Is cryptocurrency a “bubble” or new money that will disrupt our financial system?
Understanding the basics: cryptocurrency definition and main concepts
What is cryptocurrency? In one phrase, it’s a digital means of payment and exchange, based on the blockchain technology and cryptography. Each of them is essential for making financial transactions. Any cryptocurrency stands on three main principles: decentralization, immutability, and transparency.
- Decentralization means that cryptocurrency is not issued by any central bank and therefore no government can control it.
- Immutability implies that no crypto transaction can be modified or deleted after it was verified and added to the ledger.
- Transparency means that all the transactions are available for viewing by all the network participants, though they are not linked to your real-life ID.
Cryptocurrency allows two users (sender and recipient) to move money in a peer-to-peer way, without any intermediaries like banks or payment systems. If you send money through a bank, the record about the transaction is made in the centralized database that theoretically can be changed, deleted, damaged, stolen or passed to authorities.
Distributed ledger vs a central database
When you send cryptocurrency through a blockchain system, the record is verified by miners and added to the internet-based distributed ledger, each user storing a copy of it on his or her device. This ledger is not controlled by any central body, meaning no record can ever be tampered with. Due to its decentralized (distributed) nature, a blockchain system is extremely hard to compromise. Basically, it means no government, or bank, or hacker can take your money.
The first cryptocurrency named Bitcoin was invented by Satoshi Nakamoto 10 years ago, as a solution to the financial crisis of 2008, when banks lost huge amounts of money the investors had trusted them with and left many households and businesses ruined.
Today, the term “Bitcoin” is familiar to most people: even those who lack a basic understanding of cryptocurrency, seek to invest in it in hope of fast and quick gains. By this article, we want to tell you about everything a crypto user needs to know to avoid common mistakes.
How cryptocurrency works: The fundamentals
Satoshi, the inventor of Bitcoin, had a goal to develop “a peer-to-peer electronic cash system”. He described the basic principles of its work in the White Paper (the project documentation). If you have no time for reading it, here is an explanation “for dummies”. Let’s see what crypto transactions look like, who issues new coins and how they are different from our ordinary money.
Cryptocurrency transactions: Trust without a central authority
To make a cryptocurrency transaction (to send or receive digital money from another user) you both have to be the members of the same blockchain network. The natural question would be “How you know that your peer can be trusted, considering that all transactions are irreversible?” In a bank, this trust is ensured by a central authority, which keeps records and makes sure the balance is correct. In a blockchain network, this consensus is achieved by every peer having their copy of all records, validated my miners.
Cryptocurrency vs tokens
Although tokens and cryptocurrency behave largely in the same way, they are not a the same entity.
Cryptocurrency coins such as Bitcoin and Ehtereum are a means of value exchange over a decentralized network while tokens exist to create an incentetive withing a particular project.
Companies also use tokens during ICOs to raise funding.
Tokens are either securities or utilities. Security tokens fall under a lot of regulation while utility tokens exist in a gray market.
If you are interested to learn more about tokens, ICOs and the economy of cryptocurrency projects, check out our utility tokens vs security tokens guide.
How cryptocurrency is different from traditional money
There are three distinctive differences, and all are rooted in the decentralized and digital nature of crypto.
- Cryptocurrency has no material representation: you cannot cash your digital coins, as these coins only exist as cryptographical records. There are some BTC coins but they are just collectibles, not something you may use in a store. Traditional money may be represented by banknotes and coins, though this format is decreasing in popularity.
- Cryptocurrencies are issued by the network itself: this fact makes them totally different from fiat money, issued and controlled by a government. New coins are made through a process called “mining” that will be explored later in the article.
- There is a limited amount of digital coins: for instance, the total supply of Bitcoins is 21 mln BTC, and there never be more. The limited supply helps avoid inflation, that would be possible if the issuers were permitted to increase the number of coins at their own will. In the case of a fiat currency, the government in control is free to print more bills in case of need.
- Private and public keys: cryptocurrencies are sent and received using Public and Private keys – a cryptographically matched unique key pair, each looking like a long row of random symbols. The public key is available to everyone, but the Private key must be kept secret if you want to control your digital money. The keys are related mathematically, and the information encrypted with one of them can be decrypted by the other. If you send X coins to your friend Jack, you use his public key to encrypt the transaction data, and he uses his private key to decrypt it.
Blockchain and cryptocurrency
What is blockchain, or distributed ledger technology (DTL)? Understanding its basics is important if you deal with cryptocurrencies. In this part, we will describe the way this tech functions.
