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What is Cryptocurrency? Complete guide

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What is Cryptocurrency ? Although Bitcoin is the most common, there are several other digital currencies in circulation on the market. Understand how they work, what they are for, and how to invest.

Those who want to know what is cryptocurrency need to follow the market, even if from a distance. Probably you have been already surprised by the ups and downs of digital currencies in the news.

The most famous is Bitcoin, but many others also have relevance – as well as investor friendliness. But after all, what is a cryptocurrency? How do these assets work and how to trade them?

If you are taking the first steps in the world of digital currencies and you need to know where to start. It is a new asset class on the market and, precisely for this reason, arouses many doubts in those who are still learning.

We invite you to follow the next paragraphs to get closer to cryptocurrencies:

1.- What are cryptocurrencies?
2.- What are they for?
3.- What is mining?
4.- How price variation works?
5.- Which are the major cryptocurrencies?
6.- What are the advantages and risks of investing in cryptocurrencies?
7.- How to invest in cryptocurrencies

What is Cryptocurrency ? Although Bitcoin is the most common, there are several other digital currencies in circulation on the market. Understand how they work, what they are for, and how to invest.
Source: SSI Investidor


1.- What are cryptocurrencies?

Generally speaking, a cryptocurrency is a type of money – like other currencies that we live with daily – with the difference that it is completely digital. Besides, it is not issued by any government (such as the real or the dollar, for example).

But is that possible? Short answer, yes.
Before the Internet, people depended on the post office to send a message to anyone who was elsewhere. An intermediary was needed to deliver it physically – unimaginable for anyone who has access to e-mail and other messaging services.

Something similar will happen with virtual currencies in the future. “With Bitcoin, you can transfer funds from A to B anywhere in the world without ever having to rely on a third party for this simple task,” explains Ulrich in the book “Bitcoin: Currency in the digital age”.

Although Bitcoin is the most well-known digital currency, the concept of cryptocurrency predates it. According to the Bitcoin.org website, maintained by the Bitcoin-linked community, cryptocurrencies were first described in 1998 by Wei Dai, who suggested using cryptography to control the issuance and transactions carried out with a new type of money. This would dispense with the need for a central authority, as with conventional currencies.


2.- What are they for?

Cryptocurrencies can be used for the same purposes as physical money itself. The three main functions are to serve as a medium of exchange, facilitating business transactions; reserve of value, for the preservation of purchasing power in the future; and also as a unit of account, when products are priced and the economic calculation is performed according to it.

In Ulrich’s view, currencies such as Bitcoin have not yet acquired the status of a unit of account, due to the great volatility to which their prices are subject for the time being.



3.- What is mining?

To understand what mining is, you need to know that digital currencies – like Bitcoin – represent complex code that cannot be changed. Transactions made with them are protected by encryption.

As there is no central authority to monitor these transactions, they need to be registered and validated one by one by a group of people, who use their computers to record them on the so-called blockchain.

The blockchain is a huge record of transactions. According to Ulrich, it is a public database containing the history of all transactions carried out with each Bitcoin unit (other digital currencies are based on the same technology). Each new transaction – a transfer between two people, for example – is verified against the blockchain, to ensure that the same Bitcoins have not been previously used by someone else.

Those who register transactions on the blockchain are the so-called miners. They offer the processing power of their computers to carry out these records and check the transactions made with the coins – in return, they are remunerated with new units of them. Bitcoins are created as the thousands of computers that make up this network are able to solve complex mathematical problems that verify the validity of the transactions included in the blockchain.

In other words, mining represents the creation of new units of some types of digital currencies. If more computers are used to increase processing capacity for mining, the mathematical problems that need to be solved become more difficult. This is exactly to limit the mining process.

“Bitcoin was designed to reproduce the extraction of gold or other precious metal from Earth: only a limited and previously known number of bitcoins can be mined,” explains Ulrich in his book. 



4.- How price variation works?

Basically, the price of digital currencies varies according to the good old law of supply and demand. In times when cryptocurrencies gain more attention, it is normal for them to be more sought after by investors, which increases the volume of purchases – and consequently, prices tend to rise.

“There are only a limited number of bitcoins in circulation and new Bitcoins are created at a predictable and decreasing rate, which means that demand must follow this level to keep its price stable,” explains the Bitcoin.org website.

As it is still a small market, few cryptocurrency transactions are capable of having a relevant impact on quotes. In a period of just three months in 2017, for example, Bitcoin’s price jumped from about $ 4,370 to $ 13,800. Just over a year later, it had already dropped back to $ 3,500. As you can see, quotes can be quite volatile.

READ more:  What is Blockchain? Complete Guide



5.- Which are the major cryptocurrencies?

