What is Cryptocurrency?

What is Cryptocurrency? Cryptocurrency is a type of digital currency that is most often decentralized. Its mission is based on various cryptographic methods, while blockchain provides its technological fundament.

In simple words, a blockchain is a digital ledger that can store different kinds of information. In the case of crypto, blockchain is responsible for storing all the monetary transaction data. The volume of these ‘blocks’ grows as new transactions are made.

Blockchain technology has its roots in cryptography, a science of ensuring the secrecy of communication between the sender and recipient.

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What is Virtual Currency?

Virtual currency is digital money created directly on a computer network. In other words, it is a digital expression of the value users can trade digitally.

Any virtual currency includes three main components:

• a medium of exchange
• a settlement currency
• a store of value

At the same time, it does not have legal tender status in any primary jurisdiction.

Virtual currency convertibility

Virtual currency can be convertible or non-convertible:

• Convertible/open virtual currency has an equivalent weight in fiat money and can be exchanged for it and vice versa. Examples of convertible virtual currency include most cryptocurrencies, such as Bitcoin, Ethereum, and Cardano.
• Non-convertible (or closed) currency is intended for use in specific virtual realms or worlds. It cannot be exchanged for ‘real’ currency.

History of Cryptocurrency

Cryptocurrency first appeared in 2008. Bitcoin was the first well-known type of cryptocurrency. It was launched into the public space by an anonymous character named Satoshi Nakamoto. There is still no reliable data, whether one person or a group.

The evolution of cryptocurrency can be divided into several stages:

• Stage of origin: 2008 – 2010
• Stage of formation: 2011 – 2013
• Promotion stage: 2014 – 2016
• Stage of regulation by Central banks: 2017 – present.

Origin Stage

Since its creation, Bitcoin has undergone several changes. First, the founders released Bitcoin version 0.1, then 0.2, then 0.3. But Bitcoin remained vulnerable and was hacked in August 2010. During these attacks, 180 bitcoins were generated and sent to different addresses. Eventually, they were found. Later, the latest, final version of Bitcoin was released – 0.3.9.

This was the last version of Bitcoin, BTC, released with the participation of Satoshi Nakamoto. After that, he ended his activities and left the project. Also, during the birth of Bitcoin, a forum called Bitcointalk appeared, where crypto enthusiasts discussed Bitcoin and news in this field.

Stage of Formation

A new (second) cryptocurrency was released – Litecoin. There were high hopes for Litecoin, LTC. Many thought that LTC could outperform BTC. Mining Litecoin could be possible on conventional processors. Also, at this time, the development of mobile applications related to cryptocurrency began. In the summer of 2011, the first Bitcoin application for the iPad — Bitcoin Mobile — was released.

Promotion Stage

During this period, cryptocurrency rates experienced high volatility. Thousands of Bitcoin millionaires were ‘born.’

In 2014, the Mt.Gox crypto exchange collapsed in Japan, which ranked 3rd in the world in terms of trading volume at that time. As a result, the Bitcoin exchange rate fell sharply – from $940 to $655 per unit.

In the summer of 2014, Vitalik Buterin, a talented Canadian programmer, launched the Ethereum electronic payment service at the age of 20. A little later, the Ethereum company created a virtual currency – Ether. After some time, about 60 million Ether tokens were sold, worth about $14 million.

Regulation Stage

In 2017 the whole world realized that crypto isn’t about to disappear anytime soon, so it’s time to regulate it to leave the economy’s dark side. So nowadays, we still live in the regulation stage, while cryptocurrency is becoming more legal daily.

Why Cryptocurrency is the Future

Crypto is considered to be the future of the financial sector for the following reasons:

• High prevalence & versatility: it is effortless to create a wallet on various computer, smartphone, or tablet operating systems.
• Simplicity and openness of transactions: a complete history of incoming and outgoing transactions are stored without time limits.
• Each node of the cryptocurrency generation system is equal: no single center excludes the possibility of blocking wallets, canceling, and controlling payments.
• Maximum anonymity: when making payments, you can specify your wallet’s public address without revealing your identity.
• Conducted transactions are protected by cryptography: confirming a financial transaction will not be possible without transferring a block with a unique verification code. If this is done, no one can cancel the money transfer, eliminating fraud when paying for goods/services with crypto.

How does Cryptocurrency Work?

Since cryptocurrency is a unit of accounting for transactions within a decentralized payment system, its work resembles banking systems very much.

Nowadays, nearly everyone is accustomed to transferring money and making purchases or sales with the help of banks. They are centralized – information about all transactions is in one’s hands. The bank confirms the fact of transferring money from one account to another. This operation cannot be carried out twice or pretend that it did not happen since the bank is responsible for its confirmation and security. For their work, banks charge commissions from customers and dictate their terms for using financial products.