The name of the technology combines two words (“block” and “chain”) reflecting its structure. Any blockchain represents a chain of blocks, each containing a group of confirmed transactions. Every block is cryptographically connected to the previous one. Let’s see how blockchain functions.
How blockchain works, seen by a user
When you make a transaction in a blockchain network (for instance, transfer 1 BTC to the address of A, who sells you his used car), it is put into the so-called memory pool (mempool), where it waits to be verified and confirmed by miners. When they complete this task, your transaction is added to the next block and becomes a part of the blockchain. The verification procedure excludes the risk of double-spending.
What is double-spending, and why verification is necessary
As the name suggests, “double-spending” refers to the situation when a user spends his or her coins more than once (say, sends the same coins to multiple recipients, as a payment). With a bank, this trick is made impossible as the amount already spent gets unavailable to you as soon as the payment is approved. In a blockchain network, there is no central control panel. Therefore, to prevent double-spending, any transaction must be verified before it is added to the ledger. The system needs to check if the cryptocurrency you send is not involved in another transaction. Once confirmed and finalized, a blockchain transaction cannot be changed or canceled.
How long it takes to confirm a blockchain transaction
The speed of a cryptocurrency transaction processing depends on the blockchain network parameters and the activity of its users. If too many people want to send their coins at the same time, a great number of unconfirmed transactions waits in line, and it makes things slower. Sometimes you can solve the problem by offering a higher commission for processing your transaction. Miners, enticed by a larger reward, make your task a priority.
For example, last September a mysterious user sent 94,504 BTC ($1.018 bln at that time), offering a fee equivalent to $700. If he (she?) had waited for 10 min, this fee would be 20 times lower than that. Some argue it was just a mistake.
What is cryptocurrency mining
Now it’s time to explain how crypto mining works. Even if you are not going to mine any coins, it’s essential to know the basics of the process. As we have said, a blockchain network’s smooth functioning depends on it.
Cryptocurrency mining, seen by a user
In a blockchain context, “mining” refers to the work made by crypto miners. They take transactions from the mempool, confirm them as legitimate (if everything is ok) and add them to the next block (a new group of confirmed transactions). After it, every node adds the block to its database, and your transaction becomes a part of the blockchain. For their work, miners are rewarded with some amount of the in-house cryptocurrency.
What miners do, exactly
Cryptocurrency miners provide their computing power to solve an extremely difficult math problem (so-called Proof-of-Work problem). It consists of finding a hash, product of the cryptographic function used for the given cryptocurrency. Without going deeper into technical details, miners have to guess a certain number at random, because it’s impossible to predict and add it to the new block. The time and the amount of computing power needed for “guessing” depend on the network difficulty, growing with every new block added to the chain. The total computing power the network’s miners possess is called hashrate of the network.
Mining pools vs solo miners
In a young network, with fewer blocks, you can mine cryptocurrency alone, using an office or home PC, or even a smartphone. When you are lucky to find a solution, you grab the whole reward per block.
To mine BTC and other popular coins that have been around for a while, you need very powerful and expensive hardware (ASICS, GPUs), adequate cooling equipment, enough room to place it all and a lot of electricity. As a result, solo BTC mining is not profitable anymore, and it would be wiser to join a mining pool. Pooling allows miners to combine their power for solving mathematical problems, and split the reward between all the participants. The collective approach sounds less exciting, but it is more profitable in the long run.
Mining reward and halving
Every few years, after a certain number of blocks is solved, the fixed reward is halved, making mining less profitable, as the number of available (not mined yet) coins decreases. When BTC was launched in 2009, the reward was 50 BTC per block. Now it’s 12.5 BTC, and by May 2020 it will go down to 6.25 BTC. This mechanism is called halving and invented to hold back crypto inflation. The increased difficulty of obtaining new coins makes them more scarce and valuable.
Cryptocurrency is often seen as a threat to conventional money. Instead, it should be considered its improved version. Let’s explain the reasons.
Why cryptocurrency has value
The haters argue that cryptocurrency is not backed by anything, as it has no material representation. But it is not true. It is supported by math, and its value is determined by the limited supply of coins and the amount of power spent for their extraction — like in the case of gold.
Despite being digital, it cannot be controlled
Traditional money is becoming less material with every year — for most of us, they have already turned into a row of numbers on a screen. They are just some data in a centralized database, that can be changed by people who run a bank, or stolen by hackers, or frozen on your account on a government’s request.
Crypto transactions and deposits are purely digital. But they are stored in decentralized ledgers that cannot be changed by anyone and are extremely hard to hack. Security and uncontrollability are the features that make cryptocurrency so attractive.
