What Is a Cryptocurrency?

You hear a hundred times a day how your teammates and friends, and everyone around you discuss how they make profit on cryptocurrencies. Some are wondering who Satoshi Nakamoto is, and others are talking about the new Bitcoin price records. Getting rich on cryptocurrencies price fluctuations became viral.

It’s time to figure out everything about cryptocurrencies. Well, it looks like rocket science at first glance, but we will discuss crypto basics in plain English. Let’s go!

Cryptocurrency Explained

The idea of electronic peer-to-peer money was in the air a long time ago. However, it was implemented only in 2008, when someone published the Bitcoin white paper.

In 2009, Satoshi Nakamoto (perhaps a group of people hiding behind this pseudonym) completed the development of the Bitcoin program code, the first cryptocurrency. Back then, the first block was generated, and the first 50 bitcoins were mined. This is how the world learned about blockchain technology, which is now applied far beyond digital money.

In fact, cryptocurrency is a program code, it does not have an offline version, and each coin is protected from fraud by a hash. All digital money exists only in the network space.

A real cryptocurrency is decentralized. There is no central bank or a group of users that could change the current rules without the consent of the parties. Network participants (nodes) run software that connects them with other participants to exchange information with each other.

In a banking system, users have to interact with each other through a central server. A decentralized cryptocurrency system has no hierarchy: nodes connect and transmit information to each other.

The decentralization of cryptocurrency networks makes them highly resistant to shutdown and censorship. In contrast, in order to disrupt the centralized network, you just need to interrupt the main server. If the bank erases its database without having any backups, it will be challenging to determine user balances.

In cryptocurrency, all nodes keep copies of the database (or blockchain, a digital ledger, where all transactions are stored). Each node effectively functions as its own server. If some nodes go offline, other ones can still receive information from the remaining nodes.

Thus, cryptocurrencies operate 24 hours a day and 365 days a year. They allow the transfer of value anywhere in the world without the intervention of intermediaries. This is why we often call them free from restrictions: anyone with an Internet connection can transfer funds.

Let’s look at the example. Here we have two people with mobile wallets. Alice wants to transfer 1 Bitcoin to Bob.

  1. Alice creates a transaction that transfers 1 BTC to Bob’s wallet. A transaction includes the sum of the transfer, the recipient’s Bitcoin address, and a digital signature created with Alice’s private key.
  2. Nodes check the blockchain if Alice really has 1 Bitcoin and the transaction is legit (contains the digital signature).
  3. Every node updates the version of the blockchain and adds the info about Alice’s transaction. The blockchain keeps the info about all transactions.
  4. Alice and Bob use the software to interact within the network; it’s a wallet. It can manage keys, incoming and outgoing transactions, and also send/receive cryptocurrency. When the transaction is checked, Bob gets the notification about received money, as well as Alice – about the completed transaction.
Bitcoin transaction life cycle
Source: BitcoinWiki

Types of Cryptocurrency

There are many other cryptocurrencies besides Bitcoin. These coins are called ‘altcoins’ – or alternative coins – and there are thousands of them on the market. The most well-known are Ethereum, Litecoin, Polkadot, etc.

The coins that are pegged to any fiat currency or gold are called stablecoins. One of the most popular stablecoin is Tether (USDT); its price is pegged to the US dollar. STASIS EURO (EURS) is pegged to Euro, and BiLira (TRYB) – to Turkish Lira. PAX Gold is a stablecoin backed by one fine troy ounce (t oz) of a 400 oz London Good Delivery gold bar, stored in Brink’s gold vaults.

One more type of cryptocurrency is a token. A token is a unit other than a cryptocurrency, as it’s designed to represent a digital balance in a certain asset. We’ll explain the difference between coin and token later.

How to Use Cryptocurrencies?

Cryptocurrencies are in great demand due to their decentralized nature. Besides, the wide acceptance pool outside the crypto community makes cryptocurrency useful in many ways. Let’s take a look at some of its use cases.

Transactions

Cryptocurrencies are great for day to day transactions, although volatility is still an important factor explaining why most merchants do not accept them as a payment method. However, in 2020, there have been significant changes in this area. For example, Visa and Mastercard have softened their attitude on cryptocurrencies, and PayPal is announcing plans to introduce cryptocurrency sales to its 300 million user base.

With such large payment organizations, cryptocurrencies can potentially be useful for merchants who want to accept digital coins on a daily basis. Find out where to spend your crypto coins around the world.

Bank Transfer

Some cryptocurrencies can be used to facilitate money transfers. One of such currencies is XRP, which was issued by the Ripple network. Many central banks like Barclays and HSBC now accept XRP for money transfers. This approach replaces huge transfer fees with ultra-low transaction fees and processing times while creating a more efficient money transfer system.

Trading

Cryptocurrency has also opened up numerous opportunities for beginners and advanced traders to diversify their trading options. While stocks, forex, and commodities trading are the common thing to an investor, crypto trading helps expand your investment portfolio.

Anti-Corruption and Anti-Poverty Tool

Cryptocurrencies allow approximately 40% of people around the world to identify themselves in the financial world if you count people without a bank account and living in developing countries. However, in some countries, such as Myanmar, this number reaches as much as 95%. There are some reasons for this event such as the bank’s remote location, the lack of sufficient assets, and the lack of necessary documentation.

Cryptocurrencies and blockchain can provide people with access to financial services. This is an important fact for accumulating savings, obtaining loans, paying for goods and services on the Internet, and investing, which they could not do before cryptocurrencies. All of these, in turn, can contribute to poverty reduction.

