The Searing World of Cryptocurrencies

by | Apr 29, 2022 | Blog, Crypto

Anyone who follows the crypto market, even from afar, has been surprised by the ups and downs of cryptocurrency. Many have become relevant and popular with investors. But what is a cryptocurrency anyway? How do these assets work, and the benefits of trading with them?

This is a  guide for those who want to take their first steps in the world of cryptocurrencies and need to know where to start.

What are Cryptocurrencies?

First, it is important to know that it is a new asset class in the market and, precisely for this reason, it raises many questions for those who are still learning.

A cryptocurrency is a type of money, like other currencies we live with daily; the difference is that it is entirely digital. In addition, it is not issued by any government (as is the case with euros or dollars, for example).

But how is this possible? What email did with information, cryptocurrencies will do with money. Before the Internet, people depended entirely on the post office to send a message to someone somewhere else. You needed a middleman to physically deliver it. The same will happen with virtual currencies in the future. With them, you can transfer funds from A to B anywhere without ever relying on a third party for this simple task.

Although Bitcoin was the first digital currency, the concept of cryptocurrency has been around for many years. According to the Bitcoin.org website, cryptocurrencies were first mentioned in 1998 by Wei Dai. He suggested using cryptography to control the issuance and transactions of a new kind of money. This would prevent the need for a central authority, as is the case with conventional currencies.

What Are They Used For

Cryptocurrencies can be used for the same as physical money. Their three main functions are: to serve as a medium of exchange, facilitating commercial transactions; to be a store of value for the preservation of purchasing power in the future; and as a unit of account.

Although currencies like Bitcoin have not yet acquired the status of a unit of account because of the high volatility to which their prices are subject for the time being, there is the expectation they will be mass adopted in the near future.

What is Mining?

Digital currencies represent a complex code that cannot be altered. The transactions made with them are protected by cryptography.

Since no central authority keeps track of these transactions, they need to be recorded and validated by a group of people who, with their computers, record them on the blockchain.

The blockchain is a huge record of transactions. It is a public database that contains the history of all transactions made with each cry´tocurrency. For example, every new transaction – a transfer between two people – is verified against the blockchain to make sure that the same tokens have not previously been used by someone else.

The people who record the transactions on the blockchain are the so-called miners. They use their computers to enable the processing power to make these records and check the transactions made with the coins – in exchange for which they are paid with new units of the coins.

Cryptocurrencies are created as the thousands of computers that form this network manage to solve complicated mathematical problems that check the validity of the transactions.

Therefore, mining creates new units of some types of digital currencies. If more computers are used to increase the processing power for mining, the mathematical problems that need to be solved become more complex. This is precisely to limit the mining process.

Cryptocurrencies are designed to replicate gold or other precious metal extraction from the Earth: only a limited and previously known number can be mined.

How the Price Variation Works

The price of digital currencies changes according to the law of supply and demand. When cryptocurrencies gain more attention, they tend to be more in demand by investors, which increases the volume of purchases and, consequently, makes prices rise.

Because it is still a small market, few cryptocurrency transactions can significantly impact the prices. In just three months in 2017, for example, the cost of Bitcoin jumped from around $4,370 to $13,800. A year later, it had already retreated again to $3,500.

Top Cryptocurrencies

Although Bitcoin is the best-known digital currency – the two words are often taken as synonyms – there are many other types with distinct characteristics.

Bitcoin

Bitcoin (BTC) is the most popular of the cryptocurrencies. It is the first decentralized global payment system. It was designed in 2008, amid the global financial crisis that began in the US mortgage market, to replace paper money and eliminate the need for banks for intermediate financial transactions.

 

According to Bitcoin.org, Bitcoin’s first specification and proof of concept were published in an article signed by Satoshi Nakamoto, the pseudonym of an as yet unidentified programmer (or group of programmers). He invented the working logic of the blockchain.

Nakamoto established that there will be 21 million bitcoins in circulation and estimates that the last coin will be mined in 2140.

Bitcoin Cash

Bitcoin Cash (BCH) is a newer version of the original Bitcoin. It was developed to improve the first currency, which had high fees and required an extended processing time between transactions.

The main difference is that BCH has a block size limit of 8 MB, much larger than Bitcoin’s 1MB. As a result, transaction confirmations can occur more quickly and at lower rates. This gives it even greater scale than its predecessor.

Users who had Bitcoins received the same amount of BCH in their wallets when it was created. The rules of operation are similar to those of the original asset, with a limit of 21 million coins.

Ethereum

Bitcoin and Ethereum (ETH) are similar; Bitcoin was called Ether; in 2016; however, a hacker found a flaw in the system, and $50 million in Ether were stolen.

Faced with doubts about the currency’s future, the community that maintained it created a new, different network.

Ether, which was the target of the theft, was renamed Ethereum Classic, and the coin that started circulating on the new network was named Ethereum. With the community’s support, it is worth more than its first version.

Initially, Ether was not created as a digital currency. The idea was that it would be an asset to reward developers for using the Ethereum platform, a decentralized platform used to execute “smart contracts,” which are transactions performed when certain conditions are met.

Blockchain is also the basis for validating Ethereum transactions to ensure security and prevent fraud. As with Bitcoin, creating new currencies is based on the mining process. Currently, Ethereum is one of the most traded cryptocurrencies in the world.

