Recently, in the news, social networks, and just in friendly conversations, you can often hear such a thing as cryptocurrency. Since you are reading this article, you are most likely trying to understand what cryptocurrency is, what types of cryptocurrencies are, why they are so popular, what are their advantages and disadvantages, and how you can get cryptocurrencies and make money on them.
What is cryptocurrency?
So, let’s figure out what cryptocurrency is and what is its essence. Cryptocurrency is a type of digital currency, the creation and control of which is based on cryptographic methods of information processing.
is an alternative to Cryptocurrencyfiat money. The idea of creating digital money arose in 2008 after the global financial crisis against the backdrop of the bankruptcy of large financial and credit institutions, the rapid growth of the public debt of a number of countries (primarily the USA, EU, Japan) and the active launch of a printing press to cover growing debts.
The ancestor of cryptocurrencies is Bitcoin, developed by Satoshi Nakamoto, whose identity has not yet been established – perhaps even a pseudonym, which, moreover, belongs not to one person, but to a whole group of developers. In relation to Bitcoin, Satoshi Nakamoto used the term “electronic cash”, and the term “cryptocurrency” stuck with digital currencies after the publication in 2011 of an article in Forbes magazine about the Bitcoin system “Crypto currency” (Cryptographic currency).
The functioning of cryptocurrencies is based on blockchain technology. Blockchain is a system for storing information in the form of a chain of blocks. At the same time, all information (database) is not stored on a separate server, but on a variety of devices that participate in this system, and anyone can become a member of this system (somewhat like a torrent when distributing / downloading information). When carrying out any transaction, information about such a payment is displayed on all devices (data is synchronized via the Internet), so it is practically impossible to hack such a system.
The entire chain of transactions in the blockchain is publicly available (as a rule, information about the transactions performed is not encrypted and is available in clear text). Figuratively, the blockchain can be represented in the form of an electronic register, in which all transactions carried out are consistently recorded. At the same time, entries in the register can be made only with the consent of the majority of network participants through the use of cryptographic elements (digital signature based on a public key system + sequential hashing), and it is not possible to make changes to previous entries, i.e. you cannot change or delete a previously conducted transaction, just like insert a new record into the middle of the registry.
Cryptocurrencies do not have a tangible medium (unlike fiat money, which can be represented in the form of banknotes and coins) and exist exclusively in digital form.
There are ongoing discussions about the economic essence and legal status of cryptocurrencies. In different countries, cryptocurrencies can be considered as a means of payment, a specific (exchange) commodity, may have restrictions in circulation (for example, a ban on transactions with them for banking institutions). Seeabout the status of cryptocurrencies in Ukraine here.
The emission of digital money occurs in various ways:
- ICO (Initial coin offering, from English – “initial coin offering, initial coin offering”) – a form of attracting investments in the form of selling to investors a fixed number of new units of cryptocurrencies received by a one-time or accelerated emission;
- Mining (from the English mining – mining) – obtaining cryptocurrencies using special technical devices and software code. Users who search or mine on the internet are called miners. The mining process itself involves the solution of mathematical problems, as a result of which a chain of information blocks arises. For each block found, the miner receives a certain amount of cryptocurrency;
- Forging (from the English Forging – forging) or Minting (from the English Minting – the minting of coins) – the creation of new blocks in various cryptocurrencies in the blockchain based on proof of ownership with the ability to receive rewards in the form of new units and commission fees.
A distinctive feature of most cryptocurrencies is the decentralization of their issue. Unlike fiat money, where the emission of money is carried out by the central bank of the country, the emission of cryptocurrencies is not assigned to a separate center, but is carried out everywhere, since anyone can participate in the mining process.
Payments using digital money are carried out in exactly the same way as ordinary electronic transfers in thesystem non-cash settlementcarried out by banks and payment systems. The only exceptions are exchanges, through which crypto money can be cashed, that is, transferred to fiat.
Why are cryptocurrencies so popular?
The popularity of cryptocurrencies is due to the modern level of technical development and the popularization of e-commerce – it is very convenient to have a virtual payment instrumentthat is not tied either to a specific country or to a specific issuer, and through which you can quickly and cheaply make a payment.
