What is a crypto currency?

What is a crypto currency?

Cryptocurrency is a digital or virtual currency that is protected by cryptography, making it virtually 100% secure against counterfeiting or double spending. Many cryptocurrencies are decentralized networks based on blockchain technology, a distributed digital ledger of records, called blocks, maintained by a disparate network of computers.

The defining feature of cryptocurrencies is that they are generally not issued by any central authority, making them theoretically immune to government interference or manipulation.

What are cryptocurrencies?

Bitcoin is the most popular and valuable cryptocurrency. An anonymous person named Satoshi Nakamoto invented it and introduced it to the world through a so-called "white paper" in 2008.

Bitcoin, which became available to the public in 2009, remains the most widely traded cryptocurrency. As of May 2022, there were over 19 million bitcoins in circulation, with a total market capitalization of around $576 billion. The number of bitcoins is capped at 21 million.

In the wake of Bitcoin’s success, many other cryptocurrencies, known as “altcoins,” have been launched. Some of them are clones or forks of Bitcoin, while others are new currencies that were created from scratch. These include Solana, Litecoin, Ethereum, Cardano and EOS. By November 2021, the combined value of all cryptocurrencies in existence had reached over $2,1 trillion, with Bitcoin accounting for approximately 41% of that total value.

Each cryptocurrency claims to have its own function and specification. For example, Ethereum ether sells itself as gas for an underlying smart contract platform. XRP from Ripple is used by banks to facilitate transfers between different geographic regions.

There are thousands of cryptocurrencies on the market today.

Is cryptocurrency legal?

Fiat currencies (money in our usual sense) receive their powers from the government or monetary authorities. For example, every dollar bill is backed by the Federal Reserve.

But cryptocurrencies are not supported by any public or private organizations. Therefore, it was difficult to substantiate their legal status in various financial jurisdictions around the world. It doesn't help that cryptocurrencies have largely functioned outside of most existing financial infrastructures. The legal status of cryptocurrencies has implications for their use in daily transactions and trading. In June 2019, the Financial Action Task Force (FATF) recommended that transactions related to cryptocurrencies be subject to regulatory requirements.

As of December 2021, El Salvador was the only country in the world to allow Bitcoin as legal tender for money transactions. In the rest of the world, regulation of cryptocurrencies varies by jurisdiction.

Japan's Payment Services Law defines Bitcoin as legal property. Cryptocurrency exchanges operating in the country are required to collect customer information and details related to transactions. China has banned cryptocurrency exchanges and mining within its borders. In December, India was reported to be developing a structural framework for cryptocurrencies.

Cryptocurrencies are legal in the European Union. Financial derivatives and other products that use cryptocurrencies will need to qualify as “financial instruments”. In June 2021, the European Commission published the Crypto Asset Markets Regulation (MiCA), which establishes regulatory safeguards and lays down rules for companies or providers providing financial services using cryptocurrencies.

In the United States, the largest and most complex financial market in the world, crypto derivatives such as Bitcoin futures are available on the Chicago Mercantile Exchange. The Securities and Exchange Commission (SEC) has stated that Bitcoin and Ethereum are not securities.

Are cryptocurrencies a safe investment?

Cryptocurrencies have gained a reputation as a volatile investment due to high investor losses through fraud, hacks, and mistakes. While the underlying cryptography is generally secure, the technical complexity of using and storing crypto assets can present some challenges for new users.

Risks when investing in cryptocurrencies.

• Human factor: Unlike traditional finance, there is no way to reverse a transaction when sending cryptocurrency. By some estimates, about a fifth of all bitcoins are now inaccessible due to lost passwords or wrong sending addresses. Therefore, in the process of transferring cryptocurrency, you need to be extremely careful.
• Regulatory risks: The regulatory status of some cryptocurrencies is still unclear, and many governments seek to regulate them as securities, currencies, or both. A sudden tightening of regulatory measures could make it difficult to sell cryptocurrencies or cause prices in the market as a whole to fall.
• Counterparty risks: Many investors and merchants rely on exchanges or other third parties to store their cryptocurrencies. Theft or hacking of the exchange can result in the loss of all your investments. And although large exchanges pay serious attention to the security of their site and their users, we recommend that you do not store all assets on one site. The safest way to store cryptocurrencies is to store assets on “cold” crypto wallets.
• Programming risks: Many investment and lending platforms use automated smart contracts to control the movement of user deposits. An investor using one of these platforms assumes the risk that a bug or exploit in these programs could result in the loss of their investment.
• Cryptocurrency Fraud: Many investors, especially those who do not have sufficient experience in the field of cryptocurrencies, very often become victims of crypto scammers. Using various tricks and misleading users, scammers empty the accounts of gullible users.

This is only a part of all the risks that can be faced in the cryptocurrency world. Every novice investor in cryptocurrencies must consciously and responsibly approach both the investment process and information preparation.

Despite these risks, the prices of cryptocurrencies have rebounded significantly, with the total market capitalization rising to over $1 trillion.

Despite the speculative nature of the asset, some have been able to create significant fortunes by taking on the risk of investing in cryptocurrencies early on.

Advantages and disadvantages of cryptocurrency

Cryptocurrencies were introduced with the intention of revolutionizing the financial infrastructure. However, as with any revolution, there are trade-offs. At the current stage of development of cryptocurrencies, there are many differences between the theoretical ideal of a decentralized system with cryptocurrencies and its practical implementation.

