What is cryptocurrency? - ForexProp

What is cryptocurrency? - ForexProp

Cryptocurrencies: how do they work and are they worth investing in?

We often hear about cryptocurrencies nowadays. We hear fabulous stories about cryptocurrency millionaires, the incredible popularity of mining, the theft of millions of dollars in cryptocurrencies, blockchain technology - technology that is said to change this world.


But what, really, are those - cryptocurrencies, bitcoin, blockchain, mining - and why have they become so popular? In this article, we will try to understand the basic concepts of digital currencies, find out how you can get or earn them, and also since they are money, where to spend them?

Cryptocurrencies are, in fact, the same money as that which is stored on your bank card. They are suitable for payments, as well as “real” currencies, but not all sellers accept them.

The most important difference between cryptocurrency money and fiat money (the “real” money issued by central banks) is that you cannot cash it out at an ATM, you cannot touch it and put it in your wallet - cryptocurrencies do not have a material form.

Why were cryptocurrencies created? A tour of the history of digital money

The first and most famous cryptocurrency - Bitcoin - was invented in 2008. Only the pseudonym of the bitcoin creator is known - Satoshi Nakamoto. Whether he is a man, a woman, or a group of people is still unknown. In order to explain what bitcoin is and why it was created, it is necessary to understand what the blockchain, the technology underlying this cryptocurrency, is.

Blockchain is a technology that allows you to transfer information, including financial transfers (cryptocurrency transactions or fiat transactions), without the participation of a trusted third party, without an intermediary.

All information is recorded in blocks and cannot be changed or deleted, as it is stored on all computers (nodes) of the network at the same time. If you try to change the information in one place, all other computers on the network will not confirm the change and cancel it.

For money transfers, this means that the transaction will take place directly from one user to another, bypassing the intermediary in the form of a bank, payment system, or state.

These traditional payment systems can affect the transaction, delay it, require various confirmations. This was one of the main tasks of Satoshi Nakamoto. He wanted to create a system in which transactions would not require an intermediary and would be reliable and anonymous. bitcoin was introduced by him in 2008 as such a system.

Also, for transfers using the blockchain, the geographic location of the sender and the recipient does not matter - you can make a transfer from any country to any other country, regardless of their political differences and sanctions.

Now international bank transfers of fiat money are processed and delivered within 3-5 days. With the use of blockchain, this time can be reduced to hours and even minutes.

Where do bitcoins come from?

Bitcoins are created using mining. This English word draws an analogy between bitcoin, “digital gold”, and real minerals. So, bitcoin is mined. The mining process consists of solving complex mathematical problems using computing power.

At the same time, all transactions with bitcoin are recorded in a chain of blocks, which are also checked for authenticity by computers (nodes) of this network. Since the nodes have information about all transactions in the network, they can confirm the transaction or recognize it as illegitimate in the case of, for example, trying to use the same funds twice.

In order for the number of blocks mined in one day to remain unchanged, mathematical tasks are being complicated in proportion to the increase in computing power of computers in the bitcoin network.

A total of 21 million bitcoins can be mined, of which about 17.5 million already exist. The last bitcoin, due to the increasing complexity of mining, will be mined only in 2140.

How transactions in the bitcoin network are processed?

As there are no actual bitcoin coins, so there are no bitcoins as files on the Internet. All bitcoins are only records of transactions in the network. For example, in the transaction of transferring one bitcoin will be indicated:

  • Data on how that particular sum of bitcoins ended up on that wallet (records of previous transactions);
  • The number of bitcoins to be sent;
  • The address of the bitcoin wallet of the person to whom the transfer is made.

Further, transaction records for a certain amount will be removed from the sender’s wallet and attached to the recipient's wallet. If in the wallet initiating a transaction there are no transaction records for a specific amount that is transferred, a transaction record with a larger amount of bitcoins will be attached to the recipient’s wallet.

In turn, a reverse transaction with “change” will be created, which will be attached to the sender's cryptocurrency wallet.

For the transfer one will have to pay a commission. It is the main source of income for many miners who confirm transactions. Usually, the commission is low, but if the sender wants his transaction to be confirmed faster, he may pay extra. It is noteworthy that during the time of the bitcoin price peak in 2017, the transaction fee reached $55.

How does Blockchain work?

The system shown above will be true, in one way or another, for most crypto coins. Some, however, will have significant differences in the number of coins, the blockchain network, the speed and anonymity of transactions. Each project sees its flaws in bitcoin, which it seeks to eradicate and, if possible, surpass bitcoin in all respects.

How many cryptocurrencies? How do new cryptocurrencies appear? Can I create my own?

At the moment there are about 1600 cryptocurrencies. The figure is constantly growing. You can create your own cryptocurrency by conducting an ICO. This is the name of the initial coin offering, by analogy with the initial public offering (IPO).

During the ICO, the creators of crypto coins are trying to convince the public of the usefulness of their cryptocurrency (the blockchain behind it), that it will find extensive use, and hence the price of it will take off and go, in crypto terms, “to the moon.”

So the people who create a cryptocurrency attract buyers, sell a predetermined amount of coins and, after collecting money, begin full-scale development and implementation of their blockchain into the business area announced in the White Paper.

Well, at least that's how it works in theory. In real life, everything is a little bit different. A study conducted in 2018 found that 80% of all ICOs conducted in 2017 were fraudulent. Those responsible for such projects were not going to develop their cryptocurrency after the ICO. Their aims had been achieved by the time the ICO took place. Continue reading with Litefinance.com...


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