This revolutionary form of money has other properties that may be very useful, too.
Understanding cryptocurrency properties
Apart from security, cryptocurrency features:
- Immutability: when your transaction is confirmed and added to a block, it cannot be changed or reversed by no one, including yourself or the network team. The dark side of this benefit is the increased level of personal responsibility: careless attitude or ignorance may cost you a fortune, literally. If you commit an error, there will be no central authority to reach for help.
- Anonymity (Pseudoanonymity): no blockchain transaction is linked to any real-world identity. The viewers may only see the address the coins were sent to, which is just a chain of random characters. This trait makes skeptics believe that digital currency is a perfect financial tool for illegal trades, but many crypto transactions can actually be traced to real individuals if properly analyzed. The exception is some “privacy coins” like Monero, that offer 100% anonymity, but this very feature restricts the area of their use.
- Speed: unlike ordinary money, cryptocurrencies move fast and cross borders easily. A typical transaction is confirmed within minutes, even if you don’t offer any increased commission to miners. It doesn’t matter where in the world the sender and recipient are located, due to the global and P2P nature of blockchain. This cryptocurrency property appeals to migrant workers, travelers, entrepreneurs, freelancers and many other categories who deal with international money transfers regularly.
- Low fees: high transaction fees is one of the things we hate about banks, especially when sending money abroad. In a blockchain network, the fees are non-existent compared to what a bank or a payment system would charge for moving the equivalent amount in fiat. In a blockchain network, the size of the commission depends on the amount of data (and not the sum of money) sent.
Let’s refer again to the recent cryptocurrency transaction when an anonymous user sent almost $1 billion worth of BTC and paid a surprisingly big commission equivalent to $700. The community thought it was a huge overpayment. It would be hard to calculate how much a bank you take for $1 bln transfer, but if you send an amount under $10,000, a fee would be $15, more or less. And you will pay even more if the currency exchange is involved.
Cryptocurrency: Current state and perspectives
The properties of cryptocurrencies make them an attractive alternative to the existing monetary system. Therefore, the question arises if cryptocurrencies will replace real money. We believe they can, but there are some challenges.
Cryptocurrencies: Perfect solution for the unbanked
The digital money phenomenon has risen great enthusiasm all over the world. Launched 10 years ago as a financial tool for libertarian geeks, by now Bitcoin has penetrated the poorest African areas where people have no access to traditional banking services. Cryptocurrencies are also popular in the countries going through some political and economic turbulence, like Argentina, Venezuela, Chile or Hong Kong. Their citizens have more trust in BTC than in the government-issued money.
What interferes with cryptocurrency global adoption
Now, let’s have a look at the challenges that prevent the mainstream adoption of crypto:
- Controversial reputation: failed ICOs, scam projects: in 2017, cryptocurrency hype gave birth to many scam or dead-born projects. Their developers raised money through ICOs (Initial Coin Offerings) — special crowdfunding campaigns. Normally, startup owners offered their “baby-tokens” for fiat or BTC, promising the early investors would get multiple profits when the new revolutionary coin wins the world. About 80% of those projects failed. Many investors losing their money, cryptocurrencies started to be widely perceived as scammers’ tool, or a part of a get-rich-fast scheme — too risky for a respectable user.
- Lack of regulation: mainstream adoption largely depends on how cryptocurrencies are regulated, from the point of view of the law. On one hand, it may seem incompatible with the decentralized nature of blockchain. On the other hand, “normal users” are unwilling to deal with digital money if they are not sure it’s legal, or if the taxation of cryptocurrency deals is inconsistent and hard to understand.
The regulation issue splits the crypto community, some influencers saying it would be easier to operate within a clear legal framework, others arguing there’s nothing good in centralizing the decentralized.
- Volatility: it means their price may change greatly within a short period of time, and for no obvious reason. These days, there are over 2,300 various cryptocurrencies in the world, and most of them are still extremely volatile, compared to traditional money. This fact attracts risk-takers but scares all the others. Most people are not ready to invest in something so unstable, or store it, or get paid in it.
Despite all these challenges, cryptocurrency is a perspective financial multi-tool that can be used for everything we use traditional money for — and more.
What you can do with crypto
What can cryptocurrency be used for? Like any money, cryptocurrencies can be spent on goods and services, and there is no need to exchange them for “real money” for that. They can also be used as a speculation tool when traded on an exchange.
You can invest in cryptocurrencies, in hope of greater returns. Finally, you can mine cryptocurrencies — under certain conditions, it may be a good source of income.
