop people from using it.
• Quantum computers or some new algorithm will suddenly surface and Bitcoin will be
cracked.
• Governments are beginning to make bitcoin transactions illegal.
• Governments may heavily tax bitcoin transactions.
• International laws around sanctions and laundering, at any point can threaten the
economy.