Cryptocurrencies are protected by a cryptographic code, so they are more reliable than regular money – they cannot be counterfeited.
Most cryptocurrencies are not afraid of inflation, because unlike fiat money, it is impossible to issue additional emission – only a predetermined and limited amount (for example, no more than 21 million bitcoins can be issued).
Another reason for the popularity of cryptocurrencies is their decentralization – the absence of a single financial and software center that manages the system. The functioning of the blockchain is not influenced by the central bank, government, or large corporations. Of course, large miners can initiate certain changes in algorithms and processes, but their implementation is possible only if supported by the majority of participants.
Not the least role in the popularization of cryptocurrencies is played by the anonymity of transactions. Of course, in the blockchain system, you can track all payments and see how many of the same bitcoins were sent from one wallet to another, but determining who exactly owns the wallet is quite difficult, and sometimes unrealistic. Anyone can create a wallet (and more than one) for storing cryptocurrency – you will need to install the appropriate software and have access to the Internet.
Types of cryptocurrencies
Digital money first appeared in 2008, and by now there are already several thousand varieties of them. There is a certain category of cryptocurrencies that are actually not backed by any content and have all the signs of soap bubbles. However, there are also a number of highly successful and promising projects.
At the moment, the following cryptocurrencies are the most popular.
Bitcoin (Bitcoin)
Bitcoin (BTC) is the most popular cryptocurrency based on blockchain technology (often the term “cryptocurrency” is associated with Bitcoin). Actually, everything started with this cryptocurrency at the turn of 2008-2009. Bitcoin is a pioneer (now it is already called “grandfather”) and today it is the most successful cryptocurrency (has the highest level of capitalization), presented on all exchanges that trade cryptocurrency. In relation to Bitcoin, the rate is set for a number of other cryptocurrencies (bitcoin equivalent). Some exchanges have already started trading futures Bitcoin. Bitcoin is accepted as a means of payment in a number of institutions around the world, and due to its rapid growth in value, it is a very promising investment for the purpose of increasing capital.
Bitcoin Cash
Bitcoin Cash (BCC) – the “alternative to bitcoin” that appeared as a result of the hard fork – split from the main branch of the Bitcoin blockchain on August 1, 2017 and after a few days took the third place among all cryptocurrencies in terms of capitalization. The split was due to the desire to get rid of some of the shortcomings of Bitcoin in the new branch, namely to increase the number of transactions per second (increase the maximum block size) and security, as well as optimize the code to increase scalability and smooth growth in the number of participants. Bitcoin Cash (sometimes – Bcash) shares a history with Bitcoin, but is traded under a different ticker – BCC (less often – BCH).
Ethereum
Ethereum (ETH) – Pronounced Ethereum (or just Ether). It is the digital currency of a platform for building decentralized blockchain-based online services (Dapps) powered by smart contracts. If Bitcoin is often called “digital gold” (for the complexity of its production, limited supply and excellent investment qualities), then Ethereum is sometimes called the “digital analogue of oil” that this cryptocurrency is a kind of “fuel” for smart contracts and created on their basis Dapps.
Ethereum is positioned as a platform for “smart contracts” (any type of transactions without intermediaries with any types of assets – money, securities, etc.). Although, the system found its main application, of course, as a cryptocurrency.
Ether is considered a fairly promising cryptocurrency, which is predicted to have a great future. There is every prerequisite to assume that Ethereum will outshine Bitcoin.
Ethereum Classic
Ethereum Classic (ETC) is an offshoot from the main system created by those who disagree with the new policy of Ethereum ideologues. It appeared in 2016 as a result of the Ethereum (ETH) “twin brother” hard fork. In other words, this cryptocurrency is the same Ethereum before the hard fork. The goal of the project is to keep the original Ethereum decentralized, immutable, and uncensored.
Litecoin
Litecoin (LTC) – this cryptocurrency appeared in 2011 and became essentially a clone of Bitcoin, but with a number of improvements that made this system popular. Litecoin managed to solve the problem with scalability inherent in Bitcoin, namely the limited number of transactions (operations, transfers) performed per second. As a result, transactions here go many times faster, which makes this cryptocurrency popular among users. If Bitcoin is called “digital gold”, then Litecoin is “digital silver” (there are more reserves and the cost is lower).
