What is cryptocurrency

Cryptocurrency is virtual money that, unlike fiat money, has no physical expression. The unit of such a currency is “coin”, which means “coin” in English.

The digital currency is protected from counterfeiting and duplication, and its quantity and emission are strictly limited, for example, for the largest cryptocurrency Bitcoin (BTC), the maximum amount is 21 million coins (i.e., more than 21 million BTC will never be created).

The key feature of cryptocurrencies is decentralization – the absence of any internal or external administrator. Therefore, banks, tax, judicial and government authorities cannot influence the transactions of users of cryptoassets. This is possible since all data with cryptocurrency wallets and transactions is stored on the blockchain.

The transfer of cryptocurrencies is irreversible – no one can cancel, block, challenge or forcibly (without a private key) complete a transaction. However, the parties to the transaction may voluntarily temporarily block their cryptocurrencies as collateral or establish that the consent of all (or arbitrary additional) parties is required to complete / cancel the transaction. Such opportunities are available in smart contracts and depend on the specific blockchain.

How you can get cryptocurrency:

  • Cloud mining. The best way to get bitcoins at the beginning of 2020. It is a rental of the power of a cloud mining service in the form of a contract for a year. All the cryptocurrency mined by this power goes to your account. On average, income is obtained from 130% to 200% per year, it all depends on the course and the growth in the complexity of the network. But keep in mind in cloud mining there are a lot of scam or pyramid sites, you can only trust old and proven services, there are not so many of them on the market, for 2020 the most reputable company is IQMining.
  • Classic mining. Those who are engaged in mining, as it were, rent out the hashrate of their ASICs, video cards and processors to obtain cryptocurrency by using computing power. There are many bitcoin mass mining farms.
  • Buying cryptocurrency. You can purchase electronic currency for rubles and dollars on cryptocurrency exchanges or in special exchangers.

Distinctive qualities characterizing cryptocurrency

Three key characteristics of cryptocurrency:

Cryptocurrencies are not based on trust. The systems that manage cryptocurrencies do not require trust and do not involve third parties. They replace trust with verification. In a p2p network, assets are fully controlled by each participant and transferred between them directly without the approval and control of the governing body (for example, a bank).

Cryptocurrencies are immutable. By its very nature, blockchain technology makes cryptocurrency transactions immutable. They cannot be canceled, delayed, duplicated, hidden or changed. In such a system, it is impossible to cheat in the usual way, and it is protected from human error, which makes cryptocurrency infinitely more transparent than ordinary electronic money in a bank.

Cryptocurrencies are decentralized. For cryptocurrencies, new coins are systematically and transparently created by the system. Take Bitcoin: its infrastructure ensures that only 21 million units will ever exist. Now compare this with the constant “seal” and depreciation of fiat currencies like dollars and euros with the light hand of governments and central banks.

All cryptocurrencies exist on the blockchain technology, for a better perception, we will consider the principle of blockchain operation on the infographic:

principle of blockchain

To understand the essence of cryptocurrency, it is worth highlighting its advantages and disadvantages.

Positive features

  • Open source code. Thanks to this feature, everyone can mine virtual coins. Despite the complexity of the process, many people still earn their living this way.
  • Anonymity. Unlike classic electronic money, transactions with which are easily tracked, it will not be possible to obtain information about the owner of a cryptocurrency wallet. Only the wallet number and limited data on the amount on the account are available.
  • Decentralization. Cryptocurrency is an independent currency. Nobody regulates its issue and does not control the movement of funds on the account. It is this feature that attracts many members of the Network.
  • Limitation. As a rule, the cryptocurrency is issued in a limited volume, which excludes the risks of inflation due to the excessive activity of the issuer.
  • Reliability. Hacking, forging or carrying out other similar manipulations with virtual currency will not work – it is reliably protected.

Negative traits

  • No Warranties. Each user is personally responsible for their savings. There are no regulatory mechanisms here, so in case of theft, it will not be possible to prove anything and return the money.
  • Volatility. Cryptocurrency is unpredictable, because it depends on the current demand, which, in turn, can change against the background of changes in legislation, current opinions and other factors. For this reason, there are fluctuations in the price of virtual money.
  • Risk of prohibition or restrictions. Government structures are wary of cryptocurrency. Many countries have imposed restrictions on its use, and violators can face fines or even jail time. At the same time, a number of European states are still on the way to finding a compromise on the use of such money.
  • Danger of loss. The “key” for access to electronic money is a special password. If you lose it, the crypto coins in the wallet become unavailable.

