“I am open to the use of cryptocurrencies if they are properly controlled and regulated …”

Jamie Dimon, CEO of JPMorgan.

Hello everyone, I’m with you, Olga Usim! Cryptocurrency is gradually becoming more and more popular. However, many people still have no idea what it is. Moreover, some believe that digital currencies are a stronghold of scammers and schemers..

In fact, bitcoins, ethereums and other altcoins are built on the basis of advanced financial technologies. They open up new horizons for humanity. It is convenient to store assets in cryptocurrencies; you can earn good money by buying and selling coins.

In this article I will tell you how the first cryptocurrency appeared, what it is for, who creates it, I will describe the main characteristics of digital currencies and their advantages. You will also learn how cryptocurrency networks work, where and how they store digital currencies, where to get bitcoins, ethereums and other popular coins. Each section of the article will answer one of the questions posed.

Content

  • How the first cryptocurrency appeared
  • What is digital currency for?
  • Who creates digital currencies
  • Main characteristics
  • What is the advantage of cryptocurrencies
  • How cryptocurrency networks work
  • Where and how digital currencies are stored
  • Where to get digital currency

How the first cryptocurrency appeared

The word itself (in English – the phrase) “cryptocurrency” (crypto currensy) first appeared in the article of the same name by Forbes magazine Crypto Currensy. This happened back in 2011. By that time, the Bitcoin network had been developing for more than two years..

The term was liked by the media and the cryptocurrency community itself. It has become increasingly used even on television. Since then, the word “cryptocurrency” has become firmly entrenched in the information space..

Forbes and cryptocurrenciesForbes and cryptocurrencies

Without going into details, cryptocurrency (or digital currency) is just a means of payment. It “exists” only in electronic form, just like the usual programmer code. It is called so because operations with cryptocurrencies are performed through cryptographic elements. Also, an electronic signature is used for transactions..

All digital currencies are measured in so-called “coins”. In English, respectively, coin-ah. Bitcoin (BTC) and other classic currencies do not have any real collateral. That is, there is no peg of BTC to gold, oil or the dollar. The price of digital currencies is determined by the current exchange rate on the market.

The main difference between cryptocurrencies and regular money (fiat) is that they are digital in nature. Rubles or dollars exist in paper form. To top up your bank account, you need to deposit money through an ATM. They print paper money at central banks. In turn, bitcoins and altcoins are “born” immediately in digital form.

What is digital currency for?

In 2019, ten years after the emergence of bitcoin, not everyone understands how to use digital currency to their advantage. Let me list what cryptocurrencies are for.

CryptomatCryptomat

First, digital currencies, like other means of exchange, can be used for payment. Most often they are accepted in online stores. Moreover, the EU and the US are gradually starting to take Bitcoins offline. For example, at Starbucks you can buy coffee for BTC. In addition, coins can be exchanged for fiat, that is, for rubles, dollars, euros or yuan..

Secondly, digital currencies are becoming an increasingly suitable asset for investment over the long term. You can buy a certain number of coins and wait for their rate to rise. For example, the BTC rate has grown 100 thousand times over ten years..

Third, you can also profit from the volatility of bitcoin and altcoins. The course will usually change by 5-10% during the day. If you buy and sell coins at the right time, you can make a small profit every day. True, for this you need to have certain analytical skills and a trader’s flair..

Fourth, you can simply save your money as digital currencies. It is quite safe as it is very difficult to steal money from a wallet. Only if you yourself give the attackers access to your account. By the way, remember that without a private key, you yourself will not be able to return access to the money. So don’t waste it!

I have listed just four of the most obvious use cases for cryptocurrencies. In fact, digital currencies are the whole world, so don’t think that this can exhaust their value..

Who creates digital currencies

There are several main stages of creating cryptocurrencies:

  • ICO,
  • mining (PoW),
  • minting (DPoS, DPoS, LPoS, PoC, PoI, etc.).

Mining cryptocurrencies

Cryptocurrency mining ICO is the initial release of coins. It is used to collect investments at the stage of launching a cryptocurrency startup. Sometimes this stage is limited, that is, no more coins are issued. For example, Ripple initially created 100 billion XRP and does not plan to release them anymore. XRP is the third largest digital currency by capitalization.