Ripple
Ripple (XRP) is a cryptocurrency based on a distributed protocol (similar to a blockchain), but seriously different from the usual (it looks more like a decentralized ledger). There is no mining at all, transfers are quite fast and with little or no cost.
Ripple is used in real-time gross settlement, currency exchange and money transfers. The Ripple protocol launched in 2012. Its goal is to provide “secure, instant and near-free global financial transactions of any size with no chargebacks.” According to some crypto enthusiasts, the Ripple payment system may become an alternative toin the future SWIFT.
Dogecoin
Dogecoin (DOGE) is another replica of Bitcoin (or rather Litecoin), significantly redesigned. Dogcoin appeared in 2013 as a joke (the name comes from the Internet meme Doge), but has become quite popular. It is distinguished by a very large (unlimited) number of monetary units (they are called Doge) and their extremely low cost (which is quite logical). The commission in the system is extremely low, and this cryptocurrency is also quite often used for donations for the purpose of charity.
Peercoin
Peercoin (PPC) is one of the clones of Bitcoin with a number of improvements. For example, in Pircoin, security has been significantly increased, as well as the mining process has been simplified, which reduces the total energy consumption of computing resources connected to the system. At the same time, Peercoin does not have anonymity, which hinders the growth of its popularity.
Dashcoin (Dashcoin)
Dashcoin (DSH) – similar to the previous currency, but only here anonymity is implemented (transactions are anonymized thanks to the Darksend mechanism). At the same time, there remained a lower energy consumption of mining, high security (a combination of several cryptographic algorithms is used). The launch of the cryptocurrency, which was called Xcoin at the time, took place on January 18, 2014. From January 28, 2014 to March 25, 2015, the cryptocurrency was named Darkcoin.
The DASH network operates the so-called masternodes – special nodes that ensure the operation of the mechanism for mixing PrivateSend transactions. To stimulate the work of masternodes, a reward is provided, which is 50% of the miner’s reward for the block found. The DASH system also implements the InstantSend instant transaction service. Another feature of DASH is its use of the X11 hashing algorithm.
Primecoin
Primecoin (XPM) is a bitcoin clone, in which, instead of enumerating numbers in search of the desired hash, miners perform calculations that are more useful to science (looking for pseudoprime numbers). Also, the Primecoin system is ten times faster than its “parent”, a smooth increase in the complexity of calculations (after each block found), miners are paid depending on the complexity of the task, and the total number of monetary units was not initially limited, but their appearance is regulated algorithmically.
Monero
Monero (XMR) – the system operates on the basis of the CryptoNote protocol and is focused on increased transaction anonymity (transaction details are not available for viewing). Monero does not have a limit on the number of monetary units so that mining will always keep the system alive. By the way, the peculiarity of mining this particular cryptocurrency is that it is desirable to participate in the calculations not only of video cards, but also of the processor. And it also has a very large amount of data transferred with transactions (almost an order of magnitude more than in Bitcoin).
IOTA
IOTA is a system of transaction protocols for the IoT (Internet of Things). The uniqueness of IOTA also lies in the fact that network participants are not divided into users and transaction validators. Each node both sends and confirms transactions that are not packed in blocks (which distinguishes IOTA tokens from the vast majority of other digital currencies).
The bandwidth of the IOTA network is proportional to the number of nodes and their activity. It is estimated that over 50 billion devices will be connected to the network in the next decade. With this in mind, IOTA offers a way to conduct microtransactions between these devices.
The goal of IOTA is to enable such devices to make micropayments in real time, in a free competition and without commissions.
NEM (NEM)
NEM (XEM) is a digital currency that gained prominence in early 2015. NEM cryptocurrency has gained very high popularity in Japan. At the head of the project is a development team that has set itself the main goal of bringing the security and speed of banking transactions to a new level. For this purpose, in partnership with the ZAIF exchange based on the NEM blockchain, the closed Mijin network has already been created and is successfully operating.
Zcash or ZEC
Zcash (ZEC) is the world’s first cryptocurrency based on an interactivecryptographic protocol zero-knowledge proof . This means that one of the interacting parties can be convinced of the reliability of a mathematical statement without having any other information from the other party.