Consider some of the pros and cons of cryptocurrencies.

pros

• Cryptocurrencies represent a new, decentralized money paradigm. In this system, centralized intermediaries such as banks and financial institutions are not needed to provide trust and control over transactions between the two parties. Thus, a system with cryptocurrencies eliminates the possibility of a single point of failure of the entire system, such as a large bank, which will cause a cascade of crises around the world, similar to the one caused in 2008 by the collapse of institutions in the United States.
• Cryptocurrencies aim to facilitate the transfer of funds directly between two parties, without the need for a trusted third party such as a bank or credit card company. Such decentralized transfers are secured using public and private keys, as well as various forms of incentive schemes.
• Since no third party intermediaries are used, cryptocurrency transfers between the two parties involved are faster compared to standard money transfers. Term loans in decentralized finance are a good example of such decentralized transfers. These loans, which are processed without collateral, can be executed within seconds and used in trading.
• Investing in cryptocurrencies can be profitable. Over the past decade, the value of the cryptocurrency markets has skyrocketed, reaching almost $2 trillion at one point. As of May 2022, Bitcoin was valued on the crypto markets at over $550 billion.
• The remittance economy is testing one of the most well-known use cases for cryptocurrencies. Currently, cryptocurrencies such as bitcoin serve as intermediate currencies to facilitate money transfers across borders. Thus, the fiat currency is converted to bitcoin (or another cryptocurrency), transferred across borders, and subsequently converted to the destination fiat currency. This method simplifies the money transfer process and makes it cheaper.

Cons

• Cryptocurrency is an anonymous way to transfer funds. However, there are some points that may refute this. All transactions leave a digital trail that can be decoded by agencies such as the Federal Bureau of Investigation (FBI). This opens up opportunities for governments or federal authorities to monitor the financial transactions of ordinary citizens. At the same time, there are enough examples when fraudsters stole large amounts of cryptocurrencies and covered their tracks by running cryptocurrencies through various systems that can hide this very digital trace. But such manipulations require certain knowledge and software, which is not available to ordinary citizens.
• Cryptocurrencies have become a popular tool among criminals to carry out nefarious activities such as money laundering and illegal purchases. The case of the dreaded pirate Roberts, who ran a drug marketplace on the dark web, is already well known. Cryptocurrencies have also become a favorite of hackers who use them for extortion.
• Theoretically, cryptocurrencies should be decentralized and distributed among many nodes on the blockchain. In fact, ownership is highly concentrated. For example, a study by the Massachusetts Institute of Technology found that just 11 investors owned approximately 000% of the skyrocketing value of bitcoin.
• One of the advantages of cryptocurrencies is that anyone can mine them using a computer with an Internet connection. However, mining popular cryptocurrencies requires a significant amount of energy, sometimes as much as entire countries consume.
• Although crypto-currency blockchains are highly secure, other crypto-stores such as exchanges and wallets can be hacked. Many cryptocurrency exchanges and wallets have been hacked, sometimes resulting in millions of dollars worth of "coins" being stolen.
• Cryptocurrencies suffer from price volatility. Bitcoin has experienced rapid ups and downs in its value, rising to $17 in December 738 before falling to $2017 in the following months. We are seeing volatility in 7, and the volatility of all cryptocurrencies will continue into the future. Thus, some economists consider cryptocurrencies to be a short-lived fad or a speculative bubble.

Some popular questions about cryptocurrency

How to buy cryptocurrency?

Any investor can purchase cryptocurrency on popular crypto exchanges, such as Binanse, Coinbase, Okex and many others. On many exchanges, it is possible to purchase cryptocurrency using a bank card.

Another popular way to invest in cryptocurrencies is financial derivatives such as CME bitcoin futures or other instruments such as bitcoin trusts and bitcoin ETFs.

What is the meaning of cryptocurrencies?

Cryptocurrencies are a new money paradigm. Their purpose is to optimize the existing financial architecture to make it faster and cheaper. Their technology and architecture decentralize existing monetary systems and allow participants in transactions to exchange value and money independently of intermediary institutions such as banks.

Can I generate cryptocurrency myself?

Cryptocurrencies are generated by mining. For example, Bitcoin is generated by bitcoin mining. The process involves downloading software containing a partial or complete history of transactions that have taken place on its network. While anyone with a computer and an internet connection can mine cryptocurrencies, the energy- and resource-intensive nature of mining means that the industry is dominated by large firms.

What are the most popular cryptocurrencies?

Bitcoin is by far the most popular cryptocurrency followed by other cryptocurrencies such as Ethereum, Binance Coin, Solana and Cardano. And there are also a number of other “altcoin” cryptocurrencies that are quite popular in the cryptocurrency world, but for many years the leader has been BTC - Bitcoin. It’s not for nothing that in the circles of crypto enthusiasts, Bitcoin received the nickname “grandfather”)

Are cryptocurrencies securities?

The SEC has stated that Bitcoin and Ethereum, the two largest cryptocurrencies by market capitalization, are not securities. He did not comment on the status of other cryptocurrencies.

Let's summarize. conclusions

• Cryptocurrency is a form of blockchain-based digital asset that is distributed across a large number of nodes. This decentralized structure allows them to exist outside the control of governments and central authorities.
• Some experts believe that blockchain and related technologies will disrupt many industries, including finance and law.
• The benefits of cryptocurrencies include cheaper and faster money transfers and decentralized systems that do not collapse at a single point of failure.
• The disadvantages of cryptocurrencies include their price volatility, high energy consumption for mining, and use in criminal activities.

Investing in cryptocurrencies and other Initial Coin Offerings (“ICOs”) is very risky and speculative, this article does not constitute a recommendation by the author to invest in cryptocurrencies or other ICOs. Since each person’s situation is unique, before making any financial decisions, you should always weigh the pros and cons and approach the issue of investing in cryptocurrencies responsibly.

From the author