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Introduction to the cryptocurrency market

Cryptocurrency
31.10.2020
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Introduction to the cryptocurrency market

In 2008, a cryptographer named Satoshi Nakamoto described a new protocol for making transactions using the Bitcoin digital currency. After that, a new direction of the economy, independent of financial regulators and states, started to develop. Discussions about the benefits or flaws of digital assets still exist, and many countries are starting to issue their own decentralized government currencies to adopt the useful functions of cryptocurrencies.

Is it worth investing in cryptocurrencies in 2020?

Introduction to the cryptocurrency market

To invest or not is a personal choice. Among the advantages of digital assets are not only independence from regulators, but also a high level of their protection, which makes cryptocurrencies attractive for preserving and increasing capital.

In 2020, during the March collapse of the stock markets, Bitcoin lost more than half of its value. However, the profitability of investments was several times higher than the one of gold, which is considered to be the main protective financial instrument. At the time of writing, the price of the first cryptocurrency crossed the psychological mark of $10,000 and doesn’t even think to decline. Moreover, the price of gold began a correction process, because the crisis recedes and investors are selling the precious metal in order to invest in other assets.

It is also worth supporting the development of the digital market due to the fact that thanks to its existence, many different tools for protecting finances have appeared, ranging from digital signatures to private blockchain platforms.

Digital assets

Introduction to the cryptocurrency market

To start working with digital assets, it is worth understanding what cryptocurrency really is. At its core, it is the same monetary unit that is backed by investor confidence. Whereas in the traditional financial system, transactions are mediated by banks, here their function is performed by technology. Absolutely anyone from anywhere in the world can transfer or receive funds using a computer or smartphone. Transaction information is stored in online databases. You can keep assets in digital wallets.

Cryptocurrencies got their name due to the verification of transactions encrypted using cryptography. Due to this, money transfers are carried out anonymously.

Cryptocurrency can be used to pay for goods or services. Also, digital funds can be exchanged for fiat on specialized exchangers or trading platforms.

Smart contracts

Introduction to the cryptocurrency market

With their help, money transfers are carried out on the blockchain network. For the first time, the principle of smart contracts’ operation was created in 1996 by cryptographer Nick Szabo. According to his concept, smart contracts are digital protocols that allow the transfer of certain information. The technology had to “gather dust” until the creation of Bitcoin.

With the help of smart contracts, money, goods, real estate, stocks and other financial instruments can be exchanged. They have a number of advantages over traditional technologies for the exchange of financial instruments: speed of information processing, independence of the process from third parties, reliability of information, as well as cost savings by eliminating the costs of intermediaries.

Electronic payments cannot be canceled even if the recipient’s address is entered incorrectly, and therefore it is important to double-check the entered data several times.

Blockchain

Introduction to the cryptocurrency market

The blockchain is a database within which the circulation and storage of cryptocurrencies is carried out. It consists of a chain of interconnected blocks. Imagine a wall, each brick of which contains information about transactions.

The construction of the “wall” is carried out with the help of computers participating in the network. Anyone who has access to the Internet can get access to it. At the same time, anyone can see the contents of the blocks, however, no one can change it. Thus, the identity of each participant remains encrypted, and it is almost impossible to steal funds from the accounts.

Bitcoin

Introduction to the cryptocurrency market

Bitcoin is the first and most expensive cryptocurrency. It exists within the blockchain in the form of digital records. The network blocks contain records about each of the transactions. All data known about the sender and recipient is just the numbers of the cryptocurrency wallets between which the transaction was made. The rest of the data is stored encrypted and is not shared with anyone.

One bitcoin consists of one hundred million particles, which today are called “satoshi”, but Satoshi Nakamoto himself called them “cents”.

Altcoin

Bitcoin is the first and most expensive cryptocurrency. It exists within the blockchain in the form of digital records. The network blocks contain records about each of the transactions. All data known about the sender and recipient is just the numbers of the cryptocurrency wallets between which the transaction was made. The rest of the data is stored encrypted and is not shared with anyone.

