What is cryptocurrency and how does it work? Distinctive features, pros and cons
Cryptocurrency is virtual money, which, unlike fiat funds, has no physical expression. The unit of such currency is “coin”.
The digital currency is protected from counterfeiting and duplication, and its quantity and issue are strictly limited, for example, for the largest cryptocurrency Bitcoin (BTC), the maximum amount is 21 million coins (i.e., more than 21 million BTC will never be created).
The key feature of cryptocurrencies is decentralization — the absence of any internal or external administrator. Therefore, banks, tax, judicial and state authorities cannot influence the transactions of users of crypto assets. This is possible because all data with cryptocurrency wallets and transactions are stored in the blockchain.
How you can get cryptocurrency:
- Buying cryptocurrencies. The most affordable and easiest way to purchase a digital currency for rubles or dollars is to buy it on a cryptocurrency exchange. The exchange rate of cryptocurrencies on exchanges is more profitable than in exchangers and wallets. The most reliable platform with the largest turnover, for 4 years in a row, the largest crypto exchange in the world is Binance, the platform supports transfers in rubles from Visa/MasterCard bank cards and QIWI, Advcash, Payeer payment systems.
- Classic mining. Miners provide the hashrate of their ASICs, video cards and processors to obtain cryptocurrencies by using the computing power of mining equipment. Starting in 2018, this option of mining BTC is unprofitable for the average user, giving way to a more flexible and profitable cloud mining.
- Cloud mining. The most profitable way to get bitcoins in the long run. It is a lease of the capacity of a cloud mining service in the form of a contract for a year. All the cryptocurrency extracted by this power gets to your account. The income depends on the exchange rate and the increasing complexity of the network. Be careful, there are a lot of scam sites and pyramids among cloud mining services, you can only trust time-tested platforms, there are not so many of them on the market.
Key characteristics of cryptocurrency:
- Cryptocurrencies are not based on trust. Systems that manage cryptocurrencies do not require trust, they do not involve third parties. They replace trust with verification. In a p2p network, assets are fully controlled by each participant and transferred between them directly without the approval and control of a governing body (for example, a bank).
- Cryptocurrencies are unchanged. By its nature, blockchain technology makes cryptocurrency transactions immutable. They cannot be canceled, delayed, duplicated, hidden or changed. In such a system, it is impossible to cheat in the usual way, and it is protected from human errors, which makes cryptocurrency infinitely more transparent than simple electronic money in a bank.
- Cryptocurrencies are decentralized. In cryptocurrencies, new coins are systematically and transparently created by the system. Take bitcoin: its infrastructure guarantees that only 21 million units will ever exist. Now compare this with the “printing” and depreciation of fiat currencies, such as dollars and euros, with the light hand of governments and central banks.
- The openness of the code. Thanks to this feature, anyone can mine virtual coins. Despite the complexity of the process, many people still earn their living this way.
- Anonymity. Unlike classic electronic money, transactions with which are easily tracked, it will not be possible to get information about the owner of a cryptocurrency wallet. Only the wallet number and limited data on the amount on the account are available.
- Decentralization. Cryptocurrency is an independent monetary unit. No one regulates its issue and does not control the movement of funds on the account. It is this feature that attracts many Network participants, but as a rule, the cryptocurrency is issued in a limited volume, which eliminates the risks of inflation due to excessive activity of the issuer.
- Reliability. Hacking, forging or performing other similar manipulations with virtual currency will not work — it is reliably protected.
- No guarantees. Each user is personally responsible for their savings. There are no regulatory mechanisms here, so in case of theft, it will not be possible to prove anything and return the money.
- Volatility. Cryptocurrency is unpredictable, because it depends on the current demand, which, in turn, may change against the background of changes in legislation, current opinions and other factors. For this reason, there are fluctuations in the price of virtual money.
- The risk of prohibition or restrictions. Government agencies are wary of cryptocurrencies. Many countries have imposed restrictions on its use, and violators can run into a fine or even jail time. At the same time, a number of European states are still on the way to finding a compromise on the use of such money.
- Danger of loss. The “key” to access electronic money is a special password. If you lose it, the cryptomonets in the wallet become unavailable.