|what is cryptocurrency trading all about|
What is cryptocurrency?
Cryptocurrency is a special type of currency, which is issued not by the national bank of any state, but by an electronic payment system. This technology appeared relatively recently – in the late 2000s, so many financial experts are still distrustful of it, nevertheless, transactions with cryptocurrencies can bring tangible income.
A characteristic feature of cryptocurrencies is the high fluctuation of the exchange rate, which can reach even several tens of percent per day. Previously, this was considered their biggest drawback, but the events of recent years have shown that one should not be sure of the value of “classic” banknotes either. If the reliability of the national currencies of the CIS countries was almost always in doubt, then the sharp changes in the euro against the dollar and the fall of the Swiss franc came as a surprise. It is these events, as well as the global financial crisis, that gave cryptocurrencies a chance.
The very first and most popular cryptocurrency is Bitcoin price. The basic principles of the functioning of this system were described on October 31, 2008, at the very moment when the financial markets were in crisis. This article did not cause much resonance, on the contrary, the idea seemed almost unrealistic.
The first electronic wallet with bitcoins was launched on January 9, 2009, however, it only functioned in test mode. For almost the whole year, error correction and refinement of the system’s functionality continued, in particular, the service began supporting Linux and an API appeared, which made it possible for third parties to use it.
The first step towards the popularity of cryptocurrency was the opening of the forum in November 2009, before that Bitcoin was known only to a narrow circle of people, most of whom were familiar to the creators of the service. An increase in the number of users revealed small vulnerabilities in the security system, however, they were quickly eliminated.
Bitcoin became a full-fledged currency only in May 2010 – it was then that the first purchase was made. The buyer was an American Laszlo Henech, he exchanged 10 thousand bitcoins for two pizzas. Then this transaction seemed successful, because for virtual currency it was possible to get at least something, but if Laszlo had not bought pizza and saved funds on the account, now you could get about $ 7 million for them. The ability to exchange virtual currency units for real Commodities have become critical events for cryptocurrency.
James Howells was even less fortunate. He was one of the first who began to mine bitcoins, but soon the Briton became disappointed in this venture and stopped it. James had to change his laptop because it had broken due to a hot drink spilled on it. Despite the fact that the hard drive remained operational, he decided to throw it away. A few years later, when he found out that 7.5 thousand bitcoins, information about which were stored on a discarded solid state drive, were worth a fortune, James went to a city dump. All his efforts were in vain – the hard drive was never found. At today’s exchange rate, the cryptocurrency accumulated by him would be worth $ 5 million.
Since 2012, the Bitcoin Foundation, which has the status of a charity fund, has been developing bitcoin. Its main developer is one of the creators of the cryptocurrency Gavin Andresen. At the moment, the priority task of this organization is to increase the security of the system and confidence in cryptocurrency as a means of payment.
The principle of cryptocurrency
Cryptocurrency emissions are not like issuing standard money. The amount of funds in circulation does not depend on the credit policy of the state – PC computing resources are used to generate Bitcoin. The process of extracting cash is called mining.
Translated from English, “mining” means “mining”, this word comes from “mine” – “mine”. Bitcoin is a specific numerical sequence that needs to be calculated. After this is done, it is sent to the server, and the owner of the PC receives 1 Bitcoin to his account. A feature of the system is that the complexity of the calculations is not identical – the more bitcoins have already been extracted from the “mine”, the more difficult it is to get a new one. The volume of cryptocurrency emissions is fixed, it is expected that already in 2031 it will be impossible to mine bitcoin at all.
Computing a digital sequence involves performing a large number of independent operations, which means that you can do them in parallel. Best of all, this is not done by the central processor, but by the graphics processor installed in the video cards. Due to the gigantic increase in computational complexity (compared to 2010, it grew approximately 1 million times), mining bitcoins is becoming an increasingly energy-intensive procedure.
In many cases, it is not profitable to mine bitcoins, since electricity bills exceed the amount received. This is especially true of developed countries, where electricity is quite expensive. The solution to this problem was the industrial mining of bitcoins, which use energy-efficient processors or the computing power is distributed (as a rule, they are located in third world countries). The profit from the extraction of one bitcoin is small, but due to the large scale, the income can be significant.
The most common cryptocurrencies
Bitcoin is the most common cryptocurrency in the world, and its success has largely inspired other people to create their own means of payment. Today, there are about a hundred cryptocurrencies, most of which almost completely copy Bitcoin technology. So far they are not very well known, but after some time their value may well increase.
It is impossible to talk about all cryptocurrencies, however, this is not required, because most of them will remain worthless. Here are the most popular currencies that may soon try to compete with bitcoin:
- Litecoin: has a different cryptographic algorithm than Bitcoin, which was taken as the basis of this currency. The main reason to invest in it, according to users of this service, is the underestimation of the value of Litecoin and higher growth prospects than Bitcoin.
