What is cryptocurrency - let’s make things simple

Basically, cryptocurrency is encrypted information… Cryptocurrencies differ from fiat money primarily by… The pros and cons of cryptocurrency are as following… After the successful experiment of the litecoin network increasing its rate as well as...

EXMO news

What is cryptocurrency - let’s make things simple


What is cryptocurrency and how to make it profitable?

Nowadays, a lot of people have heard about cryptocurrency. Yet it’s still difficult to understand what in fact it is. We’ll try to explain it in a simple way.

Cryptocurrency is cryptographically protected (encrypted) information. Separate cryptocurrency units are called “coins”. Copying of already existing coins doesn’t make any sense because the origin of all coins ever mined and its belonging to a particular cryptocurrency wallets are written in the so called “blockchain” (the global decentralized database, protected by a special cryptographic algorithm). Producing of new coins in breach of the official mining rules is also impossible. That’s why cryptocurrencies are well protected from being forged, as well as from emission, which infringes official rules.

Cryptocurrency is significantly different compared with the electronic form of traditional money. The difference between cryptocurrency and electronic fiat money lies first of all in the necessity of converting fiat money into their electronic form before depositing in an account. This may be performed by means of bank offices, payment terminals, or the office of a digital payment system. Secondly, the emission of fiat money is the question of a governmental authority. Cryptocurrency doesn’t need a physical form. All cryptocurrencies are originally produced, stored and transferred in digital form. Thus, one may answer briefly that cryptocurrencies are; digital money, which doesn’t have a physical form.

The emission or the production of cryptocurrency is called mining. The fundamental idea of all cryptocurrencies is its decentralized emission. Any cryptocurrency could be mined by anyone on the condition that he provides enough processing power. During cryptocurrency mining, this hardware power is used to solve sophisticated mathematical tasks, while the efficiency of their solutions depends on the processing capacity of the equipment involved. At the same time the mathematical difficulty rockets along with the growth of the ever-mined coins of a particular cryptocurrency. The production of new coins, which origin and attributes are forever saved into the blockchain is the result of such mathematical calculations.

Sometimes the high level of computational complexity makes miners to unite into pools to mine coins together and then divide them between pool participants (The share depends on the processing power each miner had provided). More information about mining you can find here.

All coins that have ever been mined are stored in special cryptocurrency wallets. The information of their content is also protected from any unauthorized changes thanks to the blockchain technology.

Pros and cons of cryptocurrency

Cryptocurrency advantages:

1. The emission decentralization allows the mining of cryptocurrency by anyone who has enough processing power (nothing more than a “farm” consisting of several good quality video cards is required for cost-effective mining of most cryptocurrencies).

2. The decentralized nature of cryptocurrency payment system allows users not to be afraid of payments cancellation or the freezing of funds.

3. The anonymity of cryptocurrency holders for counterparties and for the government (some cryptocurrencies add one more option - transaction untraceability).

4. Most of cryptocurrencies are inflation protected (the amount of coins increases slowly, moreover the decrease in mining efficiency will reduce the influx of new coins.

5. It’s impossible to forge cryptocurrency.

Cryptocurrency disadvantages:

1. Assets storage in local wallet demands a high level of user’s responsibility. So, if he hadn’t taken care about the back ups, he risks to lose all coins in his wallet after any computer related breakdown. The possibility of irrevocable loss of coins still exists when a user forgets his password or doesn’t protect his files from virus attacks.

2. During several stages of its development, cryptocurrency has been under the threat of governmental prohibition.

3. With the growth of mined cryptocurrency, the mathematical mining difficulty will continue to increase. At the same time, its cost-effectiveness may drop.

4. High level of volatility varies depending on hackers’ activity and on the capitalisation of certain currencies).

All these advantages and disadvantages are especially typical for “classical” cryptocurrencies, such as Bitcoin and Litecoin. Let’s speak about them in detail.

