What is a cryptocurrency?

What is a cryptocurrency?

Table of content:

  • Cryptocurrency meaning
  • How to earn on cryptocurrencies?
  • The structure of any cryptocurrency
  • What features cryptocurrency has over conventional money
  • Conclusion

For today, it is important to understand cryptocurrency meaning. Cryptocurrency is electronic money, in cash they simply do not exist (souvenir coins do not count). Such money is created by private computers, while the central banks of the countries do not participate in the process at all. To create digital “coins” special encryption algorithms are used. Officially cryptocurrencies are not used in any country in the world (although there are exceptions, about this further), but on specialized exchanges actively hold auctions with bitcoins and other coins. Cryptocurrency or digital money appeared due to disappointment in ordinary paper money. However maybe some programmers had too much free time. The most popular type is bitcoin, even your grandmother probably heard about it.

Cryptocurrency can be developed from scratch or use the public source code of another cryptocurrency. If, in addition to the code, the new cryptocurrency also uses the already existing chain of blocks of the original cryptocurrency, such a cryptocurrency is called the forks of initial cryptocurrency. For its emission, various cryptocurrencies are used mining, forging or ICO.

The economic essence and legal status of the cryptocurrency are discussed. Depending on the country, cryptocurrencies are considered as a payment instrument, a specific product, may have restrictions on turnover (for example, prohibition of transactions with them for banking institutions).

The cost of ordinary money is established by the state, relying on the value of the material from which money is made. Not so long ago the value of the banknote was tied to a gold reserve, what means that behind each piece of paper there was real gold, which could be obtained without problems (theoretically). However, now the situation has changed: states issue money in unlimited quantities, so their value falls, and this affects people, because prices are increasing.

As an example, we can talk about caps. Like any limited resource, the caps have a certain value that grows as demand increases. The first caps are easy to find, but the further, is more difficult. People have to band together and spend a fair amount of time and energy to find another cap. They change the extraction for all sorts of necessary things, and many even make their lid supplies in the hope that eventually their course will only get higher.

How to earn on cryptocurrencies?

They are created with the help of mining. This is a process of calculations to confirm transactions in the system and ensure its reliability and security. Mining devices are called miners (as well as people, what they do). Actually, these are computers with special chips (Asik Miner) or specialized devices equipped with video cards. Serious miners have entire systems of such computers, which are called “farms”. And when they say “invest in bitcoins,” it is, as a rule, about acquiring and servicing just such a mining system. But there is another way: you can buy bitcoins on the exchange and trade them in the same way as other currencies. This type of earnings does not require computer, you need special financial knowledge. And in both cases it is necessary to understand many nuances, including technical ones.

The structure of any cryptocurrency:

  1. Cryptocurrency has no single administrator (neither internal nor external). It is completely self-organizing and independent of anyone else’s system.
  2. There is no central server on which to store the database with all the transactions in the system (it’s like in a bittorent – a decentralized system). The matter is that all participants of the system have copies of the transaction database and they are constantly checked against each other by special algorithms. And this is all implemented on the basis of technology called blockchain. By itself, this technology is probably even more interesting than the cryptocurrency created on its basis.
  3. Since there is a copy of the database for all participants, everyone can, if desired, track any payment in the system. But to track is not to get. It is like in a museum – you can watch, but you can not touch.
  4. All payments in the system are signed (encrypted) with a secret key, available only to the owner of the money. Each member of the system receives at its disposal a special address (essentially a purse) and a secret key (essentially a password). All transactions are encrypted in this way.
  5. Adding a new block to the database is agreed upon when the next currency of the given cryptocurrency is mined by the miner (in a bitcoin, the complexity of the calculations is chosen such that the new currency appears approximately every 10 minutes). At that moment, this information is added to all the distributed databases, and along with it information about all transfers (transactions) made to this moment.
  6. The commission in the system is paid mainly to speed up the transfer of money, and there are no additional fees.
  7. To hack such a system you need to have access to at least half of all the computers involved in its maintenance, and there are already hundreds of thousands of them, which makes unlocking unlikely.
  8. The next block in the transaction database (the chain of blocks – the blockchain) contains information about the block that went before it (it uses its unique hash, which serves as a guarantee of integrity, as when downloading files via the bittorent), and so on. The bottom line is that to forge a payment it is necessary to forge the entire chain of blocks stored in a distributed database (on thousands of computers), which is very expensive, requires access to these computers and makes such actions meaningless.

What features cryptocurrency has over conventional money

  1. Anonymity – on the basis of blockchain technology you can create an anonymous system if you want. However, this is a double-edged sword. Such anonymity is not enough for anyone, but everyone (loss of address or password, for example) can have problems in restoring access to their account. And no one will help you here, because nobody knows you (it will not work as a bank to come with a passport and restore everything at the moment).
  2. Simplicity – the system simplifies works, you do not need to pay large commissions and do not need additional intermediaries for serious transactions. No one will withdraw your money and will not be able to appeal the transfer. Again, the reverse side of this simplicity is also there – your mistakes in the translation will not be corrected.
  3. Insecurity of the cryptocurrency – in fact, this money is not provided with anything (neither gold nor the support of the state behind them standing). In fact, they are provided only by the interest of the users. While there is interest – the course of this virtual money will grow. Inflation can be avoided by limiting the total number of banknotes and the complexity of extraction of new ones.

Conclusion

What is a cryptocurrency? It is a digital means of payment, protected from forgery, copying and changes. Each virtual “coin” has its own unique number, operations with cryptocurrencies are anonymous, using special keys. A perfect transaction can not be canceled.

Transaction information is usually available in clear text. Thus, in bitcoin, the most popular cryptocurrency, information is a continuous chain of operation blocks, where in each subsequent block the data of the previous block are prescribed, which ensures the continuity of such a chain.

Cryptocurrencies are created, accounted for and addressed without any internal or external administration, do not have a single control center and physical implementation. Because of this, the attitude to the digital currencies is very different, there is no common opinion about their economic essence and legal status.

However, most importantly: the cost of cryptocurrency in general and bitcoin in particular depends on demand. The more people will be interested and invested – the more expensive these currencies will become. And vice versa. If we take into account the trends of recent years, it does not look that the cryptocurrencies will simply surrender their positions. It is worth listening, analyzing, delving and gradually learning about cryptocurrency. 



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