Although Bitcoin is the most well-known digital currency – the two words are often taken to be synonymous – there are a variety of other types, with distinct characteristics. Discover the main cryptocurrencies available on the market:

  • Bitcoin:
    Bitcoin ( BTC ) is the best-known digital currency. It is the first fully decentralized global payment system. It was designed in 2008, in the midst of the global financial crisis that started in the American mortgage market, to replace paper money, in addition to eliminating the need for banks to mediate financial operations.

    According to the Bitcoin.org website, the first Bitcoin specification and proof of concept were published in an article signed by Satoshi Nakamoto, the pseudonym of a programmer (or group of programmers) that has not yet been identified. He invented the operating logic of blockchain, a system that made Bitcoin possible.

    In the article, Nakamoto established that there will be a maximum of 21 million bitcoins in circulation. It is estimated that the last coin will be mined in the year 2140.
  • Bitcoin Cash:
    Bitcoin Cash ( BCH ) is a new version of the original Bitcoin, created more recently – in August 2017. It was developed in an attempt to perfect the first currency, which has rates considered high and requires a long processing time for each transaction.

    The main difference is that Bitcoin Cash has a block size limit of 8 MB, much larger than the 1 MB of the original Bitcoin. Thus, confirmation of transactions can happen faster and also with lower rates. This guarantees her an even greater scale than that of her predecessor.

    Those who had Bitcoins received the same amount of Bitcoin Cash in their wallets when it was created. The operating rules are similar to those of the original asset, also with a limit of 21 million coins.
  • Ethereum:
    There are some similarities, but also differences, between Bitcoin and Ethereum ( ETH ). The original digital currency was actually called Ether. In 2016, however, a hacker found a flaw in the system and, from it, managed to steal the equivalent of $ 50 million in Ether. Faced with doubts about what would become of the currency’s future, the community that maintained it opted to create a new network.

    The original Ether – the target of the theft – was renamed the Ethereum Classic and the currency that started to circulate in the new network was named Ethereum. With the support of the community, it is worth more than its first version.

    Originally, Ether was not created to be a digital currency like Bitcoin. The idea was to become an asset to reward developers for using the Ethereum platform in their projects. It is a decentralized platform used to execute “smart contracts”, which are operations carried out automatically when certain conditions are met.

    The blockchain is also the basis for validating transactions with Ethereum, to ensure security and still prevent fraud. As in the case of Bitcoin, the creation of new currencies is also based on the mining process. Today, Ethereum is among the most traded cryptocurrencies in the world.
  • Tether:
    Unlike Bitcoin and other digital currencies, Tether ( USDT ), launched in 2014 by a company of the same name, is a stable coin because it is backed by a physical currency. The purpose of this cryptocurrency is to maintain parity with the US dollar. That is, for each Tether issued, there must be an equivalent dollar in cash.

    Since the cryptocurrency was created, however, experts have questioned parity, as the company did not offer transparency on how it followed it. In 2019, it was announced that not every Tether is actually backed by a dollar. According to the company, 100% of them are guaranteed, but not only by traditional currency but also by cash equivalents and other assets or receivables from loans made by Tether to third parties.

    The characteristic of Tether is that it is a stable currency that represents physical currencies in the digital world. Due to the lower volatility, it has become a good option for making transfers between systems and with different cryptocurrencies. Thus, investors protect themselves from the price changes of other assets and avoid the risk of having significant losses during these operations.

    Tether is predominantly traded on Bitfinex, a large cryptocurrency exchange, which has common shareholders and executives with Tether (the currency’s parent company). Although it has some advantages over other digital assets, it has been involved in major controversies.

    For example, there has already been an accusation by the New York Attorney General’s Office that Bitfinex would have used Tether reserves to cover an $850 million gap in its accounts as of 2018. Another suspicion is that the currency has been used by a speculator in operations to manipulate the price of Bitcoin in the market, with the knowledge or even involvement of Bitfinex. These are events that have yet to be clarified.
  • Ripple:
    Ripple ( XRP ) is a distributed payment protocol created in 2011, and the currency of this system is XRP. A feature of the Ripple platform is to support other tokens representing traditional currencies and even other goods in its network. The idea is that the system allows secure and instant payments to be made.

    Conceived by developer Ryan Fugger, entrepreneur Chris Larsen, and programmer Jed McCaleb, Ripple was created in 2012. It is not just a currency, but a system in which any currency – including the most well-known cryptocurrency, Bitcoin – can. be negotiated. To some extent, Ripple’s operation is somewhat similar to that of banks, in that it accepts various assets and facilitates transactions.

    Precisely for this reason, Ripple goes against the discourse on digital currencies in general, whose ideal is not to depend on the traditional financial system to carry out transactions. Another different feature of the system is that there is no mining process, as in the case of Bitcoin and Ethereum.
  • Litecoin:
    Litecoin ( LTC ) was created in 2011 by a former Google employee named Charlie Lee and has many features similar to Bitcoin. The main difference is in the mining process, which seeks to reduce the time needed to confirm transactions made with the currency. The intention is to make it easier for anyone to participate in the process of creating new Litecoins.

