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What is Cryptocurrency?

 

What is Cryptocurreny?

What is Cryptocurrency and how to make money on it?

    Many investors have heard about cryptocurrency, the ups and downs of Bitcoin prices, success stories when a few thousand dollars made people millionaires. But the reality is more complicated than that. Before investing in cryptocurrency, it is necessary to understand what it is, what are the main advantages and disadvantages of the asset, the differences from traditional money, as well as the main ways of making money.

Content:

  • What is Cryptocurreny?
  • Pros and cons of cryptocurrencies
  • How cryptocurrency differs from conventional money?
  • Where to buy cryptocurrency and is it legal?
  • How to earn on cryptocurrencies?

What is Cryptocurrency

    Cryptocurrency is an electronic means of payment with no physical expression of form. The basic unit of measure is "coins" or coins. They are used as traditional money, including storage, transfer to third parties, payment for goods or services.

    Unlike an electronic wallet, cryptocurrency is based on a complex cryptographic algorithm. The principle of digital coins is based on an open data transfer protocol. All actions, including issuing new money and processing transactions, are done collectively by network participants.

The main concepts are:
  • Transaction - the transaction of transferring money between accounts;
  • Blockchain - a continuous chain of linked blocks where transaction data is recorded;
  • block - a set of data about transactions, as well as the number of the previous block;
  • mining - the process of finding new blocks that are rewarded and adding them to the blockchain;
  • node - an analogue of a server that constantly downloads information about the blockchain and allows the exchange of fragments with other participants in the network;
  • Purse - consists of a public key (purse number) and a private key (access password).
  • Principles of operation of cryptocurrencies:
  • Decentralization - all actions are performed by network participants without the involvement of a single central issuer. Information about funds is stored in all nodes, so access to data is preserved in case of problems.
  • Deflation - when most cryptocurrencies are issued, the final issue of coins is known, which guarantees the value of the asset and no inflation.
  • Security - the use of blockchain and special algorithms can protect the network from hacker attacks. The more miners and nodes a cryptocurrency has, the harder it is to attack.
  • Anonymity - each user gets a wallet number, which is in no way connected with his identity. But knowing the public key, you can see information about the amount of money in the account.
  • Synopsis: The value of a cryptocurrency is determined by the level of trust of users. The more people use it, the higher the value and demand for new coins.
Cryptocurreny

Pros and cons of cryptocurrencies

    The popularity of cryptocurrencies is due to mistrust of authority and traditional money. People began to become disillusioned with monetary policy, so they resorted to using a decentralized payment system. The main advantages of cryptocurrencies are:
  • Reliability. Encryption algorithms, blockchain and computing power make it difficult to hack or tamper with money data.
  • Open Source. This allows everyone to investigate the software, look for bugs and suggest improvements to the network.
  • Limitations. The number of issued coins is limited and known in advance. The parameter can only be changed with the consent of the majority of users in the network.
  • Cross-border payments. No more need to use banks or expensive intermediaries to transfer money to other countries.
  • Control over your funds. If a bank goes bankrupt, no one guarantees the safety of the funds or the ability to recover them. The cryptocurrency holder is personally responsible for the digital money.
  • Earnings Opportunity. The popularity and development of the new technology allows you to get more profits from investments compared to traditional tools.
  • Despite a number of advantages, cryptocurrencies have significant disadvantages:
  • The risk of losing all the money. A private key must be entered to access the money stored in the wallet. It cannot be recovered or changed. If login data is lost, funds will be frozen in the account.
  • Attack 51%. The security of any cryptocurrency lies in the decentralization of computing power. If one person or group has access to 51% of the network's resources, it will allow any changes to be made to the blockchain. However, the more computing power a cryptocurrency has, the harder it is to implement this plan.
  • Rate Volatility. The value of digital coins is affected by the level of user confidence and demand. Also, the market reacts unpredictably to changes in the policies of leading countries regarding cryptocurrencies.
  • Lack of guarantees. All the risks fall on the shoulders of investors. In the case of loss of money, theft of funds, lack of access to the wallet, it is impossible to do anything.

How cryptocurrency differs from regular money?

    Regular money is used by people to pay for goods and services in everyday life. It can be funds on a bank card, banknotes, or coins. In other words, fiat money is issued by the government, which sets its value and guarantees its value. Confidence in the money is reinforced by the number of sales and purchases and the payment of taxes in the state currency.

    Note: Regular currencies are not backed by anything other than people's trust. There are currently no standards for using gold or other precious metals to back the value of money. The exchange rate of fiat money depends on the government's policies and the economic situation of the country. If necessary, the government can print an unlimited amount of money and put it into circulation. This increases the rate of inflation and reduces the confidence in money.

    Cryptocurrencies are issued by members of the network. The maximum number of coins is known in advance, which indicates the deflationary nature and increase in the value of the asset in the future. New coins are issued by miners - they process transactions and mine new blocks, for which there is a reward. While the value of digital coins is not backed by anything, it is directly dependent on the level of demand. The more people are interested in cryptocurrencies and start using them, the higher the price. The market is self-regulating.

Synopsis: One of the key differences between fiat money and cryptocurrencies is the impossibility of undoing a transaction. In the case of an erroneous transaction to someone else's bank account, there is a refund procedure. There is no such possibility with cryptocurrencies.


Where to buy cryptocurrency and is it legal?

Where to buy cryptocurrency and is it legal?

There are several ways to buy digital assets:
  • Exchange sites or platforms - special resources that analyze reviews, reliability, solvency and reserves of sites. You can buy cryptocurrency with dollars, euros or rubles. It is worth bearing in mind that exchangers sell the most popular coins. If you need to buy promising assets or cryptocurrencies with small capitalization, only exchanges will do.
  • Direct purchase. On special forums you can get acquainted with holders of cryptocurrencies and directly make an exchange. Before the transaction, it is necessary to study the information about the person and make sure that he is honest. The main advantage is the absence of additional commissions.
  • Cryptocurrency exchanges - designed for both trading and buying digital assets. After depositing with fiat money, it will be possible to buy and withdraw cryptocurrencies.
  • Note: speed of transaction processing depends on network load and selected cryptocurrency. The transfer in the Bitcoin network will come within 30-60 minutes, Ethereum - 2-3 minutes, Litecoin - up to 20 minutes.

How to earn on cryptocurrencies?

The way to make money from cryptocurrencies depends on personal preferences and starting capital. Some investors use mining, others use long-term storage of assets, and some prefer active trading.

The main options for earning:
  • Mining - buying equipment and using it to mine new coins. The method will require cheap electricity, technical skills and a large investment. In this case, the payback period depends on the rate of the selected cryptocurrency.
  • Cloud mining - renting computing power from a company that services the equipment. The investor chooses only the number of hashes and the cryptocurrency to mine.
  • Buying on an exchange and holding - investing in popular and promising assets, similar to conventional securities. Profits are made by increasing the price of coins.
  • Trading - making profitable trades on exchanges by analyzing the current situation and predicting market movements.
  • Arbitrage between exchanges - buying cryptocurrencies on one exchange and selling at a better rate on another exchange. For small amounts, the method does not make sense.
  • Investment funds - an analogy to mutual funds in the cryptocurrency world, which hold stable, moderate and risky digital assets in their portfolios.
  • Because cryptocurrencies are risky, we recommend a combination of methods. Diversifying strategies and the number of assets will not only help preserve funds, but also increase investment capital.

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