Cryptocurrency - Its Functioning, Potential and Risks
The popularity of cryptocurrencies has grown significantly in recent years, and the general public has become very interested in trading them, especially after the sharp rise in the price of Bitcoin. Cryptocurrency is one of many types of digital currency that has its own specifics. What are its characteristics, advantages and disadvantages and how does it differ from other digital currencies?
Characteristic features of cryptocurrencies
Cryptocurrencies are characterized by transparency, decentralization, and peer-to-peer networking. Cryptocurrencies are based on blockchain technology and secure encryption based on asymmetric cryptography.
Cryptocurrencies, like other digital currencies, do not have a physical form and exist purely in electronic form. Virtual cryptocurrency coins are called tokens.
The first cryptocurrency? Bitcoin
The oldest cryptocurrency is Bitcoin, which was introduced in early 2009. Bitcoin is conceived as a cryptocurrency and at the same time a payment network, within which all bitcoin transactions are carried out. It is based on blockchain technology.
An open source pioneer
Bitcoin is an open-source project, so its source code is available to everyone. Anyone can copy, modify and freely use or redistribute it. So the Bitcoin developers themselves have allowed its source code to serve as a basis for the emergence of other cryptocurrencies.
Altcoins - other cryptocurrencies based on blockchain
After Bitcoin, a number of other cryptocurrencies gradually built, based on a blockchain. These cryptocurrencies, more or less derived from the original Bitcoin, are referred to as altcoins. Their number already exceeds seven hundred and new ones are constantly growing. The most important of these are Litecoin, Ethereum or Ripple.
Cryptocurrencies as a means of payment
Cryptocurrencies are designed to serve as a means of payment. They can be used for transfers and payments for goods and services at a number of merchants. However, since cryptocurrencies are generally not a recognized currency, the condition for the transfer or payment is the consensus of both parties between whom the transaction is to take place. It is therefore up to each individual or other entity to decide to accept the cryptocurrency payment.
The cryptocurrency transaction is irreversible
When performing transactions in cryptocurrencies, it is necessary to take into account that once a confirmed transaction can no longer be canceled. Therefore, it is advisable to pay close attention to the correct presentation of all data.
Cryptocurrencies as an investment tool
The value of cryptocurrencies is given purely by the trust of its users. Therefore, if the interest in a given cryptocurrency increases, its value also increases. Conversely, if user confidence decreases, typically, for example, after a successful hacker attack on one of the cryptocurrency exchanges, the value of the cryptocurrency also falls. Fluctuations in the cryptocurrency rate are significant and therefore it is generally recommended to approach them as speculation rather than as a long-term investment.
How and where to get cryptocurrencies
Cryptocurrencies can be purchased at a number of cryptocurrency exchanges and exchange offices. For example, Binance, Bitstamp, Kraken.
Some cryptocurrencies can also be purchased at cryptocurrency ATMs, several Bitcoin and Litecoin ATMs are available to users.
Another possibility is to provide your hardware for the extraction of the cryptocurrency and to receive a reward for its extraction in the cryptocurrency. However, considerable energy consumption must be taken into account. Some cryptocurrencies are released at once and are therefore not mined at all.
Tokens can also be obtained by accepting payment from another user or even earning money on various websites, where the amounts involved are insignificant.
How to preserve cryptocurrencies
Cryptocurrencies are stored in a cryptocurrency wallet, which may be in virtual or hardware form. They can be stored in a wallet located on the Internet with a third party, on the disk of your own computer or on a mobile phone. It is also possible to keep them on the stock exchange. However, it is advisable to keep only the funds currently intended for trading or payments with a third party. Hardware wallets are the safest, but are not available for all cryptocurrencies. E.g. Bitcoin can also be stored in paper form.
The basis of cryptocurrencies is blockchain
Cryptocurrencies are based on blockchain technology, which acts as a database of all performed transactions. Transactions performed in a given cryptocurrency over a period of time are stored in blocks that follow each other chronologically. The blockchain therefore records all transactions that have taken place in the network from the beginning to the present.
How a peer-to-peer network works
Peer-to-peer or P2P network is based on direct communication between individual devices in the network. Its operation, with a few exceptions, is ensured by the so-called miners, on whose computers the transactions carried out by individual users are confirmed, the creation of new blocks and the storage of the blockchain. Thus, there is no central point in cryptocurrency networks on which its functioning depends. Even if part of the network is taken out of service, the network continues to operate without difficulty.
Independence from central authorities
Decentralization of cryptocurrencies brings independence from governments, central banks, institutions and other authorities. However, there are already exceptions to this rule today.
Cryptocurrencies dependent on their creator
One of the models is the case when the cryptocurrency network works decentrally, but most of the nodes of the network are in fact in the hands of its creators. An example of a cryptocurrency, where the creators thus secured the possibility to influence the functioning of the network and determine its further development, is Ripple.
Another exception is the so-called national cryptocurrencies. Due to the growing interest in cryptocurrencies, some states have decided to issue their own official cryptocurrency. The island nation of Marshall Islands has decided to use its own cryptocurrency Sovereign to replace the US dollar, which it has so far used as official currency. The cryptocurrency Sovereign, therefore, unlike other cryptocurrencies, has a legal basis and should be accepted by all banks in the Marshall Islands.
The state-introduced cryptocurrency Estcoin comes from Estonia, which can be considered a pioneer in the digitization of public administration.
Another example is the Venezuelan national cryptocurrency Petro, allegedly covered by the state's gold and mineral wealth. But with Venezuela experiencing tremendous inflation, the question is whether Petro really has any real value and prospects.
Other countries, including Japan, Sweden and China, are also considering the introduction of their own official cryptocurrency.
What makes other digital currencies different from cryptocurrencies There are many digital currencies and they can differ in many respects. Many digital currencies, unlike the vast majority of cryptocurrencies, are issued by a company, organization, or other authority that controls their issuance and use.
Many digital currencies serve as a means of payment only within a particular community or platform. They are often used in online games or on social networks. This type of digital currency was commonly used for many years before the beginning of the cryptocurrent era. For example, even before the introduction of Bitcoin, Facebook introduced virtual coins, so-called credits, for which users could, for example, purchase game extensions. Although it later left this model, many platforms still use it.