Blockchain & Crypto - part 2

Happy Sunday, people! Today, again, we have Shubham writing this post, explaining some more concepts on blockchain & crypto. If you haven’t read the first post on blockchain basics, I’d encourage you to read it here.

And if you have, then let’s begin. Over to Shubham:

In the last lesson we talked about how Ankur gave liquidity to Jackfruit tokens to give it a real monetary value.

Now, let’s understand what is liquidity.

Imagine a bucket full of water and a swimming pool. You are Sir Jadeja and you throw the ball into the bucket and into the pool simultaneously. Where do you think water splash will be more? Yup, it’s the bucket! Because of the difference in relative volume/quantity/weight.

Now consider the pool/bucket to be the liquidity pool of Jackfruit tokens and Sir Jadeja as an investor who invests his money i.e. the ball.

Close your eyes and imagine carefully, when an investor invests in a crypto that has less liquidity (similar to a bucket), then a high price fluctuation (high water splash) is seen. Whereas, when an investor invests in a crypto with high liquidity (similar to a pool), a lower price fluctuation is seen (given the investment in both cases is constant- as a larger investment will always pump up the price). Similarly, while selling, if the liquidity is low, the price falls sharply and vice versa.

So, before investing in any crypto token or DeFi (Decentralised Finance - to be discussed later) token, make sure you are aware of its liquidity and volume of transactions. The more liquidity the better it is, because it results in less market manipulation of prices i.e. pumping and dumping.

Let’s understand a common lingo called “crypto whales” (similar to Big Bull in stock markets)

Crypto Whales are basically Investors who hold a huge quantity of a cryptocurrency - large enough to manipulate the market. Basically, they get in early when the liquidity is low and buy a large number of tokens, and then hold them till the price rises significantly, and then sell all the tokens to pull out other investors' wealth. This has become a common trend everywhere in the market to sweep out small investor’s wealth. So, while investing, we should also look at the holders’ wallet (since crypto is decentralised all transactions are recorded and is public) and see the number of whales and invest accordingly.

(To check holders’ wallet you may visit https://poocoin.app/)

Another important aspect before investing is to see if the supply is limited or not.

Crypto tokens are considered to be an asset because of their perceived value, just like gold. Just as gold is just a stone for a monkey but very precious for humans, similarly, crypto also works in a similar concept. If you understand a project, value the project and see a bright future then you invest in that token. Else you don’t.

There are more than a million tokens available but only a hand few are useful and promising. All the others are useless and called “shit coins”. So, one has to be careful while selecting his/her investment projects.

Hmmmm! What if I say gold was unlimited and could be produced free of cost by everyone? Would you still be gifting gold to your spouse? Would it have the same value as it has now?

No, right? Similarly, if crypto tokens have a limited supply, its value is expected to increase (due to its limited supply).

On the other hand, if the project has an unlimited supply, the value drops as time passes (usually and logically). Though there are a few exceptions in these as well, where the value doesn’t reduce.

These exceptions happen when there is a “burn structure” coded, which means after regular intervals/emission of tokens, a certain amount of tokens from the supply become redundant (commonly known as “Getting burned”). This is done to make sure the tokens do not exceed a given quantity and the floor value of the price provided against the liquidity is maintained at a desired level.

An example of crypto tokens limited in supply is Bitcoin (21 million supply) and unlimited in supply is Doge coin.

Kudos! You’ve reached till the end of this topic! It may have been a bit overwhelming, but do read about the topics which I have explained, and apply them in real life. Crypto projects are solving real-world problems (which will be discussed in further blogs) and hence using these concepts in your own life will make your understanding clear and crisp!

Thank you and happy learning!

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