Bitcoin and Litecoin

The process of bitcoin creation started in 2007, by a person (or maybe a group of people) hiding under the pseudonym of Satoshi Nakamoto. Initially, the creators have invented the general concept and software algorithm for bitcoin functioning. In January 2009, the mining process was launched. In the beginning, Satoshi was mining on his own. Over time he gained followers from all over the world - the geeks, the libertarians, the crypto-anarchists and just the fans of a new idea. The number of miners in the first year of bitcoin’s existence was quite. The mining difficulty was low, and miners were spending a small volume of processing power and electricity (mining 1 bitcoin cost under 10 cents) to get a huge amount of coins in comparison with nowadays. But 2010 marked the endemic interest to bitcoin. This cryptocurrency was gaining more and more popularity with the appearance of the first bitcoin-fiat exchange platforms and when it started attracting underground economy players as a convenient and anonymous payment instrument. In addition, there were so called “bearskins” who started to finance the continuous artificial “inflation” and “deflation” of the price bubble to profit from the inexperienced traders. For a few years the bitcoin price was significant for its unstable increase and in 2013 it reached 100 USD, after this it has never dropped. There were both a breathtaking bitcoin price boom (up to 1000 USD), and a long-term price depression predetermined by market conditions. Since 2016-2017 bitcoin grew dramatically because of demand and due to a surge in trust.

Nowadays, in September 2017, bitcoin is the most popular cryptocurrency, with the highest capitalization rate (USD, 78.9 billion according to CryptolizationCryptocurrency market cap analysis), However, the total amount of all other currencies’ capitalization “exceeds” bitcoin from time to time (but the balance between them remains). You can not just exchange bitcoin for electronic money on exchange platforms. You may also cash it in some ATMs or pay for goods and services via the internet or commercial establishments. Nowadays, the “black market” period is gone and this currency is widely used in financial and real sectors of the economy.

Litecoin is a “fork” of bitcoin. Its “branch” was created after a slight modification of the bitcoin code. Litecoin was launched in 2011. This cryptocurrency has never been so popular as its “big brother”. However, litecoin can compete with bitcoin in transaction speed. In the spring of 2017, litecoin became the platform for testing changes in program code based on SegWit activation (such program was also launched for bitcoin). This experiment was successful and the increase in litecoin transactional speed caused the growth of the litecoin rate (nowadays the litecoin price is more than 76 USD) and its capitalization (which is more than USD 3.9 billion according to Cryptolization Cryptocurrency market cap analysis).

Cryptocurrencies definitely have their place in the modern financial world. Everybody involved with them has the potential to profit. Miners get the cryptocurrencies, sell them on the exchange and thus cover the expenses of electricity and maintenance of their equipment; The remaining revenue is their net profit. Some investors buy cryptocurrencies, and in some cases if their timing is right, their cryptocurrencies may profit faster than storing their funds in a bank. Others buy cryptocurrencies to transfer the funds (namely, between countries’ borders) or to buy goods and services with them (especially digital ones). There are also other spheres where you can use bitcoins, for example ICO.

So, we’ve examined the main issues about cryptocurrency and its functioning. Let’s also note that everybody can create his own cryptocurrency. In addition to its buying and mining (there are some specialized resources which can help those who are technically ill-prepared for this issue). Still a lot of cryptocurrencies have not been successful. The main reason - they were created without a clear concept of how can they be better than the current ones. In order to succeed a cryptocurrency should gain a lot of users, who will prioritize it due to its innovations.

Additional materials that may help you:

Cryptocurrency trading - which currency pair is better to start from?

How to protect account and personal data on EXMO?

Cryptocurrency: Where to start? Pt.4 How to Ensure the Safety of Your Crypto Assets

Monero and Zcash - new level of the anonymity

TOP-5 facts about Ethereum

What are the pros and cons of investing into cryptocurrency

Why do miners choose exchanges to exchange cryptocurrency for fiat funds

Thank you for staying with us!
Your respectfully, EXMO team