Let’s see what things you need to start dealing with digital money, and explore each of its use-cases.
What you need if you deal with crypto: the essentials
- Cryptocurrency wallet: A cryptocurrency wallet is a special program used to store your private and public keys. It allows you to send and receive digital coins and view the balance as a banking app does. A wallet is a must-have for every crypto user. It may be hot or cold. Roughly, a hot wallet is internet-connected and serves for easy cryptocurrency use. A cold, or hardware wallet is not connected to the web and serves for secure storage of the bulk of your digital fortune.
- Account on an exchange: you need a cryptocurrency exchange account to sell and buy digital coins and convert them into other currencies, including fiat ones. Exchanges often provide a wallet, but in this case, you are not always in control of your funds.
- Special equipment: If you are going to become a cryptocurrency miner, you will need specific hardware. Depending on the coin, you may opt for GPUs (graphics cards) or ASICs. You will probably have to invest in cooling equipment because mining hardware normally produces a lot of heat. Also, you will need to install a miner – a special program, which makes mining possible and takes a certain percentage of your rewards.
How to spend crypto for goods and services
What can cryptocurrency buy? Theoretically, anything. You can spend it in different ways.
- Use a wallet
First, get yourself a wallet. It may be installed on your computer, or accessible from anywhere (so-called online wallet). A mobile wallet is very convenient, as it allows you to spend crypto using your phone.
- Connect your crypto to a debit card
Another way to spend cryptocurrency is to get it connected to a debit card: it will let you spend it the same way as ordinary money. There are multiple card options available for BTC and other popular coins. Note that both wallets and credit cards charge their fees.
- Shop in a crypto-friendly online store
You can spend your cryptocurrency directly in an online store, providing this payment option. Such stores may be using third-party payment processors, who charge their fees, so explore how the system works before you start. Among the websites, accepting crypto payments are Expedia (flights and hotels), Overstock.com (online retail giant), Fancy.com (all kinds of stuff for sale), NewEgg (gadgets), eGifter (gift cards), PizzaforCoins and Virgin Galactic (future space tourism).
- Buy network-provided services
If you earned some tokens within a certain blockchain ecosystem, you can exchange them for the paid services, provided by the platform itself. The ways to earn depend on the platform policy — for example, a reward may be offered for doing something good for the network community, or for contributing to its development, or just for complying with the rules.
Cryptocurrency exchange dashboard. Image courtesy of Anchor
How to invest in cryptocurrency
Cryptocurrencies may go up in value, meaning they are potentially a good investment. Currently, they should rather be seen as a short-term investment or speculation. To get involved in this game, get an account on a cryptocurrency exchange and follow the basic rules.
- Make sure your crypto exchange is secure and well-reputed
If you deal with an exchange, you trust it with your money. Choose your platform carefully, paying attention to its trading volume, reputation, history of hacks and the security features implemented. Read the reviews of other users to see how their support team deal with the problems and look for first-hand trading experience. Avoid the exchanges that don’t share the important details like their address, license, KLM/AML policies on their website.
- Don’t invest more than you can afford to lose
Theoretically, you can invest in a cryptocurrency and become rich if its price skyrockets. But remember that right now most coins are rather volatile. The rule of thumb is never to invest more than you can afford to lose. Try investing some part of your income in the digital coin that looks promising, and watch the price. When it reaches a certain point, it would be smart to convert your coins into something more stable like fiat money, or property.
- Explore your country’s cryptocurrency taxation policy
“Can cryptocurrency be taxed?” A good question to ask if you are going to sell your digital coins for fiat, or buy something in order to freeze their value. Cryptocurrency taxation laws may be rather complicated and inconsistent, depending on your jurisdiction. If you fail to understand them, consult a specialist to avoid legal consequences.
How to mine cryptocurrencies
Crypto mining may be a good way to ensure additional income. Every time a new block is solved, the lucky miner gets a reward, and if s/he operates in a mining pool, the reward is split between the participants. In this part, we will talk about how to make cryptocurrency mining profitable.
- Choose the right coin for mining
What is the best coin to mine? Your choice of a coin depends on the equipment you are ready to buy, and on if you are going to become a solo miner or join a pool. Pay attention to the price and market capitalization of the coin, it’s volatility and its overall popularity. If the coin is very popular, like BTC, ETH or LTC, too many people are already involved in mining it, and the difficulty of this process rapidly increases. Therefore, you will have to invest in expensive and powerful hardware, or join a mining pool. For a beginner, it makes sense to opt for a less popular (but not very volatile) coin that seems promising.
