Top Questions About Cryptocurrency — Newbies Need to Know Answers
Сryptocurrency interest continues to grow, so more and more newcomers are appearing in the digital money industry. We understand that there is more and more information about cryptocurrency. So, we collected together the most common questions about digital assets and provide the most comprehensive answers to them.
What is Cryptocurrency?
There are over 2,000 different cryptocurrencies, and new ones are being developed every day. Many could invest in cryptocurrency on time and now receive passive income. But some have just started to interest in digital assets. Let’s figure out what cryptocurrency is.
Cryptocurrency is a digital currency or a digital payment system that uses an online ledger with strong cryptography to secure online transactions and does not use banks to verify them. It is a peer-to-peer system that allows anyone, regardless of location, to send and receive payments. This is not physical money, but we can exchange them online for goods and services.
Today companies issue their tokens as digital records in an online database to carry out specific transactions and sell their services and products.
Encryption is used to verify transactions using cryptocurrency. When transferring funds in cryptocurrencies, it recorded transactions in open registers. Cryptocurrency is stored in users’ digital wallets, and it is well protected. For its storage and data transmission, encryption algorithms and cryptographic techniques that safeguard these entries are used.
Since cryptocurrency uses a technology called blockchain, it would be logical to answer the next question.
What is Blockchain?
Blockchain interest has grown along with the popularity of cryptocurrencies. Blockchain seems complicated for newbies. But its central concept is rather simple. It is modern technology, a specific type of database, a continuous blockchain that contains all the records of cryptocurrency transactions. We can store different information on it, but the most general is transactions. A fresh block appears when new data comes into the blockchain. This block will then also be added to the chain once filled with transactions. The fundamental difference from conventional databases is that you cannot change or delete these records, you can only add new ones.
In cryptocurrency’s case, we use it in a decentralized way. No administrator, single person, or group has control of the blockchain. Transactions are constantly recorded and visible to any user.
Technology cannot change anything, but the technological solutions implemented on its basis can have a global impact. Cryptocurrency is a completely new financial instrument that allows you to make mutual settlements without going through the banking system. Like any innovation, cryptocurrencies have some unresolved issues, for example, high volatility, and other risks.
What are the top cryptocurrencies?
Now it is hard to name the exact number of cryptocurrencies. New tokens appear constantly, and some actual ones do not find the popularity and cease to exist. Among the most famous besides Bitcoin, which appeared in early 2009, Ethereum, Ripple, Litecoin, Dash, and Monero. Let’s talk briefly about each of them.
This first and decentralized digital currency has the status of the most popular digital currency in the world. According to the official version, Satoshi Nakamoto came up with the idea to create an electronic payment system based on mathematical calculations. This is how the first Bitcoin appeared in January 2009. The live price of BTC is available with price history, charts, the latest news, and an analysis of the cryptocurrency market.
A decentralized authority operates Bitcoin offers lower transaction fees. All transactions are verified by a large amount of computing power. There are several ways to become the owner of bitcoins — buy them in exchange for real currency, receive them as a reward for the work performed, or using mining.
ETH appeared in 2015. This is the second-largest cryptocurrency in terms of capitalization, which has not lost its position for many years. It is a decentralized software platform that allows you to build and run decentralized applications (DApps) and smart contracts. This means that a smart contract can “take the form” of any object.
Another advantage is that the amount of ether is unlimited. There are also miners here who mine the cryptocurrency, blockchains that store information about transactions. We store Ethereum blockchains on each user’s computer, so it is impossible to make fake records. At the time of this writing, Ethereum cost was 2510.56 USD.
XRP technology is a centralized cryptocurrency created by Ripple Labs in 2015. The market capitalization is $30 billion. XRP is powered by the RippleNet digital payment platform and allows financial institutions and banks to leverage the power of blockchain technology to improve cross-border transaction systems. Using this technology, they can make mutual transfers anywhere in the world in just a few seconds.
Litecoin is a peer-to-peer (P2P) cryptocurrency and a public blockchain. Former Google and Coinbase engineer Charlie Lee launched it in late 2011. Litecoin is an alternative cryptocurrency based on the model of Bitcoin. It uses a PoW mining model to prioritize fast transaction speed and efficiency. Even consumer hardware can mine Litecoin. Anyone can use Litecoin to make cross-border transactions, speculate on its price, store it, and make payments. At the moment, the cost of the cryptocurrency is 139.02 USD.
