Cryptocurrency: Bitcoin, Ethereum, Altcoins and DeFi Explained

The crypto market consists of many different projects, each with its own purpose and its own risks. This explainer covers the basics: how Bitcoin and Ethereum work, what altcoins and DeFi are, and which risks come with them. We give no price forecasts. Nobody can reliably predict the price of crypto.

Please note: crypto is highly volatile and you can lose your entire stake. This is not investment advice.

Bitcoin: The Digital Gold Narrative

The Bitcoin Halving: How It Works

Bitcoin has a fixed maximum number of coins. Roughly every four years, the reward miners receive for adding a new block is cut in half. This is called the halving. As a result, fewer and fewer new bitcoins are created.

Some see this as scarcity that can support the price. But past periods guarantee nothing for the future. The price is also shaped by demand, interest rates, regulation and general sentiment.

Institutional Adoption

Exchange-traded Bitcoin ETFs: A Bitcoin ETF lets investors gain exposure to Bitcoin without holding coins themselves. These products have made crypto more accessible to large parties and ordinary investors. For availability in your country and the terms, check with your provider.

Companies and countries: Some companies and countries hold Bitcoin as a reserve. This is controversial. Supporters call Bitcoin a hedge against inflation. Critics point to its sharp price swings.

Lightning Network

The Lightning Network is a second layer on top of Bitcoin. It enables fast, low-cost payments by handling transactions outside the main chain. This allows Bitcoin to be used for small payments too.

Bitcoin Mining and Centralisation

Mining is the process that confirms transactions and creates new bitcoins. It requires a lot of computing power and energy. When the reward falls, mainly large, efficient miners stay profitable. This raises questions about decentralisation and network security.

Price Levels and What You Can Follow

Technical analysis uses support and resistance levels. They show where the price has stopped or reversed in the past. They guarantee nothing for the future.

Factors that can influence the price:

Inflows into and outflows from exchange-traded crypto products
Liquidity in global markets
Regulation
The macroeconomic environment (interest rates, inflation)

Ethereum: The Infrastructure of Web3

Ethereum and Proof-of-Stake

Ethereum is a platform on which developers build smart contracts and applications. Since the switch to Proof-of-Stake, validators confirm transactions by locking up ETH (staking) instead of through mining. This uses far less energy.

Staking:

Validators receive a reward for locking up ETH
The reward is not fixed and varies over time
With liquid staking you receive a token you can use elsewhere, but this brings extra risks, such as smart contract bugs and concentration at large providers
See also staking

Layer 2 Solutions

Layer 2 networks process transactions outside the main Ethereum network and then record the result on Ethereum. This makes transactions faster and cheaper.

Examples of Layer 2 networks: Arbitrum, Optimism, Base, Polygon and zkSync. They differ in technology and in security assumptions. Research a network yourself before using it.

Ethereum ETFs

As with Bitcoin, exchange-traded products on Ethereum exist. They give access to ETH without holding it yourself. Availability and terms differ by country and provider.

Altcoins: Many Types and Many Risks

Altcoins are all cryptocurrencies except Bitcoin. Most have much lower trading volume and are therefore more volatile.

Layer 1 Alternatives

Other blockchains compete with Ethereum, each with its own approach:

Solana: focused on high speed
Cardano: academic, step-by-step development
Avalanche: custom blockchains of its own (subnets)
Cosmos: connected blockchains through the IBC protocol

Themes and Narratives

New themes keep appearing, such as tokens around artificial intelligence, tokenisation of real-world assets (RWA) and gaming tokens. A theme can attract attention quickly, but it says nothing about the quality of a project. Look at whether there is real usage, what the tokenomics look like and who builds the project.

Memecoins

Memecoins are tokens that gain value mainly through the attention of a community. They often have no underlying value and are extremely speculative. You can lose your entire stake.

Decentralized Finance (DeFi)

DeFi refers to financial services on a blockchain, without a traditional intermediary.

Lending and Borrowing

In DeFi lending protocols you put up collateral and borrow against it. Usually the collateral must be worth more than the loan (over-collateralisation). You risk liquidation if the value of your collateral falls.

Decentralized Exchanges (DEXs)

On a DEX you trade directly from your own wallet through smart contracts. Prices are set through liquidity pools. Risks include bugs in the code, temporary losses for liquidity providers and high transaction costs at busy times.

Liquid Staking and Decentralized Futures

Liquid staking protocols give you a token in exchange for staked ETH. Decentralized futures offer leveraged trading without a central exchange. Both add complexity and risk. Leveraged trading can lead to losses greater than your stake.

Returns from DeFi

Returns come from, for example, interest on loans and trading fees paid to liquidity providers. A high return usually goes hand in hand with high risk. Be careful with returns that look unrealistically high.

Regulation

Rules for crypto differ by region and change regularly.

European Union: The MiCA regulation (Markets in Crypto-Assets) sets rules for issuers of crypto and providers of crypto services. It covers licences, disclosure requirements and consumer protection, among other things.

United States: Regulators and lawmakers are working on frameworks for crypto. The rules are not clear-cut in every case.

Asia: The approach differs greatly by country, from open to strict.

Always check whether your provider holds a licence for the service it offers.

Trading Principles for Crypto

Bitcoin Dominance and Market Cycles

Bitcoin dominance is Bitcoin’s share of the total crypto market. Some traders follow it to understand where capital is flowing. Cycles can differ and do not always repeat. Use this as a tool, not as a prediction.

Risk Management in Crypto

Essential principles:

Position sizing: Do not put too much into a single coin, especially smaller altcoins
Stop losses: Crypto can move sharply. Decide in advance at which loss you exit
Taking profits: Altcoins can fall quickly and sharply after a rise
Investing or trading: Decide in advance whether you hold longer or trade short term
Diversification: Be careful with too much concentration in speculative projects
Storage: Learn how to store your coins securely and protect your access with two-factor authentication

On-Chain Analysis

Blockchain data gives extra insight:

Exchange flows: large inflows to exchanges can point to selling pressure
Large addresses: movements by large holders can provide information
Active addresses: a measure of network usage
MVRV ratio: the ratio between market value and realized value
Funding rates: show the mood in the futures market

No single indicator is reliable enough to depend on alone.

Conclusion

Crypto is a fast-changing and risky field. The key points:

Bitcoin and Ethereum each work differently and have their own purpose
Altcoins and DeFi add extra complexity and risk
Regulation changes and differs by region
Your own research and fundamental analysis remain necessary

Never invest more than you can afford to lose, work with clear risk management rules and keep learning. Daytraders.nl provides general information and not personal advice.