- Explore the affordable mining hardware options
Cryptocurrencies can be mined with ASICs (mining hardware units, customized for a certain mining algorithm), GPUs (graphics cards) or CPUs (processors). The main thing to note is that an ASIC unit is only suitable for one or several coins, based on the algorithm is used. Besides, some coins are made ASIC-resistant, like Monero or Vertcoin. The price and efficiency of mining hardware may vary greatly, search for users’ reviews to make a smart choice.
- Check if you need any additional equipment
Mining hardware may require additional things, like fans or power supply units. It means some extra costs. When you order a hardware unit, pay attention to what equipment is included.
- Consider the electricity costs in your location
Mining is a very power-consuming process, that’s why most big pools are located in China, where electricity rates are lower. If you live in a place where electricity is expensive, mining makes less sense. Or no sense at all.
- Use a mining calculator
Services like WhatToMine allow you to enter many parameters (electricity cost, network difficulty, coin market price and dynamics, hardware) to calculate the profitability of mining. It’s a very useful tool, especially for beginners.
How to buy cryptocurrencies
Cryptocurrencies are different — some coins you can buy with fiat currency like EURO or USD, and others are only available for purchase with BTC (or another digital coin). Also, cryptocurrencies can be converted into cash, using an exchange or a BTC ATM.
Main ways to buy cryptocurrencies
- Wallet: you can do it using a crypto wallet: it offers a currency exchange option, meaning you can buy a coin of your choice with digital or fiat money. A crypto wallet is often integrated with popular payment systems, and it charges a certain fee that would be wise to check beforehand. Currency exchange rates may vary, too.
- Exchanger service: another method to buy cryptocurrency would be through an online exchanger service, like Crypto Exchangers or Changelly.com. Everything is simple: you choose the currencies and amount of crypto you want to buy, and the system calculates how much you will pay. If you are ok with it, this sum is transferred from your banking account or e-wallet.
- Exchange: looking for a better exchange rate? Try to buy cryptocurrency on an exchange. For it, register on the exchange site, deposit some amount in your account, using a banking card, a terminal or an e-wallet, choose the cryptocurrency you buy and the amount desired and send the order (purchase claim). If everything is ok, the specified amount in crypto will soon appear in your exchange account.
It is not recommended to store your cryptocurrency on an exchange account permanently. Exchanges may have different levels of security, but in general, they ensure less protection than cryptocurrency wallets. Therefore, you’d better withdraw the bulk of your crypto from the exchange right after buying it.
How to store cryptocurrencies
Can cryptocurrency be hacked, and how to ensure its safety? The network itself is almost impossible to hack, but an irresponsible human is the weakest link in any blockchain. In this part, we will talk about the safe storage of cryptocurrency. Crypto is similar to cash — it’s easy to lose forever if you talk about it and leave it unattended.
- Keep your private key secret: never share your private key with anyone — neither online nor in real life. If you want to be the only owner of your digital money, keep it hidden. There are many tips to secure your private keys, and you’d better follow them.
- Diversify your funds between cold and hot storages: keep your cryptocurrency eggs in multiple digital baskets: your hardware wallet, your trading account on a secure exchange and your hot wallet (installed on your mobile, or computer, or both).
Cold or hardware wallets (Trezor, Ledger, CoolWallet, KeepKey, DigitalBox) look like a portable HDD. They are disconnected from the Internet, keeping the bulk of your funds out of reach of hackers. They require you to create a recovery phrase (“recovery seed”) that will let you get access to your funds even if the device is damaged, stolen, ruined, or lost.
Other ways to store cryptocurrency are less safe, though in every case the level of security depends on the platform or app you use.
- Take the recommended security measures
Protection of your cryptocurrency is your own responsibility, take it seriously. If you use a desktop wallet, install good antivirus software (not freeware!), and create backups. If you are a trader, opt for a secure crypto exchange, which implements all the necessary measures. Don’t send your recovery seed to anyone, through any online-connected device. Last but not least, don’t discuss your cryptocurrency-related activity with people you don’t know well, or in social media.
Why you would transfer cryptocurrencies
You can send crypto to another user, or accept it as payment. Can cryptocurrency be traced and is it possible to see who transferred money to whom? And why would you want to transfer crypto and not ordinary money in the first place? Here are a few possible reasons.
- The recipient is unbanked or located in an unbanked area: in this case, to transfer cryptocurrency would be the only possible way to send them money without paying a huge commission to a payment system like Western Union. In some areas, such payment systems don’t operate at all, because of economic sanctions or other unfavorable conditions.