Another option for issuing coins is mining. For example, miners are rewarded for issuing bitcoins and ethereums. “Mine” means to calculate (calculate) new blocks in the blockchain according to a certain algorithm. These are very complex mathematical operations that require significant computing power. There are many mining farms in the world. There, special devices are used for the extraction of cryptocurrencies – ASIC miners, as well as powerful video cards.

Another option for issuing cryptocurrencies is minting (forging). This is a trickier way to create new blocks on the web. When using this method, the block formation algorithm does not depend on the capacity of the equipment, but it is more likely that the block will be formed by the account with the higher current balance. In other words, the richer you are, the more blocks you can make. This type of minting is also called PoS mining, but there are other types of minting, for example: DPoS, LPoS, PoC, PoI, PoB, PoAuthority, PoA, PoET, pBFT. This may not be a complete list. The methods of forming blocks are increasing along with the development of the blockchain technology itself, so even I find it difficult to keep track.

We will talk about all these letters and their meaning in future articles, do not miss &# 128521;

In all three cases – ICO, mining, rally – new coins are generated literally out of thin air. However, mining takes a lot of electricity, which you have to pay for. So in this case we can say that coins are “mined” from electricity.

Main characteristics

Decentralization of cryptocurrenciesDecentralization of cryptocurrencies

At the moment, according to Coinmarketcap, there are 2361 names of cryptocurrency assets. They all have different tasks, but they all have one function that is necessarily present in every cryptocurrency – the ability to transfer an asset between users. The transfer speed and the size of the commission depend on the blockchain architecture. For example, the duration of a transfer for Bitcoin and Ethereum can be up to several tens of minutes, depending on the network congestion and the low bandwidth of the first generations of the blockchain. On the other hand, EOS, Stellar and all coins created on Graphene technology (BTS, STEEM, GOLOS) are transferred in a matter of seconds.

The same can be said for the commission. It is completely different and somewhere it does not exist at all, such as in IoT coins, and somewhere it can reach several dollars, as in the case of Bitcoin.

To be fair, it should be noted that when transferring Bitcoin and Ethereum, the user himself sets the commission. The blockchain nodes of these currencies process transactions in descending order, which means that the more the sender has set the commission, the faster the transfer will be. This is a much more honest approach than with a bank transfer, where the commission is tied to the transfer amount and is quite large, but at the same time, there is a risk that with a very small commission, your transfer may hang in the blockchain of the network for a very long time.

A little about blockchain

Cryptocurrencies and blockchainCryptocurrencies and blockchain

Most cryptocurrencies are based on blockchain technology. Roughly speaking, this means the following: the network database is not centralized, but distributed over many blocks. Copies of blocks are distributed among all holders of a full node – a computer connected to the blockchain network. Typically, the node holder receives a fee from the network in the form of a commission. For example, for Bitcoin, each holder of a special node who is engaged in mining receives a reward. Thus, the blockchain network, thanks to its self-copying into each of the nodes and wide geographic distribution, becomes decentralized and resistant to attacks. Since all the nodes are closed in a single network and the synchronization of block recording goes on simultaneously for all participants, an attacker’s attempt to “forge” the cryptocurrency and change the record on one computer will immediately be detected and prevented by other nodes whose copies of the blockchain are different from the fake.

The very scheme of transactions in the blockchain network can be described as follows. Let’s say the owner of wallet X transfers his assets to wallet Y. The transfer operation is divided into blocks. Each block has its own number and hash from the previous block. Next, the nodes come into play. They first check for errors in the operation. And then each participant in the network writes the operation to their copy of the database. Finally, the verified block is added to the unified blockchain network. It contains all information about all transactions that were completed earlier. Funds transfer completed!