With the increasing complexity of the formation of blocks, mining of virtual currency also loses its relevance. The cost of purchasing equipment and the cost of paying for electricity simply do not pay off. That is why in recent years special companies have been in demand that have the necessary capacities at their disposal – cloud mining services.

The term “cryptocurrency” came into use after the publication of an article about bitcoin – a digital currency and a payment system.

Bitcoin is the brainchild of Satoshi Nakamoto, but what kind of person or group of people is hiding behind this pseudonym is still not known for certain. Nakamoto presented the concept of a decentralized payment system on October 31, 2008. Its main principles are: anonymity for all participants, protection against fraud and independence from regulatory organizations.

The Bitcoin network is made up of interconnected blocks of transactions. Each subsequent block contains information about the previous one, so you can build them into a single chain and get information about all previous transactions (but not about the owners of bitcoins). The process of creating new blocks is called mining. In order for the next block to appear on the network, you need to generate a cryptographic signature for it. As a reward, you get new bitcoins. By the way, their emission is not an endless process. It is known in advance that no more than 21 million bitcoins can be created in total.

It was relatively easy to create blocks at first, and lone miners did it too. Over time, the complexity grew, mining required solid computing power, so miners began to unite in pools and mine new bitcoins by joint efforts.

In simple words

If you simplify everything as much as possible, then you can explain the phenomenon of bitcoins using the example of lemonade caps (yes, hello to Fallout fans). Let’s say you can’t fake these caps, go shopping and buy all the lemonade too: it is no longer produced. The number of lids is limited and is known in advance, so you just have to wander and look at your feet – suddenly you come across a lid.

Like any limited resource, caps have a certain value that grows as demand increases. The first caps are easy to find, but the further you go, the more difficult. People have to unite in groups and spend a fair amount of time and effort to find the next cap. They exchange the production for all sorts of necessary things, and many even make stocks of caps in the hope that over time their rate will only become higher.

Types of cryptocurrencies

According to the Coinmarketcap resource as of 06/09/2020, there are 5,549 different cryptocurrencies. The total market capitalization of virtual assets is more than $ 274 billion, approximately 75% of this amount is shared by the 20 largest blockchain projects. A fairly large part of the coins are used to pay for services in a certain network, are not sold on exchanges, and are of no value to investors.

All cryptocurrencies can be divided into the following types:

  • Currencies Coin or payment system coins. They are intended to pay for goods and services and can serve as an investment. They are completely decentralized, anonymous and easy to use. The most popular of these cryptocurrencies is Bitcoin (BTC). In fact, Bitcoin is the only fully decentralized digital currency.
  • Platforms Coins or internal tokens of crypto platforms. They are financial instruments that users of networks designed to develop and execute smart contracts cannot do without. A smart contract is a program that automatically controls the transfer of assets between two or more parties to an agreement on predetermined conditions. The most famous cryptocurrency platform is Ethereum. In addition to its main purpose, ether is used as electronic money along with bitcoin. People invest in the infrastructure of the Ethereum network, confident that they are not investing in a marketing trap, but are increasing their capital by contributing to the development of innovative projects.
  • Cryptocurrency Exchanges or internal marketplace tokens. Major crypto exchanges issue their own digital currency. Thus, the administration accelerates the turnover of funds and increases the liquidity of little-known assets on its trading floor. Users can at any time sell a particular coin for an exchange token, with a minimum service fee, which significantly reduces the risks of investing in young projects. The digital coins of crypto exchanges are completely centralized networks, which is their main difference from traditional cryptocurrencies. They have good liquidity, but only as long as the platform that issued them develops successfully. The most popular exchange tokens are Binance Coin (BNB) and EXMO Coin (EXM).
  • Stable Coins (stablecoins) are the least volatile cryptocurrency, because their value is always tied to a physical asset. The company issuing stablecoins must have an amount in fiat funds, for example, in US dollars, on the reserve fund balance in order to guarantee the value of the token. The most famous coin of this type is Tether (USDT), but there are other stablecoins that are backed by the dollar and the euro.
  • Utility Tokens or utility tokens, also called App Coins. They are released in a limited volume for the ICO. After completing a fundraising campaign, blockchain project teams sometimes try to promote as an investment option. But this practice is now strictly controlled by the US Securities and Exchange Commission, so for a successful investment you need to be an expert in the field of economics.
  • Security Tokens or hardware tokens are directly analogous to securities. They are distributed among investors to enhance the financial security of investments. The Security Token is a kind of digital token received by each contributor. On the basis of cryptographic tokens, dividend payments are distributed, they themselves can be invested in other projects. The STO owner’s right is recorded in a smart contract, and the tokens themselves are sold on trading platforms. STO turnover is controlled by financial regulators such as the US Securities and Exchange Commission (SEC) or the Swiss Financial Markets Authority (FINMA).
  • Crypto Commodities or Crypto Commodities, the general name for a traded or exchanged asset in the real or virtual world, which can be obtained through the blockchain network using exclusive digital tokens. Crypto commodities tokens are used to pay for hosting on a remote server, media content and other goods and services within a specific platform. For example, coins from the Aeron blockchain network can be used to pay for access to a database of air travel security. Self-regulation and execution of financial transactions in Crypto Commodities is embedded in the program code in the form of a smart contract. Unlike Platforms Coins, Crypto Commodities tokens are never used as regular money outside the project.