- The recipient stays in another country: if you want to avoid rather big (and sometimes hidden) fees, related to multiple currency exchange and other cross-border procedures, transfer cryptocurrency. In a blockchain network, there are no intermediaries, each claiming their share. The only price you pay is a really small commission for processing your transaction, and it does not depend on the amount you transfer.
- You need the payment to arrive fast: transferring cryptocurrency is a matter of several minutes. It’s the time miners need to solve the next block. If you send money abroad through a bank, the process may take up to several days.
Understanding cryptocurrency: legal issues
Are cryptocurrencies legal to use? Many beginners who would like to use crypto but are not sure if it is against the law, ask this question. The use-cases and taxation issues depend on the legal status of cryptocurrency in your state, and on your government’s attitude. Below are some examples.
Used to be rather unfriendly to crypto (though the ban of crypto exchanged didn’t prevent many citizens from actively investing in BTC). Now, this attitude is changing: the President of China recently called for blockchain development. The cryptography law is to come into effect soon, meant to create a clear legal framework that should attract blockchain startups.
In the States, cryptocurrency has a legal status of an asset, and not money. Therefore, if you exchange your BTCs for dollars or other fiat currency, you will pay long-term or short-term capital tax, depending on how long you have been holding them. If you buy something with crypto, it is seen as a barter.
Here, cryptocurrency has been seen as a type of virtual money since March 2016, when the relevant law was approved and came into effect. The official recognition of digital money meant that the Financial Services Agency created clear standards for its use.
The most crypto-friendly countries
Apart from Japan, they are Estonia, Malta, France, Germany, Argentina, Israel, Canada, Switzerland, and Slovenia. Some of these states seek to strictly regulate and control the blockchain sector, and others provide a relaxed regulatory climate, with pleasant taxation rates.
The countries, hostile to digital money
In some states, cryptocurrency use is utterly prohibited and may lead to a serious penalty, like imprisonment. The biggest enemies of digital coins are Afghanistan, Pakistan, Algeria, Bolivia, Bangladesh, Saudi Arabia, and Vietnam.
Countries that restrict cryptocurrency use
Sometimes the usage of crypto is not utterly banned, but legally restricted or “not recommended”. The governments normally issue special bills, warning the citizens against cryptocurrencies, presented as a Ponzi scheme (a financial pyramid) or a scam project designed to fool naive people and take their life-long savings. Often, banks and other financial institutions like exchanges are not allowed to deal with cryptocurrencies. These “skeptical” countries are India, Nepal, Ecuador, Indonesia, Morocco, Egypt.
The major legal concerns
These days, the biggest problems regulators seek to resolve are related to cryptocurrency taxation (may be too sophisticated and difficult to understand), ICO/ISO rules and money laundering/terrorism prevention.
List of cryptocurrencies
What is cryptocurrency and Bitcoin? If we talk about cryptos, able to operate independently, they fall into two big categories — BTC and altcoins (all the other coins, as the name suggests). Bitcoin staying the most important cryptocurrency, there are other coins which are having a significant impact on the global crypto landscape. Let’s see the shortlist of cryptocurrencies.
The first digital coin introduced 10 years ago by Satoshi Nakamoto, BTC serves as the industry gold standard and has no rivals in terms of popularity and market cap.
It has a rather turbulent history, with prices going up and down, leaving some people enriched and others ruined. The Bitcoin White Paper, describing the principles of work of the new peer-to-peer payment system, was published in 2008. The network was launched shortly after, in 2009. In the beginning, the price of BTC was less than 10 cents ($ 0.008 to be exact) and few people believed it was good for anything. Now its price is around $10,000 (more or less), with the market capitalization of over $165 bln. The maximum BTC price so far was registered on 17 December 2017 and was $17,900.
Bitcoin is based on the Secure Hashing Algorithm SHA-256, which belongs to a family of cryptographic hash functions, designed by the NSA (National Security Agency). Despite the history of famous exchange hacks, the network itself has never been compromised as a system.
ETH is based on the ASIC-resistant Ethash algorithm. This cryptocurrency was created by Vitalik Buterin, a young software developer from Canada. Unlike Bitcoin, the Ethereum network is not focused on the payment aspect, offering numerous opportunities to exchange values. The developer came up with the idea of smart contracts, making it possible to create so-called “trustless protocols”. It means, that 2 peers can make unchangeable commitments, without having to know each other (trust being ensured by the system). Potentially, smart contracts may be used to transfer anything of value, including cryptocurrencies. They are seen as one of the most useful and promising blockchain tools.
