How does cryptocurrency work and what is it?



18 października 2021
How does cryptocurrency work and what is it?

How does cryptocurrency work and what is it?

Cryptocurrencies, or money of the future, are digital currencies that do not have a physical form. However, they have their value, so they can be used to pay for some goods and services. Currently, cryptocurrencies are not accepted by many companies in Poland. The situation is completely different in other countries. In the US, virtual money is accepted at most hotels, restaurants, and even some funeral homes. In our country, cryptocurrencies are accepted only by some premises, mainly located in large cities, as well as hotels belonging to popular networks. However, investors should not worry as the popularity of digital coins continues to increase.

Key features of cryptocurrencies

The main feature of virtual money is decentralization. Cryptocurrencies in the blockchain are not subject to any central authorities. State institutions cannot influence or control them. Moreover, they cannot make decisions about the size of their emission and the way of creating value. All data on cryptocurrencies can be found on the blockchain in the respective blockchains. Virtual money is not subject to any supervisory bank.

The above-mentioned decentralization allows transactions to be verified by several people at the same time. Thanks to it, investments are not carried out by entities such as banks. When using cryptocurrencies, you don't have to worry that cutting off a financial institution from the system will deprive you of access to means of payment. Of course, decentralization also has its drawbacks. First of all, it takes a bit longer to make transactions with digital currencies. It is largely dependent on the number of operations supported. In addition, when choosing a distributed accounting system, you have to take into account large expenses on electricity. Unfortunately, cryptocurrencies are not an ecological solution.

How does cryptocurrency work?

Now that you know what cryptocurrencies are, it's time to find out how they work. Well, virtual money uses a decentralized system that is based on blockchain, which is a blockchain. Blockchain is a public register of transactions made using a specific cryptocurrency. Many devices watch over its updating and maintenance. Once the computing device has performed the calculations, it is rewarded with the appropriate amount of digital "coins". This process is called mining or digging. On the other hand, people who perform these activities are commonly referred to as "miners".

It should be noted that cryptocurrencies use cryptography technology - difficult mathematical calculations. As a result, the information about the coins is properly encrypted. In addition, cryptography makes it impossible to counterfeit digital currencies and transactions using them.

How to store cryptocurrencies so that they are completely safe?

Virtual money is kept in crypto wallets. They have two keys - public and private. The first of them can be shared with others without fear, e.g. to collect a payment. However, the second one should be protected against leakage, because they protect us against the theft of cryptocurrencies. Thanks to private keys, you can log into the wallet and operate with virtual money.

The most popular types of cryptocurrencies

The most popular and oldest cryptocurrency is Bitcoin. The creator of this currency uses the pseudonym Satoshi Nakamoto, and his true identity has not been determined to this day. It is also not certain that the inventor of Bitcoin is one person. Experts say that a large group could have worked on the creation of this cryptocurrency. Bitcoin is considered a virtual alternative to gold and fiat currencies, because it can be operated in the same way as traditional money, and additionally it is an excellent investment.

The second, very popular type of cryptocurrency are Stablecoins. As the name suggests, they are characterized by market stability. Investing in these coins does not risk suddenly fluctuating because the price fluctuations are small. Stablecoins include, among others Tether, USDCoin, and TrueUSD.

Another popular type of cryptocurrency is Ethereum. It appeared on the market in 2015 and has become a serious competition for Bitcoin. It works on the basis of the same technology as BTC, but additionally enables the creation of Smart Contracts, i.e. applications and scripts saved in the data chain. In addition, ETH is much easier to mine than Bitcoin.

Cryptocurrencies - threats

Cryptocurrencies have both their supporters and opponents. The first of them believe that digital money allows you to easily and quickly gain a large fortune. Others, on the other hand, claim that mining cryptocurrencies is associated with high risk and many threats. Both supporters and opponents are somewhat right. You can gain a lot from virtual money, but there is also a good chance that the investment will turn out to be unprofitable.

To start your adventure with cryptocurrencies, you need to acquire appropriate knowledge. It is necessary to obtain reliable information on what cryptocurrencies are and how they work. You have to remember that cryptocurrencies will not magically multiply your savings. Without knowledge, you can fall victim to fraud.

The public availability of cryptocurrencies is both their advantage and disadvantage. It should be remembered that blockchains are not only used by honest people, but also by frauds who want to easily get rich at the expense of other users.

Attention! The above article neither in whole nor in part constitutes a "recommendation" within the meaning of the provisions of the Act of July 29, 2005 on trading in financial instruments or the Regulation of the European Parliament and of the Council (EU) No. 596/2014 of April 16, 2014 on market abuse (market abuse regulation) and repealing Directive 2003/6 / EC of the European Parliament and of the Council and Commission Directives 2003/124 / EC, 2003/125 / EC and 2004/72 / EC and Commission Delegated Regulations (EU) 2017/565 of 25 April 2016 supplementing Directive 2014/65 / EU of the European Parliament and of the Council as regards organizational requirements and operating conditions for investment firms and defined terms for the purposes of this directive. The content contained on the website does not meet the requirements for recommendations within the meaning of the above-mentioned act, incl. do not contain a specific valuation of any financial instrument, do not rely on any valuation method, and do not identify investment risk.

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