Dogecoin

Dogecoin (DOGE) was born as a meme. The meme is based on the Doge meme, which surged in 2013, and consists of a picture of a Shiba Inu, to which grammatically incorrect phrases are added. Over time, it has evolved, but it’s still a Shiba Inu dog with funny sayings.

The Dogecoin was created in December 2013 by Billy Markus, a programmer, and former IBM engineer. Markus wanted to create an alternative to Bicoin. The name of the cryptocurrency came directly from the meme, and the image of the dog is used in the images used to illustrate the currency.

Dogecoin is based on Litecoin, and it operates similarly to that of other cryptocurrencies: a program is needed to solve the algorithms with which it is mined. Just like Litecoin, Dogecoin also uses a cryptographic program called Scrypt, which allows it to be mined faster.

This speed is also present in transactions, meaning that payments through this cryptocurrency can be faster than those you make with other cryptocurrencies.

Tether

Tether (USDT) was launched in 2014 by a company of the same name; it is a stablecoin since it is backed by a physical currency. Its purpose is to maintain parity with the US dollar. In other words, for every Tether issued, there must be an equivalent dollar in cash.

However, since the cryptocurrency was created, experts have questioned the parity, as the company offered no transparency on how it did to track it. In 2019, it was announced that not all Tether is backed by a dollar. However, according to the company, 100% of them are backed by traditional currency and cash equivalents.

The main characteristic of Tether is that it is a stable currency that represents physical currencies in the digital world. Due to its lower volatility has become a good option for making transfers between systems and with different cryptocurrencies. Thus, investors can protect themselves from the price variations of other assets and avoid the risk of incurring significant losses during these transactions.

Tether is predominantly traded on Bitfinex, a cryptocurrency exchange with shareholders and executives in common with Tether (the company that owns the currency). Nevertheless, it has been involved in major controversies.

Ripple

Ripple (XRP) is a payment protocol that was created in 2011, and the currency of this system is XRP. One feature of the Ripple platform is to support other tokens representing traditional currencies and even other assets on its network. The idea is that the system allows for secure and instantaneous payments.

The brainchild of developer Ryan Fugger, entrepreneur Chris Larsen, and programmer Jed McCaleb, Ripple was created in 2012. It is not just a coin but a system in which any currency – including the most well-known cryptocurrency, Bitcoin – can be traded. To some extent, Ripple’s operation resembles that of banks to some degree, in that it accepts various assets and makes it easier to conduct transactions.

Because of this, Ripple goes against the grain of the discourse on digital currencies in general, which have as an ideal the non-dependence on traditional financial systems to carry out transactions. Also, Ripple has no mining process.

Litecoin

Litecoin (LTC) was launched in 2011 with many similar characteristics to Bitcoin. The main difference lies in the mining process, which seeks to reduce the time required to verify transactions to make it easier for anyone wanting to create new Litecoins.

Because of its faster transaction processing, Litecoin is considered a better alternative for conducting day-to-day transactions.

Advantages and Risks of Investing in Cryptocurrencies

Cryptocurrencies are current assets with a very sophisticated logic of operation. For this reason, there are still many people seeking to better understand how to work with them.

Digital currencies definitely have some advantages over physical currencies and other means of payment like:

  • Freedom of payment: With cryptocurrencies, you can instantly send or receive any amount.
  • Low fees: Currently, payments made with digital currencies are processed with low or even exempt fees. There are charges if users want to have faster confirmation of transactions by the system. For commerce in general, there are specialized services where sales processing and value transfer are performed daily and at lower costs than traditional methods.
  • Security: Cryptocurrency payments can be made without linking the user’s personal information to the transaction. This offers strong protection against identity theft. Also, the user can protect the money with backups and encryption.
  • Transparent: All information about the supply of cryptocurrencies is available on the blockchain to anyone. No one and no organization can control or manipulate the digital currency protocol because it is encrypted. Cryptocurrencies’ core is recognized as reliable because it is neutral, transparent, and predictable.

Those who bet on the digital currency market, on the other hand, need to be aware of several details that are specific to this segment. Some of them are:

  • Degree of acceptance: Since a relatively small number of people know and – even fewer – use digital currencies, not every establishment accepts this form of payment.
  • Volatility: Major price adjustments are standard in digital currencies. This happens precisely because cryptocurrencies are slowly gaining visibility, attracting many new users and overvaluing their assets.

Such adjustments resemble traditional speculative bubbles: overly optimistic press coverage causes waves of novice investors to put upward pressure on the cryptocurrency’s price. The exuberance then reaches an inflection point, and the price finally plummets.

While some analysts are skeptical of this behavior, others believe that the maturation of the market and the system will reduce volatility over time.

  • Security: If users are not careful, they can risk “erasing” or losing their currencies. If the digital file gets lost, the money is lost, in the same way as with hard paper money.
  • Wallets: Digital currency wallets can always be protected by encryption, but it is up to the user to activate them. If a user does not encrypt his wallet, malware can steal cryptocurrencies. Similarly, digital currency exchange houses need to protect themselves from the action of hackers – news about thefts happens eventually.

This is a brief introduction to the surge and current state of cryptocurrencies and how they are changing the paradigms of financial markets. This, in turn, is changing how everyone understands assets and daily transactions. The importance of the role of these cryptocurrencies will grow with time and the aim of crypto experts is for them to be mass adopted along with the blockchain and the metaverse.

 

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