Introduction to cryptocurrency: What is cryptocurrency?
The digital world of cryptocurrency is quickly becoming one of the central subjects in today’s fast-paced society. The impact of cryptocurrency is visible in every area of modern-day trade, and its rise in popularity has made it an essential financial topic.
From the moment cryptocurrencies entered the market, the industry started changing and evolving extensively. Today, new branches in the financial sector exist because of it. The first questions we will answer in this guide are, what is cryptocurrency and why is it a significant subject for you.
This segment covers the basic concepts of cryptocurrency. We will provide you with the necessary information about each of the following questions:
What is cryptocurrency?
Cryptocurrency has developed into a bursting industry of its own, and it is safe to say that it reached a global phenomenon status. For you to take part of this new financial market, it’s best to familiarise yourself with the terms and processes that define the cryptocurrency realm.
The easiest way to explain cryptocurrency is to define it as a digital money exchange done through secure and anonymous channels. Now, let’s break that definition into smaller, more precise pieces. Digital money, like Bitcoin, is a virtual currency which functions like any other currency on the market, but it is not controlled or issued by a centralised government. On the contrary, the control over new units is in the hands of the developers, and they use cryptography for protection of these units, hence the name cryptocurrency.
The exchange is the brilliant part of the design because, by using cryptography, every transaction is secured and verified by code. That means that every virtual coin is, in fact, a limited entry in a database that cannot be changed, unless stringent conditions are met.
The origins - David Chaum
Before there was cryptocurrency, we had the idea of digital cash. The concept of virtual money started gaining traction after David Chaum published his research paper “Untraceable Electronic Mail, Return Addresses, and Digital Pseudonyms” in 1981. In this paper, he laid out the foundations for anonymous communications, cryptographic protocols and inspired the cypherpunk movement of the 80s.
By 1990, he founded DigiCash, which went bankrupt in 1998. Nonetheless, his work stirred the founding of Dot-com bubble, E-gold, Liberty Reserve, the QQ coins and more. The technological boom of the 1990s and the rise and the fall of these companies put the digital currency theory on the map.
Full decentralisation was not yet possible at the time, and all of the companies used the Trusted Third Party approach, which means they only verified and enabled transactions. However, all of that changed with the invention of the Bitcoin in 2009.
The invention of the Bitcoin - Satoshi Nakamoto
The short history of the first cryptocurrency, Bitcoin, also starts with a research paper called “Bitcoin: A Peer-to-Peer Electronic Cash System” published by Satoshi Nakamoto in 2008. The pseudonym Satoshi Nakamoto has been linked to some of the most prominent mathematicians and coders in the world, including Elon Musk, but they have all denied their involvement. There is still mystery and controversy about the inventor or the inventors behind the Bitcoin and the blockchain database.
The most important thing about the Bitcoin, however, is not who invented it, but the value it has on today’s market, along with the technology that made it all possible. They managed to create a decentralised system with no central servers or issuing authority.
As of 2018, the list of cryptocurrencies is over 3,500, and it is continually growing. Other than the Bitcoin, the most famous cryptocurrencies on the market include:
- Sia Coin
The diversity of cryptocurrencies opens up options for financial gain and technological advancement. You, as either a buyer or a seller, can earn money by trading the most popular cryptocurrencies on Blockbid. You can see the differences in market capitalisation between each of the currencies and decide which ones are the safest bets. However, even though some of the cryptocurrencies are gaining traction, like Ether or Ripple, Bitcoin is still by far the most famous and valuable virtual coin.
The value of cryptocurrencies
The price on the market determines the value of any currency. Simply put, people believe that the Bitcoin has value, so it truly does. Traditional fiat currencies, like Euros or Dollars, are issued by governments and are supported by the national gold reserves. Cryptocurrencies are a bit different. They are entirely decentralised and independent from any government.
Other financial factors that determine the value of cryptocurrencies are:
- Limited supply and demand
- The Blockchain
- Easy to store, easy to transfer and easy to exchange
- Public perception and media coverage
- Higher security
- Bigger profits
Most of the investors will argue that the future of commerce is in cryptocurrencies, and the fact that the value of the Bitcoin skyrocketed in 2017 ($19,783.21 on December 17) helps that notion. Furthermore, countries started accepting them as part of their fiscal systems.
In fact, Japan passed the law allowing Bitcoin as a legal tender. However, since the hack on the Japanese exchange on January 26, 2018, which caused a loss of $530 million worth of NEM coins, the government is more sceptical.
The U.S. is still working on a specific bill regarding cryptocurrency regulation, but they are preparing one, according to the statements of the Securities and Exchange Commission. Canada passed Bill C-31 on June 19, 2014, the world’s first national law on digital currencies. Australia adopted the approach where transactions with Bitcoin have the same legal obligations as a barter arrangement, considering it as an asset for capital gains tax (CGT) purposes.
The EU and the United Kingdom are also preparing directives that would closely regulate cryptocurrencies. Since the beginning of 2018, Germany and France created working groups regarding the issue of cryptocurrency policy. Switzerland is the most open country when it comes to cryptocurrencies, according to the statement of Johann Schneider-Ammann, the economics minister, the government wants to brand the country as “the crypto-nation.”
Russia published a draft law “On Digital Financial Assets” on January 25, 2018, which would regulate tokens, ICO procedures and the legal regime for cryptocurrencies and mining.
The allure of cryptocurrencies
The main reason people love cryptocurrencies is that there are no ownership or control issues. Once you get the coin, you are free to do use it in any way you deem fit. The Blockchain technology is also a big plus. It guarantees a secure digital transaction through encryption, and it makes the currency virtually unhackable. Additionally, the Blockchain is easily understandable and accessible for everyone.