Cryptocurrency works similarly, but there is no single center. While transaction information is stored on thousands of computers worldwide, it is combined into blocks, then blocks into chains protected by cryptographic keys. The entire chain will change if you change the information in any of the blocks.

This technology is called a blockchain. Blockchain is formed continuously with the advent of data on new operations. Processing transactions on the blockchain and selecting keys for encryption require computing power and effort. For this work, the people who do it are rewarded.

The unit of this reward is the coin or its fraction – Bitcoin, Litecoin, Ethereum, or any other. This is how cryptocurrency mining works.

In simple words, mining is the process of sealing blocks in the blockchain, which supports the existence of the payment system and the cryptocurrency itself.

States or central banks do not control cryptocurrency. It makes transaction processing independent, transparent to all participants in the network of computers included in the blockchain, and at the same time, anonymous. The legal status of these transactions in many countries has been re-examined in the last few years.

What is Cryptocurrency Used for?

The first cryptocurrency, Bitcoin, was only used as a means of payment. However, today we can utilize crypto in many other ways:

Payment

Cryptocurrency, like regular fiat currency, is a payment instrument. It can be used to pay for goods and services. Already today, many companies accept bitcoins and other popular tokens for payment.

Bank Alternative

Blockchains allow you to process transactions quickly and without fees. Many modern cryptocurrencies’ speeds are close to or exceed those of traditional payment systems, such as VISA and Mastercard.

In simple terms, crypto conducts financial transactions quickly, without intermediaries, and anonymously.

Native Currency

Cryptocurrencies can be utilized as tokens of blockchain projects, decentralized finance, applications, games, and so on. It can be both an internal unit of account of such a network and a way to develop the project and attract new resources.

For example, one of the most popular blockchains, Ethereum, has formed an extensive network that serves smart contracts to various industries.

Trading

Most cryptocurrencies are not pegged to gold or traditional currencies. Their rate fluctuates based on supply and demand in the market. Therefore, coins are highly volatile, and many traders earn on fluctuations by selling and buying cryptocurrency on various exchanges.

Investment

Many cryptocurrencies show impressive growth in the long term. The already mentioned Bitcoin and Ether have grown thousands of times since their inception. Therefore, cryptocurrency is a risky but very profitable investment tool.

How to Buy Cryptocurrency

The process of buying crypto recalls online shopping. So the steps are pretty similar:

1. Choose where to buy

There are many options out there. The most popular ones are crypto exchanges, p2p exchanges, OTC markets, and DEXs. The easiest is leveraging crypto exchanges (online markets where virtual coins are sold). Let’s choose Binance as an example.

2. Register

Create an account and deposit the amount you want to spend. Binance may ask you to pass KYC (Know Your Customer) verification before topping up your balance. Also, you can choose to buy directly with your credit card.

3. Choose crypto

Binance offers more than 600 crypto tokens for sale, but the most popular ones are BTC, ETH, and BNB. You can buy any of them.

4. Place an order

Click on “buy” and enter the sum you are willing to convert or the exact number of coins you want to buy. Then confirm the deal.

5. Check your portfolio

After doing all this, you can find your purchase in your spot wallet.

Is Cryptocurrency a Good Investment?

Cryptocurrency is still a young financial market that has yet to show its full potential. So the short answer is yes. But be careful!

Let’s take the opinion of Wells Fargo (an American banking giant and global financial services provider that manages approximately $1.9 trillion in assets) as an example. In February 2022, they released the report Cryptocurrencies — Too early or too late?

Their main idea is that the crypto market’s evolution now is something like the development of the Internet in the late 90s. Investing in crypto assets today is already “not too early” but “still not too late.”

Wells Fargo thinks this activity can still bring us some profit in the future. The number of cryptocurrency users is growing dynamically all over the world. Crypto assets are approaching the phase of “hyper-acceptance” — they are on the verge of mass adoption when they are no longer perceived as an exotic and risky financial instrument.

Is Cryptocurrency Safe?

If you choose a reliable crypto project, your coins will probably be safe (unless the company disappears the day you make the purchase).

Moreover, dealing with cryptocurrencies doesn’t mean you are in the ‘darknet’ zone. This is just an alternative to the traditional financial system. Also, most cryptos are secured in several ways.

What about the money invested in a particular coin? Well, unfortunately, the crypto market is highly volatile. Here you can lose 10% in value today and gain 300% the day after.

Hence investing in crypto implies additional risks to the value of your fiat savings.

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