    Due to the faster processing of transactions, Litecoin is considered a better alternative for carrying out day-to-day operations. Bitcoin, in turn, would work better as a store of value. Litecoin was designed to produce more units, with a limit of 84 million coins, against 21 million for Bitcoin.
READ more:  How and where to buy Safemoon



6.- What are the advantages and risks of investing in cryptocurrencies?

Cryptocurrencies are recent assets and have a very sophisticated operating logic. Therefore, there are still many people looking to better understand how to operate with them.

Digital currencies have some advantages over physical currencies and other means of payment. The Bitcoin.org website lists the following for Bitcoins:

  • Freedom of payment: With a Bitcoin, you can send or receive any amount instantly anywhere.
  • Low rates: Currently, payments made with digital currencies are processed at low rates or even exempt. There are charges if users wish to have a faster confirmation of operations by the system. For commerce in general, there are services based on Bitcoins in which the processing of sales and the transfer of values ​​are carried out daily and at lower costs than those of traditional methods, such as PayPal or credit card networks.
  • Security: According to the Bitcoin.org website, Bitcoin payments can be made without linking the user’s personal information to the transaction. “This offers strong protection against identity theft,” he says. Another advantage is that the user can protect money with backup copies and encryption.
  • Transparent: All information about the offer of Bitcoin units is available on the blockchain to anyone. No one, nor any organization, can control or manipulate the digital currency protocol because it is encrypted. With this, the Bitcoin core is recognized as trustworthy for being neutral, transparent, and predictable.

Anyone betting on the digital currency market, on the other hand, needs to be aware of a number of details that are specific to that segment. Some of them are:

  • Degree of acceptance: As a relatively small number of people know and – even less – use digital currencies, few establishments accept this form of payment, as reported by Bitcoin.org.
  • Volatility: Major price adjustments are not uncommon in digital currencies like Bitcoin. This is exactly because, little by little, cryptocurrencies are gaining visibility, which attracts many new users and ends up overvaluing the asset.

“These adjustments resemble traditional speculative bubbles: overly optimistic press coverage provokes waves of novice investors to push up the price of Bitcoin. Exuberance, then, reaches an inflection point, and the price finally plummets, ”explains Ulrich. Some analysts are skeptical of this behavior, while others believe that the maturing of the market and the system tend to reduce volatility over time.

Security: Although Bitcoin.org reinforces the security as a positive aspect of digital currency, Ulrich points out that if users are not careful, they risk “erasing” or losing their Bitcoins. “Once the digital file is lost, money is lost, just like paper cash,” he says.

Ulrich explains that digital currency wallets can be protected by encryption, but it is up to the user to activate them. “If a user doesn’t encrypt his wallet, Bitcoins can be stolen by malware,” he says. Likewise, digital currency exchanges need to protect themselves from hacking – news about thefts happens eventually.



7.- How to invest in cryptocurrencies

There are some ways to invest or purchase Bitcoins and other cryptocurrencies. It is possible to buy shares of cryptocurrency funds, trade them directly in a specialized broker (also known as an exchange), accepting digital currencies as payment in some business or even mining.

Purchasing shares of funds is one of the simplest ways.  These portfolios are distributed by brokers and investment platforms and some require relatively low-value investments ($5,000 or even less). Funds can be a good alternative for those who want to expose themselves to the cryptocurrency market, but do not feel safe doing it alone, since the one who decides and monitors applications is a specialized manager.

Another relatively simple way to invest in Bitcoins and other cryptocurrencies is through a specialized broker. There are some houses, called exchanges, that offer this type of service.

The first step is to open an account on the exchange, filling out registration with personal data. It is possible that she may request the presentation of some documents or copies of them to validate the identity of the investor.

Some brokers adopt extra protection mechanisms, in addition to the usual passwords, such as tokens. If it is the case of the Exchange that you have chosen, you will need to make the necessary activations. Then, just transfer money to the account and start trading.

Check our other “Complete Guides:

What is Cryptocurrency?
What is Blockchain?
What is Bitcoin?
What is Ethereum?
What is DeFi?
What are smart contracts?

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Disclaimer:

The information expressed in this article is solely those of the author and do not necessarily reflect the vies of CryptoDeFinance.  Each and every investment and trading move involves high risk. You should always conduct your own research when making a decision in crypto investment.
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Ana Teixeira

Hi! I am Ana and I am a crypto enthusiast. Enjoy my articles, share them and don't forget to drop a comment. If you like us and our news, share the posts and comment. Your visit and interaction is very important to us.
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