What is Cryptocurrency: Beginners Guide
August 23, 2019
Since the appearance of the first cryptocurrency in 2009, the number of its followers has steadily increased. Interest doesn’t weaken, no matter what ups and downs are observed in the crypto sphere.
- What is Crypto?
- Monetary Principles of Cryptocurrency
- Technology behind Crypto
- History of Crypto
- Legal Regulation
- Top 4 Cryptos
Today, many of us have heard of cryptocurrency. Well, at least on the subject of Bitcoin. The media hasn’t stopped talking about the mysterious digital money.
However, “in the public eye” doesn’t mean “understandable.” According to studies, many ultra-wealthy crypto investors are poorly aware of what is the thing in which they have invested. It’s just prestigious, say, like a Porsche, and it can bring good profit in the future (or not). But ordinary people who are easily addicted to widespread phenomena should understand what this is all about.
In this article, we explain what cryptocurrency is, and briefly answer the popular questions.
What is Crypto?
It’s meaning is sort of understandable. “It’s sort of” because only a few people think about the cryptocurrency definition in everyday life. Usually “currency” is “money”, for which you can buy food, pay for receipts, go to a movie. As usual, the state issues money, each country has its currency.
But what is the prefix “crypto”? Cryptography (in other words, encryption) is the method used in our case for making money. If the state issues bills in the mint, then cryptocurrencies are created using a unique code.
So, it turns out that cryptocurrency is a digital currency created by a group of developers that exists exclusively in the virtual space, has no physical analogs, and is not controlled by the states.
The question is: if this is something ethereal that was created by someone unknown, so why are cryptocurrencies valuable?
Answer: For the sake of example, the Internet cannot be touched either, and hardly every user knows who created it. Nevertheless, most of us pay providers for the service every month. In other words, visibility and “physicality” are not paramount parameters. Value is shaped by the benefits, field of use, and, of course, the presence of interested users.
Countries that develop regulation of a relatively new phenomenon define cryptocurrency differently. Someone sees in them a kind of security, someone — property or goods, others — means of payment. But, initially, virtual coins were conceived as anonymous, safe, and bank-free money that can be used to pay for goods and services.
Several specific questions arise if we consider the original concept of independent digital currencies. How to get cryptocurrency? How to store it? Where can I use it? Why are virtual coin prices rising? Why go through all that trouble if we have a real currency?
Any type of cryptocurrency doesn’t have official status as a means of payment (many countries have already recognized Bitcoin, but this issue is still under discussion). However, typical properties like decentralization are attractive to users. The owner of any existing cryptocurrency is not tied to any geographical point, state, or political system. Despite linking courses with real money like the US dollar or the euro, digital money is “valuable on their own.”
Virtual money has gained popularity for the following reasons:
- High prevalence, versatility. The wallet is easy to create on any computer, smartphone, or tablet on various operating systems.
- Simplicity, the openness of payment processing. The full history of incoming and outgoing transactions is stored without time limits.
- Each node of the cryptocurrency generation system is equal. There is no particular center that excludes the possibility of blocking wallets, canceling, and controlling payments.
- Maximum anonymity increases the independence of the payment system. When making payments, you can specify the address, account number at the request of the wallet owner from which the payment is made.
- Conducted transactions are protected by a cryptographic method. It won’t be possible to confirm the financial transaction without the transfer of a block with a unique verification code. If this is done, no one will be able to cancel the money transfer that eliminates fraud when paying with cryptocurrency for goods/services.
Due to the high reliability of electronic wallets protected by a private key, cryptocurrency can be used to create savings. They will be useful as a universal means of exchange, the method of calculation in online stores, or on freelance exchanges.
Where does a cryptocurrency exist, store and circulate? Everything is approximately clear with fiat (bank money) because there is a banking system. And even if the real money is transferred in digital form (through the app or using electronic payment systems), you can imagine how funds are saved and transferred. But everything is not so clear with the lines of code.
Here it’s worth telling about the next concept — the blockchain. If you translate it literally, then you get a “chain of blocks.” But what are these blocks, and what is this chain?
Blockchain is a decentralized system based on a distributed registry: a sort of a book where all network operations are recorded. It’s decentralized because transactions or blocks creation records are stored on all computers that support the system at the same time.
As soon as the user sends his cryptocurrency or accepts it — a new block is formed, which is recorded in the registry. So the chain is built.
Does it sound complicated anyway? Then we will try a more obvious example. Let’s say you have a bill and the cover letter that traces its path since its inception. For example: “your bill has been issued on a particular date, and then it has been used ten times.”