Like Bitcoin, Zcash works on the blockchain, but it is completely anonymous: even the amount of transactions is hidden – each payment is published in the general block chain, but the data about the sender, recipient and the amount of funds remain hidden from other participants in the system.
Advantages and Disadvantages of Cryptocurrencies
Cryptocurrencies have a number of distinctive features in comparison with classical money, in connection with which they have both positive and negative properties.
The advantages of cryptocurrencies are:
- Mining, i.e. anyone can participate in the process of issuing digital currencies (in the process of mining, the payment chain is also confirmed) and receive an appropriate reward for this.
- Decentralization and deregulation is an anarchist’s dream, the basis for building a free digital economy.
- Anonymity of payments.
- Limited emission – no inflation.
- High level of reliability and protection due to the use of cryptography.
- Low transaction fees.
The disadvantages of cryptocurrencies are:
- High volatility – even for Bitcoin on some days the price fluctuates +/- 10% The
- constantly growing level of mining difficulty of the vast majority of cryptocurrencies – continuous improvement of technical means is required, which entails additional financial costs, incl. and by increasing electricity consumption. If earlier Bitcoin could be mined even on a home PC, now it is required to assemble a whole “farm”.
- Inability to use cryptocurrency in case of loss of the password from the wallet or damage to the hard disk with the information on it. To avoid this, you should back up your data.
- Lack of proper legal regulation. The government of the country may prohibit or restrict work with cryptocurrencies, establish additional taxation of income received, controversial transactions (given their anonymity) are unlikely to be challenged in court (for example, an advance payment for a product that the seller did not provide later or did not provide in full) etc.
- The use of cryptocurrencies in the shadow economy and illegal circulation. At the moment, the governments of the countries are puzzled by the problem of conducting high-quality financial monitoring. While the volumes of transactions carried out are relatively small, cryptocurrencies do not pose any particular concerns, but as trading volumes grow, the situation will change dramatically.
Almost at the moment, cryptocurrencies perform all the functions inherent in ordinary money: a
- measure of value;
- means of payment;
- means of circulation;
- storage medium;
- world money.
How to make money on cryptocurrency?
We examined with you what cryptocurrencies are, their types, main advantages and disadvantages. Such a high popularity of cryptocurrencies is primarily due to an actively growing market, a rapid increase in its total capitalization, an influx of more and more investors, which promises very good earning opportunities in a relatively short period (the cost of key cryptocurrencies over the past year has increased by 10-20 or more times) …
So how do you make money on cryptocurrency? There are several main ways to make money on cryptocurrencies:
- Mining, i.e. mining of coins. At the moment, its key disadvantage is the high cost of entering the business (the cost of equipment and its maintenance), as well as a long estimated payback period (on average, from 6 months to 1 year). The problem of large investments can be partially solved through the so-called cloud mining, in which you can rent computing power, but the profitability here will be lower and the risks higher.
- Trading, the essence of which is to buy cryptocurrency on the exchange at a lower rate and sell at a higher rate. There are a number of cryptocurrency exchanges, for “entry” a minimum investment is required, a large number of traded cryptocurrencies. But for good earnings, you need to have the skills of technical analysis, and there is also a risk of bankruptcy of the exchange.
- Purchase of cryptocurrency (on an exchange, in an exchanger, cryptomat, etc.) and its further storage in your own electronic wallet. You can buy any cryptocurrency, in any volume, but, as a rule, for a long period (from 1 year). Startups show the highest profitability (although their risks are higher).
- Arbitrage, the essence of which is to buy one cryptocurrency on an exchange at a lower rate with the subsequent transfer and sale of this cryptocurrency on another exchange at a higher rate. The difference in rates should cover the commissions of both exchanges for depositing and withdrawing funds and buying and selling cryptocurrency. You need to be well-versed in the working conditions of the exchanges, as well as to quickly perform operations, because delay can offset the existing difference.
- Transfer of funds to trust. For example, a cryptocurrency can be transferred to trust management to a broker who “plays” on the exchange. This method is distinguished by high profitability (from 100% per month), but the likelihood of a complete loss of funds is also high.