El Petro is the first government-owned stablecoin issued by the Venezuelan government. It is secured by the country’s oil and mineral resources. The government agencies of China and Russia are working on similar projects. All stablecoins have one obvious flaw, the centralized mechanism for maintaining the exchange rate comes into clear conflict with the decentralized nature of cryptocurrencies.

Preparations for the transition to digital currency are actively underway in China. The development of the crypto-yuan began in 2014, and in May 2020, the People’s Bank of China introduced the national cryptocurrency (DCEP) in four regions of the country as part of a pilot project to transfer the main money supply to the blockchain.

How can cryptocurrency be used?

We realized that Bitcoin and Ethereum are revolutionary, but what are the benefits of cryptocurrencies in practice?

What makes cryptocurrencies useful is not so much the goods that you can buy with them, but getting rid of the problems they solve. This is the main value they provide to the end consumer. It’s no coincidence that the most valuable cryptocurrencies are innovative.

Take Bitcoin, which revolutionized the way we transact and store valuables by allowing us to send money to anyone, anytime, anywhere, without any permission.

Like any great idea, bitcoin has had several followers at once who want to improve what it has achieved. Players such as Litecoin, Dash, IOTA, and Ripple quickly entered the scene, offering faster transactions with lower costs, improved scalability and energy efficiency.

While to some extent these altcoins are fighting to become the most popular payment system of all, nuances keep them in different markets. For example, Monero is a trace-protected cryptocurrency with anonymous transactions, which allows users to keep their transactions private and maintain balance without fear of being discovered by third parties.

The first and most obvious use of cryptocurrencies is in payments, with the list of companies accepting bitcoin to pay for goods and services is growing, and ATMs with withdrawal functions are located all over the world. The race has begun to create a standard form of payment using cryptocurrency debit cards such as Bitpay, which will allow their owners to pay for purchases through regular terminals in stores.

While this is all great, blockchain technology is not limited to the financial realm. It can be used to solve many of the problems that exist in today’s digital world. Therefore, now we can see hundreds of new projects with really incredible ideas.

In the wake of Ethereum, dozens of smart contract platforms have emerged to offer innovative solutions to problems in agriculture, medicine, IT, logistics, and nearly every other sector.

For example, Sia allows you to rent out unused hard disk space. In exchange for connecting this empty space to the blockchain, you will receive a certain amount of Siacoin, the project’s own cryptocurrency.

The difference between coins and tokens should be noted here. Coins exist exclusively as a form of digital money on their own blockchains. Bitcoin and Litecoin are prime examples of coins.

Tokens occupy a different niche and serve alternative purposes – for example, represent a digital asset, share, system usage fees, etc. Dragonchain, Waltonchain and Civic are ERC20 tokens. This means that they exist on the Ethereum blockchain, and they all serve the corresponding utilities provided by the project.

It is important to note that the usefulness of a cryptocurrency is its main characteristic: if a token has practical use and solves an existing problem, it is likely to grow in value.

At the same time, many useless coins ended up getting more than they should have. For example, Dogecoin was originally a prank cryptocurrency with no value or real market use. With a market cap of around $ 600 million (at the time of writing), this is arguably the most profitable joke in the world.

Despite some low quality projects (or humorous projects), it is fair to say that cryptocurrencies do not exist in a vacuum, but depend on the value of the decentralized application, platform or blockchain on which they are based.

After reading what you read, you will most likely begin to realize that cryptocurrency is just a great idea.

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