- Peercoin: takes third place in popularity, its main difference is the absence of restrictions on the issue of money, which leads to an annual inflation of about 1% and simplified mining.
- Namecoin: almost everything copies Bitcoin, except for the possibility of legal protection of domain names from scammers. Nevertheless, the currency is quite popular.
- Feathercoin: one of the few currencies that does not copy the original Bitcoin, but its improved version – Litecoin. Feathercoin has a larger emission limit and improved security system.
- Freicoin: also copies Bitcoin, but here a tax is levied for using the funds, and also part of the service’s income goes to charity.
Cryptocurrencies are placed on special electronic wallets, paper money does not have such money. There are many wallets that differ in functionality, support for various operating systems or work online, as well as the degree of protection. You can conduct transactions with Bitcoin in the popular EPS WebMoney.
You can exchange cryptocurrencies through special services or exchanges on which users place their applications, indicating the rate and the required amount, and then wait until someone responds to their offer.
The increasing popularity of cryptocurrencies allowed them to pay in many online stores, however, only Bitcoin and Litecoin can be exchanged for real goods and services, other currencies are accepted very rarely and often at a disadvantageous rate. Some banks even offer to issue a cryptocurrency-nominated payment card. It can be paid in ordinary stores, conversion to “classic” currencies will be carried out at the current rate.
The difference between electronic money and those issued by national banks of different states is a significant change in the exchange rate in a short time. Due to this, cryptocurrencies are an attractive object for exchange speculation. Litecoin price It is difficult to say whether this positively or negatively affects the development of cryptocurrencies. On the one hand, money turnover is increasing, on the other hand, significant jumps in the exchange rate, which are only intensified due to speculation, make cryptocurrencies an unreliable tool for storing savings.
Nevertheless, the formation of the cryptocurrency exchange rate is significantly different from other currency pairs. The cost of Internet money is not affected by the political situation in the world, volumes of natural resources extraction or military conflicts. The value of cryptocurrency depends solely on the availability of demand for it, that is, it obeys objective market laws.
The presence of artificial restrictions on the emission of cryptocurrencies restrains their inflation, and also increases the cost as they are mined. However, some currencies do not have clear emission limits in this case, their inflation directly depends on the production rate and the monetary units in circulation.
Advantages and disadvantages of using cryptocurrencies
The characteristics of almost all cryptocurrencies are similar, so the features of their use can be evaluated comprehensively:
- Safety. It is impossible to fake cryptocurrency and it is rather difficult to steal, perhaps this is only due to the negligence of the user himself.
- Ease of use. It is easier to open your own electronic wallet than a bank account, and the commission for transferring funds is lower.
- Informational content. The use of digital technologies makes it possible to simplify the work with the currency as much as possible and provide the user with detailed statistics, for example, a graph of the change in the balance of his wallet, receipts for a certain period or the dynamics of the exchange rate in relation to another currency.
- Anonymity and independence. Cryptocurrency is not tied to a name, therefore, tax authorities cannot control the income of the wallet owner, as well as manage the credit policy of the cryptocurrency issuer. Depending on the legislation of a particular country, this can be either a plus or a minus.
Negative features of the use of cryptocurrencies are:
- Uncertain legal status. Some states have fully recognized the illegal circulation of cryptocurrencies, at least a fine is provided for this.
- Too frequent changes in course. For ordinary users, this is a minus, since it is impossible to predict how much a particular currency will cost even after a few days, this complicates budget planning.
- Use in the shadow economy. Cryptocurrencies are often settled by criminals; there are also many scammers who offer currency exchange at a favorable rate or other services, but actually steal money. Their victims are almost useless to contact law enforcement.
Cryptocurrency earning methods
The main methods of earning on cryptocurrencies are: mining (mining), investment, trade. Extraction has already been considered earlier, so only the last two will be described here.
To invest in cryptocurrency, you first need to purchase it at an exchange office, and then wait until the exchange rate against other currencies grows. In this case, it is advantageous to use developing currencies, since they are subject to the most rapid growth, however, the risks of such an investment will also be higher.
Another strategy is to invest in popular cryptocurrencies at the time of the fall. They have a fairly high volatility, so they quickly restore their previous value.
Brokers almost do not provide the opportunity to trade little-known currencies, and there are not so many who want to do this, with the exception of speculators. The most popular cryptocurrencies have already become full-fledged finances, they can be exchanged not only among themselves, but also directly into dollars, euros, yuan, rubles and others. The volume of such operations can not be compared with trade in dollars or euros, but nevertheless they are higher than in some little-known currencies.
It is quite difficult to predict the behavior of cryptocurrencies, so the risks of trading operations are quite high. They are usually traded by professional traders, not amateurs. You can practice and evaluate your own strengths on demo accounts.