DASH is an open-source blockchain and cryptocurrency. The principal goal is to provide a cheap and fast global network of decentralized payments. They launched DASH cryptocurrency in 2014. Now the price is over $150.
Monero is open-source software. This is a privacy-focused currency created in 2014. The Monero (XMR) cryptocurrency was created based on the ByteCoin token blockchain. This currency is also decentralized and can be used to trade using blockchain technology. Monero’s blockchain is intentionally configured to be opaque. It makes transaction details anonymous. The creators of Monero have developed a dynamic block system. The system allows you to confirm transactions quickly and keep fees on the network low, so as not to create transaction queues.
How was cryptocurrency created?
Cryptocurrency does not exist by itself and appears in mining. This is a process in which many users of a single system select a specific cipher, which is a cryptographic key.
Cryptocurrency mining cannot be blocked, transactions cannot be reversed, and all data is stored in a shared database. Here, blocks are used that arise in the process of creating, for example, bitcoin. The complete process ensures total anonymity. Therefore, it is impossible to trace the chain of transactions.
The value of cryptocurrency lies because it exists in a decentralized system. Digital assets are not tied to any country and are very difficult to steal directly.
What is mining?
Any cryptocurrency is a decentralized network of transactions for the exchange of assets. To create such a network requires the use of computing power and the involvement of certain resources. This is mining — a way to get a virtual cryptocurrency.
Users make all calculations for the operation of the network. There is a cryptocurrency emission algorithm: Proof of Work (PoW), Proof of Stake (PoS), Proof of Capacitу (PoC).
The most popular is PoW consensus. Often, investors build big factories for mining, most of which are in China today. PoW mining is profitable only in countries with cheap electricity. With PoW conception, the miner’s income will depend on the number of blocks connected to the chain. Every day, using PoW is becoming more and more difficult. PoW is monitored by hashes rating. If attackers control over 50% of the hash rate, they exposed the cryptocurrency to a cyberattack. New cryptocurrencies use PoW and PoS. These emission methods are more energy efficient.
Mining is a way of making money on cryptocurrency, receiving rewards for closing a block on the chain. There is an element of risk here because of the high volatility of cryptocurrencies. But the payback comes in a few months.
What is cryptocurrency trading?
Crypto trading is one of the principal ways to make money on cryptocurrency. Trading in cryptocurrency tokens has insignificant differences from trading in value stocks, metals, or currencies. The primary task is to buy as cheaply as possible, sell at a higher price. The difference between the buy rate and the sell rate of the token is the trader’s profit.
The main difference between cryptocurrency trading and the stock market is the high volatility of the exchange rate.
Many traders dream of a return of thousands of percent on a trade. Fast trades with high returns are common for crypto trading.
For successful trading, a crypto trader must:
- learn how to analyze the cryptocurrency and its trading volume;
- track the trading history;
- use charts and encoding;
- finish transactions.
Based on the knowledge gained, it is possible to conclude the cryptocurrency profitability, predict its movement and make a profitable deal.
Why is cryptocurrency so volatile?
In the traditional stock market, the basic meaning of the term volatility refers to a statistical measure of the fluctuations in the price of an asset. Volatility is the rate at which an asset price changes. For traders, the volatility of cryptocurrencies is most important.
Cryptocurrencies have high volatility, so they quickly and aggressively rise and fall in value. Also, crypto traders are interested in the expected volatility of crypto assets. This is a forecast of the future price behavior of a particular token. Understanding the volatility of crypto assets is vital. It reflects the risks that financial investments in a particular asset. Cryptocurrencies are the riskiest asset. By investing in it, you can get rich, or lose all your savings.
Cryptocurrency price changes do not happen spontaneously. At the same time, the volatility of the cryptocurrency can be influenced by:
- news in the media;
- the crypto decentralization;
- dumps and pumps on crypto exchanges;
- the lack of proper security for crypto assets;
- the lack of real value.
The most volatile cryptocurrencies are Bitcoin, Litecoin, Ethereum, Dash, Ripple.
In 2020, investors appreciated cryptocurrencies and viewed them as a risk-hedging tool and a profitable investment for the medium and long term. Cryptocurrency remains a high-risk, volatile asset. But with some knowledge, such investments can bring profits quickly.