Ethereum is divided into two separate currencies — Ethereum (ETH) and Ethereum Classic (ETC). The blockchain was forked to eliminate the consequences of the serious code bug used by an attacker to withdraw $50 mln worth of ETH. This measure, aimed at refunding lost money to the network users, caused a lot of controversy in the Ethereum community, blockchain seen as something that could not be modified under any circumstances. As a result, Ethereum is now represented by the hard fork (new blockchain version, with the DAO hack deleted) and Ethereum Classic (the old-school version that accepted the DAO hack).
Ripple is one of the biggest cryptocurrencies in terms of market cap. It was aimed to offer a solution to many urgent banking issues, like cross-border money transfers that can take many days to process. The Ripple team introduced “the interledger” using an XPR cryptocurrency to settle accounts across the different ledgers of two banks, participating in the process. It allows to greatly reduce the time, needed to finalize a transaction, and make the procedure seamless.
The team behind the project has both crypto and fintech background and is generously supported by investors. The perspective of solving one of the most serious banking problems made the currency rather popular, its price rapidly growing. The future of Ripple looks bright, some experts seeing it as a “new generation Bitcoin”. It has been reported that several leading banks and payment systems (including SWIFT, Santander, American Express and UBS) are starting to test the Ripple network.
Monero is the most popular example of “privacy coins”, based on the CryptoNight algorithm. If used in a transaction, it does not allow anyone to trace your identity. These features make Monero and other similar coins (Zcash, Dash and a dozen others) very attractive if you see privacy as a top priority, for good or bad reasons.
The word “Monero” means “coin” in Esperanto. The currency first appeared in April 2014 under the name of “Bitmonero” (“Bitcoin”) and was warmly welcomed by the community. The team behind the project stays anonymous, except for Riccardo Spagni and Francisco Cabañas.
The promise of complete privacy promoted Monero use for the dark market. The coin got famous due to the WannaCry virus attacks in 2017 when the attackers converted their BTC into XMR for privacy reasons. Also, Monero is widely associated with mining malware.
While Monero stays popular among miners and investors, its adoption is resisted by regulators, who prefer better transparency.
Litecoin is one of the most popular cryptocurrencies by 2019, operating on The Scrypt algorithm. It is a BTC fork created by Charlie Lee, who sought to develop “a silver to Bitcoin gold”. As the name itself suggests, Litecoin is cheaper and easier to operate than BTC, and it’s more convenient for dealing with smaller sums of money. Its “lightness” results in faster transactions and larger coin supply. Another advantage of the coin is comparatively high-security level: an LTC block is 4 times faster to generate that a BTC one, leaving hackers less time for an attack.
All these features contributed to the increasing popularity of LTC, which is always in the first 10 (or even 5) positions in the list of top cryptocurrencies.
A recent addition to the family, EOS cryptocurrency has already become very popular due to some of its distinctive features. EOS, introduced in 2017, was targeted at creating more efficient and scalable dapps (decentralized applications). The platform functions similarly to the Ethereum one, but the delegated proof-of-stake (DPoS) consensus mechanism allows it to process transactions much faster. As only 21 producing nodes are needed to solve a block (compare to millions of nodes in the BTC and ETH networks), It takes less than a second to confirm a transaction and about 2 min to finalize it.
Any EOS token holder can influence the way the network is developing, and the extent of this impact depends on the number of tokens s/he has.
Cryptocurrency market cap
The Market capitalization of cryptocurrencies is often mentioned by experts in their articles and reports. It’s important to understand what it means and how we can use it.
What is cryptocurrency market cap
It is an important metric used to measure the total value of a given cryptocurrency. To define it, we multiply the number of tokens in circulation by the current token price. The higher the price, the bigger is the market cap.
What are the biggest coins, in terms of market cap
The leader here is Bitcoin ($154 696 399 751), normally followed by Ripple ($26 281 657 092) or Ethereum ($20 111 990 277). Other top coins are Bitcoin Cash, Litecoin, Tether, Stellar and some others. The coins with a market cap over $1 billion are rather few — now there are about 20 of them. You can check these numbers online anytime, using a website like CoinMarketCap.
What cryptocurrency market cap tells us
Looking at the market capitalization is the easiest way to evaluate the value of the coin.
You should remember is that coins with smaller caps are more vulnerable and volatile, and their holders take a risk of being ruined by larger traders. If several “whales” (market giants) conspire to sell at the same time, the price of your coin may drop to zero in an instant. Big coins (ETH, BTC, etc.) are much harder to be influenced this way. In general, a stable market cap indicates a strong, healthy coin, though in some cases this metric can be misleading.