The transactions are high-speed, secure and, most importantly, not restricted by banks. The possibilities for profit, amidst the devaluation of fiat currencies, are significant, and there is also the option for capital preservation.
What is the Blockchain?
As we mentioned above, the technology that made it all possible is called the Blockchain, and it was perfected by Satoshi Nakamoto. He called it the “purely peer-to-peer version of electronic cash,” and it is one of the most prominent trailblazing technologies in the last few decades.
Professionals from every sphere are still debating the uses and benefits the Blockchain can bring in every aspect of life, from finances to education, from healthcare to politics. However, we will focus on the way cryptocurrencies use this novel technology.
What is the Blockchain?
The Blockchain technology allows digital information to be transferred, but not copied. For example, if you want to make a transaction, your request will be broadcasted to a P2P network of computers (nodes), which will verify and validate your request through a series of algorithms.
When the Blockchain is used for cryptocurrencies, it also involves codes. After the process of verification is completed, the transaction is combined with other required transactions, and it creates a block (data) for the ledger, which cannot be altered after it is added to the blockchain.
Alternatively, imagine an excel sheet that is duplicated and updated all the time, and every record is safe and unchangeable. You can even see it as a highly sophisticated database that is more secure than most. The beauty of the Blockchain is the P2P network, which makes it almost impossible for hackers to corrupt because it is not located on one central server.
Owners of cryptocurrencies have full control over their coins and are not depended on a government or a bank for transfer.
What is Bitcoin?
The most popular and expensive cryptocurrency in the world is the Bitcoin. Since it debuted on the financial stage on January 3, 2009, as the first decentralised currency in history, it reached an all-time selling price of $19,783.21 in 2017.
What is Bitcoin?
The Bitcoin is a virtual coin, a cryptocurrency, which is used as a method of payment worldwide. Today, Bitcoins are exchanged for everything from other crypto or fiat currencies to products and services. You can buy them or mine them.
Mining Bitcoins was a very profitable business venture for a couple of years when cryptocurrency was first introduced. Today, it would be a costly investment in proper hardware, electricity, cooling units and regular maintenance expenses. Therefore, it is highly advisable to buy and trade Bitcoins on a proven virtual exchange, like Blockbid. If your goal is to turn a profit or make an investment, then buying is a more secure way to achieve that goal.
What are Altcoins?
The popularity of Bitcoins brought Altcoins into existence. The term comes from“Alt” for alternative and “coins” for currency, signifying an additional option to the cryptocurrency Bitcoin. They are essential to the financial and technological world because they strive to improve on some aspects of the Bitcoin, but most of them use the Blockchain technology.
What are Altcoins?
Every other cryptocurrency that came after the Bitcoin is considered an Altcoin, like Ripple or Litecoin. Since its creation, Bitcoin has faced some problems in high fees and processing time, and some Altcoins offer lower fees and significantly shorter processing times. The concept is to create alternatives that would be more efficient, either in anonymity or in simpler mining methods.
Altcoins created a diverse market for cryptocurrency offering buyers various substitutes that might better suit their needs. Furthermore, there is room for profit because of the next prominent cryptocurrency that would do well on the exchange. As a buyer, you just might want a more diverse portfolio when it comes to your cryptocurrency investments, and altcoins are a prudent way to do just that.
What is Ethereum?
Ether is the cryptocurrency, and Ethereum is the platform created by a team of developers for the Ethereum Foundation, which is a Swiss non-profit organisation. It was introduced to the world on July 30, 2015, with 11.9 million “pre-mined” coins. The Ethereum idea was presented and developed by Vitalik Buterin, a cryptocurrency expert and programmer.
What is Ethereum?
Ethereum is a Blockchain, decentralised app platform that runs smart contracts. That means that the open software allows developers to build and set up decentralised applications, which are secure from censorship, fraud or interference.
Even though Bitcoin and Ethereum look similar and they use the same basics of the Blockchain technology, Ethereum is more focused on the programming code of the apps. The platform uses its cryptocurrency for transactions, which is called Ether.
What is Ether?
Ether is the primary currency on the Ethereum platform for developers and miners working as p art of the P2P system or, as they call it, “the fuel.” The issuance of ether is capped at 18 million ether per year, and it can be traded on virtual exchanges.
How are Bitcoin prices determined?
Bitcoins are rare, and they are also useful to the buyer, thus valuable. This value is determined by the market’s price, which is dictated by the supply and demand variables. The maximum of Bitcoins is capped at 21 million, making them very desirable because they are limited. Bitcoins are divisible, transferable and fungible (standardised), making them useful.
How are Bitcoin prices determined?
Nevertheless, the value does not always reflect in the price. Instead, the leading indicators that define the worth are the supply and demand variables on the exchange. In this regard, the Bitcoin is not different from any other commodity or currency offered on the market. As we mentioned above, the price of the Bitcoin will be mostly determined by the price people are willing to pay for it.
The prices change as the factors of the market change. Moreover, Bitcoin is not traded on one particular exchange, but many different virtual exchanges, which have their average prices listed as part of the trading commodities.
Liquidity is also an issue when it comes to any cryptocurrency, not only Bitcoins, since the amount is not always the same, and it goes up and down according to the price. The rate of fiat currencies is an equally important factor.
Now that we explained the basics concepts of what is cryptocurrency, we can move on to more detailed clarifications and in-depth analysis of this new and exciting virtual domain.