What are the advantages and disadvantages of cryptocurrencies

Advantages and disadvantages

Let’s start with the benefits:

  1. Cryptocurrencies have no physical appearance. There is no need to release a lot of unnecessary waste paper. All transactions are carried out electronically.
  2. Digital currency networks are decentralized, and therefore not controlled by a hotel group of individuals or the state.
  3. The controlled emission of cryptocurrencies is not carried out in the central bank, but in the process of mining or the algorithm that is laid down in the blockchain protocol. Some currencies, such as Ripple, are already initially issued in full at the stage of placement and their number cannot change.
  4. Cryptocurrency anonymity. This statement applies, of course, not to all currencies, but only to a limited list that uses anonymization technologies. First of all, Monero and Zcash can be attributed to anonymous currencies..
  5. Cryptocurrency transfers are carried out without intermediaries and around the world, and the cost of the transfer is several times cheaper than interbank and international transactions

Now about the disadvantages:

  1. The risk of losing funds due to hacking of cryptocurrency exchanges and wallets;
  2. Attack 51 is a hacker attack that is possible in the event that attackers own more than 50% of the network’s production capacity. In this case, they have the opportunity to make edits to the blockchain and falsify transactions.,
  3. The high volatility of the rate of cryptocurrencies makes it difficult to use them as a means of payment, 
  4. The problem of legal regulation of cryptocurrency. In some states it is prohibited as an asset class, in others it is in the gray zone.
  5. Manipulation of the course by large holders and stakeholders,
  6. The problem of providing real assets. Despite statements and high-profile disputes on the part of the creators of digital assets, there is no real cryptocurrency backed by natural assets. Due to the lack of legal regulation, even currencies such as Tether (USDT), which were originally backed by the dollar at a 1-to-1 ratio, are now facing challenges in confirming their real value..
  7. ICO scam. According to experts, about 80% of ICOs that took place in 2017 and 2018 are cases of fraud.
  8. Risk of losing your wallet access key. Since cryptocurrency is a decentralized asset without an administrator, only the owner himself has access to the asset. In case of loss of the key or death of the owner of the cryptocurrency, access to the asset will be permanently lost.

Where and how digital currencies are stored

Where can digital currencies be stored to prevent fraudsters from stealing them? This question often haunts newbies. Here’s the answer: cryptocurrency is stored in wallets. Such a wallet can be either a regular program on a laptop, or an application on a smartphone or a wallet on the Internet, which can be accessed using any browser..

The safest method of storing digital currencies is, of course, a hardware wallet. The hardware wallet cannot be accessed over the network. The fact is that this is a separate portable compact device not connected to the Internet..

Hardware walletHardware wallet

Sometimes such a wallet is divided into several parts, which are stored in different places. This further increases the security of cryptocurrency assets..

Where to get digital currency

The article comes to an end. Let’s talk about how to get cryptocurrencies. In order not to prolong my story, I will list only the main ways. Digital currencies can be bought on crypto exchanges for fiat, that is, for regular currency. You can also use the services of exchangers.

There are options for how to earn coins without investment.

First, you can go for mining. For mining, you need to create a powerful station from video cards or ASIC miners. Sufficiently experienced techies can handle it. Your “farm” will perform the complex mathematical calculations required for the network to work. And you will receive a reward for this in the form of cryptocurrencies.

Cryptocurrency miningCryptocurrency mining

Secondly, you can also do cloud mining. This term is understood as the use of other people’s capacities for the extraction. You will rent them and pay a certain amount of money for it. It may turn out that this will not be profitable for you. Check it yourself.

Third, you can use taps. These are special resources that offer almost free coins. To do this, you will need to complete various tasks: watch ads, register on sites, etc. Try it if you do not mind your time.

Conclusion

Remember, digital currencies are very different. So if you decide to become a member of the cryptocurrency industry, find yourself a suitable project. It is not necessary to buy Bitcoin or Ethereum, but it is better to focus on cryptocurrency, which occupies top positions in terms of trading volumes. There are hundreds of interesting projects, but in order to protect yourself, it is better to choose the cryptocurrency that is associated with a real, operating business. Let me remind you that in one of my articles I told you how to correctly compose an investment portfolio. Good luck to you!

“In recent decades, the US dollar has performed its target relatively well. But in countries and corners of the financial system where traditional money services are underserved, bitcoin (and cryptocurrencies in general) can offer viable alternatives. “,

Goldman Sachs analysts Zach Pandle and Charles Himmelberg.

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