What is cryptocurrency: Conclusion
Presently, the cryptocurrency market is rather unstable, currencies coming and going every year, with a promise to disrupt the way things work.
The key to stability lies in the mainstream adoption of cryptocurrencies. To have value, any coin should be backed by people who use it for daily payments, rather than for speculations. When it happens, the traditional financial institutions will have to push back or adopt the technology, too. It’s still unclear how long the process will take, but cryptocurrencies are here to stay.
Cryptocurrency is a type of digital money on the base of cryptography and blockchain. It allows people to make payments and exchange value in a direct peer-to-peer way. Roughly, the main types of cryptocurrency are Bitcoin and altcoins.
The term combines the words “cryptography” and “currency”, reflecting the method any digital coin is produced. It has nothing to do with “creepy” or “crypt”.
Q: What is blockchain?
It’s a distributed ledger consisting of a chain of blocks, each block connected to the previous one cryptographically. The blocks store the information about every transaction made in the network, and this data cannot be changed, damaged, or deleted by any of the parties.
Q: How blockchain and cryptocurrency relate to each other?
Blockchain is a technology behind any cryptocurrency. Therefore, these two things are not equivalent to each other, as some beginners think. Blockchain is not necessarily used for financial purpose, it can be applied for secure storage of any data.
Q: What is Bitcoin?
Bitcoin is the first and most famous cryptocurrency, with the biggest market cap. Though sometimes this name is used as a synonym for “cryptocurrency”, it is not correct. Cryptocurrency is an umbrella term for both BTC and altcoins.
Q: What can you use cryptocurrency for?
You can send or receive cryptocurrency using your digital wallet. You can mine coins with special hard- and software. You can hold cryptocurrency, in the hope its price will rise, or use it to pay for services and goods — both online and offline. Finally, you can donate crypto to a charity.
Cryptomining is the process of verifying the network users’ transactions and adding them to the blockchain. To mine cryptocurrency, you need special hardware and software, as well as access to cheap electricity.
Q: What do I need to start using cryptocurrency?
To start using crypto you need a wallet that will support your coin. You may install it on your PC or your smartphone, taking all the recommended security measures. Also, you will need an account on a well-reputed exchange. If you deal with big amounts of crypto, invest in a cold wallet that will ensure safe storage. If you want to mine cryptocurrency, you will need special soft- and hardware, the type depending on the coin you use.
Q: Can cryptocurrencies be converted into cash, or moved to a bank account?
Yes, you can convert them into cash using a special ATM, or an exchange (exchanger), where you can sell your crypto and withdraw the resulting amount in fiat to your bank account.
Q: How cryptocurrency is different from conventional money?
Unlike traditional money, cryptocurrency is decentralized (not controlled by any government and is issued by mining), has no material representation (does not exist in the form of coins and bills). There is a limited supply of coins that cannot be increased.
Q: Can cryptocurrency replace fiat currency?
In some failed states where citizens cannot rely on their government-controlled money, or in underdeveloped and unbanked areas, crypto has already become a dominant means of payment. Nevertheless, its mainstream adoption depends on many factors, including global and local regulatory policies.
Q: Are cryptocurrencies legal to use?
It depends on your jurisdiction, your legal status and on what you use crypto for. Depending on the country, cryptocurrency usage may be encouraged (Japan, Estonia), restricted (China, India) or prohibited (Bolivia, Afghanistan, Vietnam) — either for citizens, or organizations, or both.
Q: Can cryptocurrencies be taxed?
To get the right answer, consult a specialist. Cryptocurrency taxation issues can be complicated, especially if you convert it into fiat money. In general, they depend on how your government sees crypto, and on its status (legal tender, asset, security, etc).
Q: How to choose cryptocurrency for investment?
Pay attention to the basic metrics like the market cap. Nevertheless, the coins with the biggest cap may be less attractive for an investor, than new coins that are bringing some utility to the ecosystem. The most urgent issues to be solved are scalability, privacy, and interoperability. Read the White Papers of the projects to see what they promise, and what the promises are based on.
Q: How do I know what cryptocurrencies are on the rise, to make a good investment choice?
There is no definite answer to the question “What is the best crypto to buy right now?” To know what cryptocurrency is worth investing in, determine your goals, opportunities and the level of risk you are ready to take. Also, make some research online and read the documentation by the developers, to see what problems it addresses. Don’t be tempted with big promises, they are often based on nothing. See what value the coin adds to the system.