Mined vs Unmined Cryptocurrencies – Which is Better for Indian Investors?

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Cryptocurrencies or digital currencies have become a global phenomenon and skyrocketed in the past year, with a market capitalisation of $1.6 trillion as of February 2021. There are more than 6,700 cryptocurrencies currently trading publicly, with Bitcoin being the most popular cryptocurrency. Part of this has been due to the ease with which people can buy cryptocurrency, and the other, due to the phenomenal rise in crypto gains.

Cryptocurrencies fall into two broad categories: mined currencies and unmined currencies. The mining of currencies is a process of people using complex computers and processes to validate blocks of data and add them to a public ledger, known as the blockchain. Popular mined currencies are Bitcoin, Ethereum, Monero, Ravencoin, etc.

Non-mined currencies do not use complex computer processes to validate the block of transactions; instead, they rely on ownership of the currencies and validation based on trust and consensus among the owners.  A popular non-minable currency is Cardano. Both categories of currency are essentially intended to confirm that no virtual token has been spent more than once.

What are mined currencies?

Cryptocurrency consists of digital currency that is encrypted, and mining of cryptocurrency involves a process wherein an individual or organisation uses high-powered computers to solve complex mathematical equations that are part of the encryption process in order to validate a block of transactions. Such individuals or organisations, who do the mining, are known as ‘miners’. They receive cryptocurrencies as block rewards. Only the first individual/organisation to validate a particular set of transactions receives this reward. Such rewards can be held as investments or converted into fiat currency. This method of validating currency is also known as ‘proof-of-work’.

What are unmined currencies?

Unmined currencies work on a concept known as proof-of-stake. The holders of these cryptocurrencies validate the transactions by first being owners of the currencies and secondly by holding them for long periods. There are randomised selections of individuals to validate the currencies, but owning for long periods creates a higher likelihood of getting chosen.

The fundamental difference is, there are no high-powered computers or equations here. By owning the currencies, sometimes for long durations, one can ‘proof’ or validate them because they have owned them. In the proof-of-stake method, there are rewards for validating the transactions ‘differently’.  Take for example, Ethereum, which follows the proof of stake protocol. The price of Ethereum in India is much lower than that of Bitcoin. This is because the rewards in this method are usually aggregate fees from a block of transactions. These may be significantly lower than the block rewards with mined currencies, but so are the costs of transactions.

 

 

The pros and cons for Indian Investors:  Mined vs unmined cryptocurrencies

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Mined Unmined
Pros ●      High rewards in the form of tokens for miners, which can be cashed out or held for longer durations as an investment.

●      Decentralised and cryptographically secure.

●      The cost of validation is very low.

●      Transactions can be speedy since owners need to validate based on their stake.

Cons ●      Very expensive for the following reasons:

 

●      High electricity costs to maintain and use servers and specialised chips

●      Mining farms’ equipment is highly specialised and gets obsolete quickly.

●      Expensive cooling equipment is needed as servers and graphics processing units generate a lot of heat.

●      All prominent cryptocurrencies may get fully mined and reach their token supply limit in the near future.

●      Rewards of validating the blocks of transactions are not very high in value and usually in the form of fees rather than tokens.

●      Control can get centralised with an individual or group if they own a significant stake in that currency, such as 51% or higher. They can hold the entire network and its stakeholders hostage, especially if these are with lower market capitalisation.

●      With the centralisation of control, there’s an inherent risk of also controlling the direction of the token and the network.

 

Conclusion

Mined currencies dominate about 65% of the cryptocurrency market by value. However, it is likely that in the near future, all these currencies get fully mined; in other words, they may reach their token supply limit. The cost of mined currencies is also prohibitively expensive, and the process consumes a lot of electricity. These reasons make unmined currencies a lot more attractive. While they do have a risk of centralisation in the hands of a few, it is unlikely to happen with the higher market capitalised currencies.

Disclaimer: Anything expressed here directly or indirectly is not investment advice. We ask you to do your own research before investing.

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