Moreover, bank employees can track, freeze, decline or seize the payments. The authorities of some countries are already resorting to this practice. Do you remember what happened to WikiLeaks in 2010? The US government pressured Visa and Mastercard to freeze all the WikiLeaks donations made through traditional payment channels.

See alsoCryptocurrencies can fight inflation. In 2008, the Zimbabwean dollar rate collapsed by 1023 %. It was a 100% average daily inflation rate. The same situations occurred in Yugoslavia in 1994, Peru in 1990, Ukraine in 1994, and Hungary in 2017. The use of cryptocurrencies does not imply such market situations.

Advantages & Disadvantages of Cryptocurrencies

Advantages of cryptocurrency:

  1. Since it is impossible to freeze the account or withdraw the cryptocurrency, coins are available on your account at any time. You can check the reliability of the operations performed.
  2. Unlike fiat or electronic money, transactions with which are easily tracked, it’s quite complicated to get the information about the owner of a cryptocurrency wallet. Only the wallet number and limited data on the amount on the account are available. This makes cryptocurrency anonymous.
  3. As a rule, cryptocurrency is issued in a limited volume, which attracts attention to investors and eliminates the risks of inflation due to the excessive activity of the issuer. Thus, cryptocurrency is not subject to inflation and is inherently a deflationary currency.
  4. Cryptocurrency is a synonym for decentralization. Nobody regulates its issue and does not control the movement of funds on the account. Mostly, this feature attracts many members of the network.
  5. There is no commission for transferring funds between countries. Users pay the fees required from the blockchain to complete the transaction.

Disadvantages of cryptocurrency:

  1. Government structures do not have trust in cryptocurrency. Governments of quite a few countries do not look at cryptocurrencies as a real asset. Moreover, digital coins are prohibited in China, Bolivia, Columbia, and Iran.
  2. There is no way to revoke the payment. You should check the destination address twice.
  3. Volatility. Cryptocurrency price is unpredictable, as it depends on the current demand. Consequently, there are fluctuations in the price of virtual money.
  4. The private key to electronic money is a special password. If you lose it, the crypto coins in the wallet become unavailable.
  5. Each user is personally responsible for their savings. There are no regulatory mechanisms here, so it will not be possible to prove anything and return the money in case of theft.
  6. The cryptocurrency is not backed by anything.

Are Cryptocurrencies Legal?

Cryptocurrencies are mostly legal worldwide. However, there are some exceptions. We’ve created the table with the governments’ relation to the Bitcoin statement.

IllegalLegalUndefined*
AlgeriaNigeriaThe USA
EgyptMauritius (as a digital asset)Canada
MoroccoAngolaColumbia
BoliviaSouth Africa (as an intangible asset)Russia
EcuadorNamibiaSaudi Arabia
UAEZimbabweJordan
IranMexico (as a virtual asset)Taiwan
BangladeshCosta RicaCambodia
NepalNicaraguaVietnam
PakistanJamaica
ChinaArgentina
IndonesiaBrazil
Chile
Venezuela
Uzbekistan
Kyrgyzstan
Cyprus
Israel
Lebanon
Turkey
India
Hong Kong
Japan
South Korea
Malaysia
Philippines
Singapore
Thailand
Brunei
The UK
Australia and New Zealand

*Undefined mostly means that cryptocurrencies are not recommended to use by the government but not prohibited, though. Please, check the rules and regulations in your country before buying or trading any cryptocurrencies.

Here you can see the whole regulation of cryptocurrency around the world list.

Coin vs. Token

At first glance, coins and tokens appear to be the same. Both are traded on exchanges and can move between blockchain addresses.

A coin is a digital asset that is a full-fledged cryptocurrency. You can understand that it is a coin in front of you by various technical characteristics. But don’t be alarmed – we will not go into details and “poke around” in the code. It is better to consider three main features by which you can easily and quickly distinguish coins from tokens:

  • All coins have their own blockchain.
  • Coins are full-fledged and multifunctional “digital money”.
  • Most coins can be mined.

A token is an internal conditional unit in the blockchain of a particular cryptocurrency and is intended to perform a specific function. Tokens cannot be considered full-fledged independent cryptocurrencies. Unlike coins, tokens do not have the features that we listed above:

  • Tokens do not have their own blockchain.
  • A token is not digital money.
  • Tokens cannot be mined.

Read more about the difference between token and coin in our article.

CoinsTokens
BlockchainOwn and independent blockchainReside on the top of any blockchain
FunctionAlternative to Bitcoin as the means of paymentRepresentation of asset or utility
Use CaseCommerce; to send and receive paymentsTo be a representative asset of any project based on a blockchain

Should You Invest In Cryptocurrencies?

If you are all set to start your investment experience, Changelly is happy to offer you the best cryptocurrency purchase rates. But before, we would like to give you some investment advice:

  • DYOR! Study the market carefully before buying any cryptocurrency. There are always risks, and sometimes very big ones.
  • Do not think that if Bitcoin cost $20,000 last night and $19,999 this morning, you should immediately buy it. It’s not a stock market. You need to monitor the quotes and wait for the right moment closely.
  • It cannot be assumed that the cryptocurrency is growing at any moment, and you are guaranteed to make money on it. As we said in the example above, we must keep in mind that the market value is always several percent higher than the purchase price.
  • Do not rush to invest. A good deal doesn’t happen as often as you’d like. Analyze the market and be patient.

Now you are all set! If you are already excited about cryptocurrencies and want to start your investment experience, we are here to help you.

Credit: Changelly

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