Cryptocurrencies – what is the idea behind them? What is cryptocurrency, bitcoin and ethereum?

Cryptocurrencies – what is the idea behind them? What is cryptocurrency, bitcoin and ethereum?

Cryptocurrencies are gaining more and more popularity. For many people, they are a way to invest or ensure additional financial security. There are also people who do not fully understand what the idea of cryptocurrencies involves. This is not surprising as the concept is quite complicated. Especially for people who have not dealt with any virtual currencies in the past. If you are one of them, then this article is for you. Find out everything about cryptocurrencies.

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What is cryptocurrency?

What exactly is cryptocurrency? To understand the definition of this word better, it is useful to break it down into simple terms. Everyone knows what currency is. It is the monetary unit of a country that forms the basis of its monetary system. The prefix “crypto” refers to cryptography, which is an area of knowledge relating to the creation of algorithms for securing knowledge against unauthorised access. This means that cryptocurrency is a form of virtual money, a digital record based on a specifically developed algorithm.

Cryptocurrencies – what type of assets are they?

Cryptocurrencies do not have a physical form. They are only available in digital form. Nevertheless, they have a certain value and are therefore considered a means of payment. This means that you can use them to pay for any product or service. The only condition for this type of transaction is that the seller must accept this form of payment. It’s interesting to note that only a few people use cryptocurrencies for their payment function today. Their growing popularity and high value are the reasons why they are now being bought by investors. They are more and more often considered as financial instruments.

Differences between cryptocurrencies and traditional money

It is also worth mentioning that digital currencies are very different from traditional money. First, their value is determined by free market mechanisms. This means that the current exchange rate of a given cryptocurrency depends on the demand and supply. Also, digital currencies are not under the control of the central bank or other institutions. Instead, they use a decentralised transaction registration system. The lack of a management body for these assets makes them very volatile. Large fluctuations in ratings are noticeable in the cryptocurrency market.

What is blockchain?

Cryptocurrencies are based on blockchain technology. This is a decentralised system based on a chain of blocks. Blockchain is a kind of digital book that records transactions performed within the network. How does it work? Virtual transactions go through the verification process and are assigned to individual blocks. Then, they are encrypted using cryptographic methods and attached to the chain of previous transactions on the network. This technology works in a way preventing any attempt of fraud. These types of transactions always take place without intermediaries. It is worth knowing that although the details of the operation are known only to its participants, the basic data is recorded in the public book.

What is cryptocurrency mining and who is a miner?

There are many concepts related to mining associated with cryptocurrencies. Of course, they should not be taken literally, as they are a kind of metaphor. For example, “to mine cryptocurrencies” means to mine something valuable, in this case virtual currency. People who mine cryptocurrencies are referred to as “miners” and the place where it all happens is called a “mine”. The mining activity itself is often referred to as “mining”.

What is a cryptocurrency excavator? How to mine virtual currency?

Cryptocurrency mining is the activity of recording transactions on a blockchain using computer hardware known as an “excavator”. Machines with high computing power are used for this purpose, enabling them to solve complex cryptographic tasks. They are calculated in order to attach a new block to the blockchain network. This is how the spaces for all kinds of transactions are created. For each new block attached to the network, the miner receives a reward in the form of a certain amount of cryptocurrencies.

What are the methods to mine cryptocurrency?

How do you actually mine cryptocurrencies? There are several ways to do this. The first one is renting a virtual server or creating it yourself. It can be a private computer with lots of RAM, a fast SSD and fixed access to the Internet.

Another way is to use the computing power of a mine, i.e. cloud mining. A fee must be paid in return for participation in the award. It is worth mentioning that this method is quite risky. Such designs often turn out to be a scam. There is also no control over the actual amount of production. Nevertheless, such mining is profitable – it allows you to achieve high profit without the need to purchase expensive equipment.

Is cryptocurrency mining legal?

When analysing the above, one important question may arise. Is cryptocurrency mining really legal? After all, no state body controls this task. To answer your question: yes, the process is legal, but not in all countries.

Although the vast majority of countries permit mining of virtual currencies, there are also those that categorically prohibit it. And those include: Algeria, Bolivia, Egypt, Ecuador, Morocco, Nepal and Pakistan. China represents a similar attitude. In this country, mining has not been banned, but cryptocurrency trading is illegal.

Bitcoin and other cryptocurrencies

Have you been wondering what the first cryptocurrency on the market was? It is assumed that it was bitcoin (BTC). Its circulation started in early 2009. It is worth noting that this was the period of the outbreak of the global economic crisis. A programmer (or a group of programmers) nicknamed Satoshi Nakamoto is responsible for the creation of this solution. It’s interesting to note that no one knows the true identity of this person (or group). It is also worth mentioning that although bitcoin is considered the first official cryptocurrency, similar tools appeared before it (e.g. bit gold and hashcash).

What are the other types of cryptocurrencies?

Bitcoin is undoubtedly one of the oldest and most popular virtual currencies in the world. Its current value is around $ 42,000 (data as of 18 March 2022). Interestingly, there are many more such assets. The cryptocurrency market is really extensive – you can find over 1000 different cryptocurrencies on it. Which of them are worth paying attention to?

What is litecoin?

Let’s start with litecoin (LTC). It is a virtual currency based on peer-to-peer technology. At the outset, it should be noted that it is very similar to bitcoin. So what makes it different? Among other things, it allows you to process blocks even faster. Additionally, it relies on more complex mining methods. It offers its clients the possibility of price speculation and has great investment potential. Currently, the value of one LTC is around $ 112 (data as of 18 March 

What makes ethereum different?

Another noteworthy cryptocurrency is ethereum (ETH). It is very often referred to as a bitcoin replacement. 2015 is considered to be the date of its creation. What makes it stand out? It has a much wider application when compared to bitcoin. It gives you the opportunity to sell and buy virtual tokens (in this case, ethers) of a certain value. However, apart from that, it is a contracting company. Currently, the value of one ETH is approximately USD 3,000 (data as of 18 March 2022).

Buying cryptocurrencies

You already learnt a bit about cryptocurrencies. Let’s now talk about buying them, starting with the fact that concluding this type of transaction is similar to trading in stocks or bonds. Trading takes place on the cryptocurrency exchange, where purchase and sale orders are placed, and also incur transaction costs. The adventure with virtual currencies usually begins with creating an account on the investment platform.

The next step is to pay appropriate funds for them and sometimes verify your identity. As we mentioned before, the vast majority of transactions take place via exchanges. They are not only a convenient solution, but also come with a low cost of trading cryptocurrencies. Purchasing virtual currencies is possible through exchanges.

Advantages and disadvantages of investing in cryptocurrencies

Is it worth investing in cryptocurrencies? The approach to this idea is quite individual. This solution has many advantages and disadvantages. The popularity of the virtual currency continues to grow, and with it its share in transactions and payments. It has great potential for further technological development and a good chance of a high return on investment. On the other hand, the market is very volatile and there are large price fluctuations. By deciding to buy a virtual currency, you can gain a lot, but also lose.

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