It looks even brighter on the scheme:
How blockchain works
What are the advantages of the blockchain, and why is this technology gaining popularity? The fact is that innovation has very attractive features:
- Decentralization. Each participant is an independent server, so if one computer fails, five or even ten, the system will continue to work.
- No boundaries — the blockchain has no limit, the number of entries is unlimited.
- Reliability — only verified entries of legitimate operations appear in the network.
- Transparency — you can always see the history of each coin: entries are kept in the public domain; therefore, it’s quite simple to verify the authenticity of each transaction. Besides, it’s impossible to falsify information. If, say, user A tries to change the entry on his computer, there are still hundreds and thousands of PCs with the original entry.
True, it’s fair to note that the blockchain also has problems. For example, low speed of information processing (confirmation of transactions) and a small block capacity are the main lacks. Developers and enthusiasts of the most popular blockchain platforms are continually working on solving these problems to improve the network.
The history of cryptocurrency
Cryptocurrency has gained popularity after some Satoshi Nakamoto (or was it a so-called organization?) published technical documentation of Bitcoin in a small community of programmers and cryptographers. It’s noteworthy that his project, as it turned out later, was largely based on the ideas of Nick Szabo. He presented his work to the public long before Satoshi. It was about the development of digital money based on cryptography.
The ability to make transactions anonymously quickly attracted fraudsters from around the world. It’s reliably known that the first rays of popularity came to Bitcoin due to the fact that its qualities were highly appreciated by representatives of the Silk Road marketplace, there has been traded weapons and prohibited substances.
After law enforcement agencies managed to close the site and arrest its organizer (the arrest was made on October 2, 2013), Bitcoin managed to get out of the “shadow” and stopped to be associated only with black-market trading among potential users.
Further, the history of the first cryptocurrency has a mass of ups and downs. New digital money technical components appeared on the market. However, the main thing was the gradual spread of cryptocurrency, as fiat’s main competitor.
Top 4 cryptos
- Bitcoin is the first cryptocurrency, the foundation. Created by a group of developers with Satoshi Nakamoto (or it was the name of the organization). The coin is designed to give people a taste of decentralization and perceive the world of finance without centralized authorities. Bitcoin determines the mood of the entire market and drags on altcoins. The encryption is based on the SHA-256 algorithm.
- Ethereum is one of the most well-known cryptocurrency after Bitcoin. To be more precise, Ethereum is a blockchain platform for creating apps. CryptoKitties will probably remain the most famous of those apps, whose players went crazy because of the multi-colored kitties. Another Ethereum chip is smart contracts: special programs for performing the necessary operations under the specified conditions. Vitalik Buterin is considered the main founder of the project.
- XRP is a digital asset for making payments and is the internal cryptocurrency of the Ripple platform. It was created for enterprises, but then XRP became a banks’ favorite. It’s easy to explain the situation: the coin is a lifesaver when making cross-border payments. Besides, XRP reduces the cost of currency exchanges and helps companies enter new markets.
- EOS is a platform for developing decentralized applications. The main idea is to combine the strengths of all sorts of smart contract technologies. Also, the authors want to make the process of creating Dapps more accessible; that is why fans often call it “the killer of Ethereum.” EOS is one of the favorite cryptos by authorities and ranks first in their ratings.
Cryptocurrency — Legal Regulation
The issue of cryptocurrency regulation takes not only officials, but users are also interested in its resolution. Some investors legalize cryptocurrency; others are afraid. In their opinion, control is a euphemistic synonym for restrictions in favor of the state.
Such legal instruments regulate the cryptocurrency market:
- Tax regulation. Taxation applies mostly to trading on the cryptocurrency exchanges. It also can affect mining, ICO, and, in general, any operations with cryptocurrency. This method is used in the USA, Argentina, Singapore. However, some countries have made opposite amendments to the tax code, which exempts users from consumption taxes (Japan) or crypto-business taxes (Belarus).
- Licensing. It involves the issuance of licenses for currency exchange, currency trading, and so on. Used, for example, in Japan.
- Equating mining to entrepreneurial activity. Most often is applied for the collection of taxes, but sometimes just for the miners’ registration. It is used, for example, in Belarus.
- Official registration of exchanges. It allows you to open a crypto-exchange under the control of the state with certain conditions. The last ones may be the provision of information on users, trading, prohibition, or restriction of the number of transactions for specific users (who have not provided complete personal data, for example) and so on. It’s used in the USA, Japan, Luxembourg, Russia, Belarus, and other countries.