One bitcoin consists of one hundred million particles, which today are called “satoshi”, but Satoshi Nakamoto himself called them “cents”.

Altcoin

Introduction to the cryptocurrency market

Altcoins are literally alternative cryptocurrencies. By creating them, the developers sought to replicate the success of Bitcoin, as well as bring new features to the industry. Today there are over a thousand altcoins. As a result of their development, four types appeared:

  1. Altcoins

They are most similar to Bitcoin, as they are mined through complex cryptographic calculations. The most famous altcoin is Ethereum.

  1. Stablecoins

Developers create them in order to solve the problem of crypto volatility by linking their value to traditional financial assets. One of the most popular stablecoins is Tether, the value of which is influenced by the US dollar exchange rate.

  1. Security tokens

These assets are a kind of prototype for traditional stocks. They are launched as part of projects and provided in return for investments. Holders of coins either receive dividends or a share of ownership in the business.

  1. Utility tokens

Their second name is “the tokens of use”. Companies release this type of assets at the ICO stage to attract investments for the further development of the project. In the future, asset holders may receive a discount from the company for any service or product.

Forks

Introduction to the cryptocurrency market

Altcoins can also appear as a result of splitting an existing network — this process is called a fork. There are two types of them: soft forks and hard forks.

A soft fork is a soft change in the internal rules of the network, which don’t need the transformation of the entire network. For example, all platform participants speak Russian. At one point, most of them decide to switch to English. In this case, the change in the protocol doesn’t violate the previous agreements and rules.

With a hard fork, the internal rules of the network change dramatically so that the new conditions of the game contradict the previous ones. Then the network is split into two branches, which can no longer interact with each other within the same network and work in isolation.

ICO

Introduction to the cryptocurrency market

Cryptocurrency companies, like traditional ones, need investments to develop a project. Initial placement of tokens or ICO is one of the tools available to developers for raising funds from outside.

At an early stage of the ICO, the developers show the investors a White paper, which contains all the information about the technical side of the project: the number of tokens issued, goals and time frames for their implementation.

In return for investment, creators can provide an opportunity for investors to receive altcoins or the right to own a share of the project.

Cryptocurrency exchanges

Introduction to the cryptocurrency market

The most popular trading platforms today are Binance, OKEx, Coinbase and others. Traders can not only trade cryptocurrencies on them, but also exchange for fiat. Exchanges also allow users to keep funds in their own accounts, however, for security reasons, professionals advise to create separate wallets.

Cryptocurrency exchanges work according to the same principle as traditional ones: buy and sell prices are regulated depending on the level of supply and demand. But the work of the websites is carried out within the framework of the blockchain.

Cryptocurrency wallets

Introduction to the cryptocurrency market

With the help of technology, not only currencies can be digital, but also the wallets in which they are stored. They are divided into two types: hot, which work only with the help of the Internet, and cold, which are connected to the network only when necessary. Each of them has its own set of unique characteristics that allow you to keep funds safe.

Mining

Introduction to the cryptocurrency market

The mining of cryptocurrencies is carried out using a mining rig. In return for providing their own services, miners receive a reward in the form of digital currency. It is thanks to them that the life of the network is carried out.

Anyone who has access to the Internet can mine cryptocurrencies. Imagine that you are tossing a few dice in the air and trying to achieve a certain result. But in the blockchain, this process is carried out using a video card. When a specific set of numbers is reached, a new block of cryptocurrencies appears on the network.

Thanks to the blockchain, none of the participants can control or influence this process, and digital assets can be mined not only with the help of video cards, but through phones.

Summary

Introduction to the cryptocurrency market

Cryptocurrencies are not that easy for ordinary people. They need to be studied as seriously as traditional assets, if not more thoroughly. Fewer financiers doubt the success of bitcoin as a project, and therefore it is likely that the main cryptocurrency, together with altcoins, will become a new reality of the economy in the future.

Author:Елена

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