What does it mean to mine crypto? What does the Bitcoin dominance index tell you? And are your hands made of diamond or paper? Here are brief answers to some of your frequently asked questions about crypto.
In very simplified words, mining is a process that any blockchain needs to confirm the validity of the new transactions and protect itself from attacks. From a technical point of view, mining is the engine that keeps a blockchain working and safe. At the same time, mining is used to create new coins and thus keep a continuous supply of new tokens, and this is where the name ‘mining’ (like in gold mining) came from.
There are many ways blockchains validate new transactions but mostly lie under the general concept of proof-of-work (PoW), where miners should prove the usage of high computational power unparalleled by potential attackers, or proof-of-stake (PoS), where validators should have a high amount of the blockchain’s cryptocurrency in a way that makes it against their interest to jeopardize the network’s integrity.
In both cases, miners are rewarded from two sources: the new coins or tokens that are created with every new block, and the fees network members pay in exchange for processing and validating their transactions, known as transaction fees, or gas fees in the case of Ethereum.
Even with the existence of almost 40 cryptocurrencies with a total market value of more than 1 billion dollars, Bitcoin still to some extent dominates and leads the cryptocurrency market. The Bitcoin dominance index simply measures the percentage of Bitcoin’s market cap of the overall cryptocurrencies market cap.
A high Bitcoin dominance is usually considered a negative sign for the crypto markets as it means crypto projects are losing momentum and investors are turning to Bitcoin as a safer cryptocurrency. Also, that’s because historically when the crypto markets were performing well, Bitcoin’s dominance tended to slow down. There are similar indexes created for other major cryptocurrencies like Ethereum and XRP.
This index is provided by several websites and platforms, but it varies depending on which cryptocurrencies are included in the total crypto market cap. For instance, the total market cap usually tends to be higher on CoinGecko than it is on CoinMarketCap, which in turn leads to the Bitcoin dominance being lower on CoinGecko than it appears on CoinMarketCap.
These two terms simply describe an investor’s strategy or trading style. Having diamond hands means you hold to your assets at times of turbulence, and resist the urge to sell and limit your losses. An investor with diamond hands focuses on long-term goals and strategies and doesn’t get distracted by the short-term movements of the market. In other words, diamond hands don’t panic.
On the other side, there are paper hands. Having paper hands means the investor would panic and sell their assets at the first sign of trouble. Investors with paper hands are the ones with no strategies or mid- and long-term investment goals and would exit the market whenever it feels their investments are not paying out.
These two terms were born on the internet, rather than through professional atmospheres, and are mainly used with high-risk investments, such as cryptocurrencies, especially the upcoming ones that haven’t proven their immunity to the market cycles.