- KYC-procedure when registering on cryptocurrency exchanges, exchanger sites, and wallets. It involves the provision of users’ personal information — usually passport (including scans). Various countries and resources may require different data. It’s common in the USA, Great Britain, although most states that recognize cryptocurrency require users to provide private information — Sweden, Switzerland, Australia, Norway, Belarus, Japan, and others.
- Recognition of the ICO legitimacy. Here is often required to disclose the identity of the organizers. It was introduced for ICO taxation and its regulation. For example, Russia recognizes ICO for taxation and control, and Belarus — to protect investors.
- Recognition of a cryptocurrency or a specific coin as an investment asset. It involves regulation by financial structures, getting investment, and investors’ protection. It is used, for example, in the USA (Bitcoin futures), Poland (futures), Hong Kong (where cryptocurrencies are equated to securities).
- Recognition of cryptocurrency or a particular cryptocurrency payment instrument. It involves the regulation of turnover by financial structures. The state usually gets information from banks about individuals or legal entities that are using cryptocurrencies. Recognized, for example, in the United States (as a virtual currency), in Japan and Germany (monetary unit), in Luxembourg (means of payment), in Sweden (on a par with traditional currencies), in Switzerland (on a par with foreign currencies) and so on.
How to use cryptocurrency
To start working with cryptocurrency, the user must create his wallet where it will be generated the address (for sending and receiving funds). Then, he will require the acquisition of digital money. To do this, one can use exchanges.
Important! Some exchanges work exclusively with cryptocurrencies. Before registering, it’s essential to clarify whether the site accepts funds to replenish the account.
Then you can safely begin to use cryptocurrency as intended (for making payments) or to withdraw profit (trading, investing, and so on).
Interesting! You can become the owner of a cryptocurrency, not only through its direct purchase. To get it, you can participate in bounty programs and airdrops. Alternatively, there are various contests and the so-called “faucets” (resources that provide payment in cryptocurrency for the processing of simple tasks, for example, for entering a captcha).
There are several ways to use cryptocurrency:
- Investment in cryptocurrency. Since the last few years, the cryptocurrency rates and popularity have been growing steadily, and they can be a great way to make money. All you need is to buy the most top cryptocurrencies, in particular, Bitcoin and Ethereum, and wait for them to grow. There is a high probability that in a few months you will be able to sell them twice, or even three times more expensive. However, the possibility of a drop in the course also exists.
- Cryptocurrency trading on stock exchanges (cryptocurrency trading). This method requires professional knowledge in the field of trading and is not suitable for everyone. However, more and more new players appear on such platforms.
- Mining cryptocurrency is a fairly popular way to get more profit, but it requires no small investments and technical knowledge. Mining is the blockchain basis. The process means solving a mathematical problem that will confirm the loyalty of the blockchain chain block. You will receive income for your work on calculations.
- Investment in projects related to cryptocurrencies. The Internet is now overflowing with various cryptocurrency HYIPs, where you can invest a certain amount of cryptocurrency and receive interest on it. However, this is a hazardous method of earning, and the chances of losing your money here are much more than earning.
- Payments. It’s often more profitable to pay for goods with bitcoins than fiat currencies. Also, many stores offer extra discounts when paying by cryptocurrency.
- Cryptocurrency faucets. There are many sites on the Internet where you can just collect cryptocurrency and then withdraw a certain amount on your crypto wallet. This method is well suited to students or people who already have a stable primary income.
Cryptocurrency is a new word in the world of finance. And although the first virtual coins appeared in 2009, only now the phenomenon has begun to gain breadth and depth, going beyond a small party of geeks.
The crypt has room to grow and improve before it becomes publicly available and massively used. For example, there are still unsolved problems with the speed and cost of transactions, high mining expenses, and basic usability. It’s not as easy for every PC user to immediately understand how to create a wallet, make a transaction, or how to run a project on the blockchain.
Since the cryptocurrency market is now being formed, it’s difficult to say in advance what it will be in five or ten years, what will remain from the initial plan in connection with the regulation. It’s not yet known how the trade-off between anonymity and security will be solved, which disturbs large investors, and how Bitcoin and altcoins will clear their reputation. At the same time, cryptocurrency is often associated with money laundering and terrorist financing, fraud, and the risks of hacker attacks. However, many people see prospects in blockchain technology and cryptocurrency.
We also should mention a new project from Facebook that plans to implement the Libra cryptocurrency and Calibra wallet to make money transfers more easily around the world. The phenomenon is unlikely to disappear somewhere, and the sooner we will have to face it. And better sooner than later.