Everyone has heard about cryptocurrencies, about bitcoin. There are many stories about the quick enrichment of some people and the equally quick ruin of others. Some consider it the currency of the future, others - a deception and a way to take money from people.
Let's try to figure it out.
What is cryptocurrency?
Cryptocurrency is digital money. This is essentially a computer code based on Blockchain technology.
Blockchain is a chain of encrypted data that records all operations with cryptocurrency. Many copies of this chain are stored on the servers and computers of cryptocurrency owners around the world.
After each transaction, a new block with transaction information is added to the end of the chain. Creating a block requires complex mathematical calculations that perform computers of miners to get a reward. The chain becomes longer, calculations become more complicated and cryptocurrency mining requires more and more computing power. To get cryptocurrency, miners create special mining farms - powerful computers that can do complex calculations with high speed.
There is a comparison of the Blockchain copies from different sources before each transaction. If the copies match, the transaction will be executed. Otherwise, the transaction will be canceled. That's why it is impossible to fake and to embed a fake record in this chain.
It all started with the advent of Bitcoin in 2009. It was created by Satoshi Nakamoto. Who is this, one person or a group of people is not known. Bitcoin is the most popular and most expensive cryptocurrency at the moment. Its quantity is limited to 21 million coins, and it is impossible to get more. This currency is not backed by precious metals or other guarantees. Its price consists of the cost of electricity spent on its mining and demand for it.
All cryptocurrencies except Bitcoin are called Altcoins (alternative coins). They appeared as branches of the Bitcoin chain. The most popular and expensive are Ethereum, Ripple, Litecoin, Dash. Most of them are based on Blockchain technology, but with some modifications. As a result, altcoins differ in some characteristics such as emission limitation, the rate of emergence of new blocks, partial or complete anonymity, and miner reward algorithms. The code of some altcoins (Ripple, Tem) is not a modification of the Blockchain. It is unique and written from scratch.
Most often, the prices of altcoins repeat the behavior of the price of Bitcoin. If Bitcoin grows, altcoins grow and vice versa. But there are exceptions.
Cryptocurrencies are capable of performing the functions of ordinary money. The owner can exchange them for real money, for another cryptocurrency or pay for goods and services. But the creators also endow them with additional useful functions, for example, smart contracts of the Ether currency, quick transactions of Litecoin, and complete anonymity of Dash.
But the cryptocurrency market is unstable. Sharp fluctuations in the exchange rate prevent them from becoming a stable payment unit. A very striking example is the story of Pizza for Bitcoins. In 2010, one man bought 2 pizzas for 10,000 bitcoins ($ 40-50 at that moment), and later bitcoin went up to $ 20,000 for one coin.
Therefore, you need to be prepared for any surprises. At any moment, a complete calm at the market can turn into a powerful impulse in any direction. And long and stable growth can turn into a quick collapse.
Cryptocurrency is stored on special wallets, they are of several types:
A program you need to install on the local computer. It stores keys and all the necessary information for access and operations with cryptocurrency.
An Internet site or web application that provides full functionality for receiving, sending, and exchanging cryptocurrencies. Private keys and other information are stored on servers.
Applications for use on smartphones. The most popular type of wallet at the moment.
A sheet of paper with QR key codes printed on it.
A special device is similar to a flash drive. All necessary information is stored on it. You need to connect it to a computer to gain access to your cryptocurrency.
Different wallets provide different functionality, convenience, and level of security. When creating the wallet, the user receives a private key to gain access to money and a public key to receive currency from other users. Be sure to backup your private key. In case of loss, it can be restored using a passphrase, which also needs to be stored securely. It is also advisable to use two-factor verification wherever possible.
Blockchain technology does not allow forging a record in the chain. But, unfortunately, it does not protect against theft. There are many cases of theft of cryptocurrency to hackers. Using all sorts of vulnerabilities, they gain access to the servers of crypto exchanges and the personal data of wallet owners. They act quickly and professionally, so when using cryptocurrency, special attention should be paid to security.
The most secure hardware and paper wallets because the keys are stored on physical media that are not accessible online. Hardware and mobile wallets are less secure. Web wallets have the lowest security level because they're the keys are stored on a remote server.
Cryptocurrency can be converted into any other cryptocurrency or into ordinary (fiat) money. Specialized exchanges and trading platforms offer many exchange options.
Cryptocurrency exchanges have their reserve of currencies and make an exchange for everyone. Before choosing a particular exchanger, you need to familiarize yourself with its terms and read reviews about it.
Cryptocurrency trading platforms help those who want to sell and buy a cryptocurrency find each other and agree on an exchange. You need to be very careful when choosing an exchange partner so as not to get to scammers.
A cryptocurrency is a unique tool with great potential. Many governments are considering introducing digital analogs of national currencies based on blockchain technology. But first, they need to create a legislative framework and improve security. It is safe to say that this is the technology of the future.