Cryptocurrencies

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Cryptocurrency

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Cryptocurrency is a type of digital currency, the issuing and accounting of which are based on cryptographic methods such as Proof-of-work – which assures that coins are mined only by users putting computing power to work in solving complicated mathematical problems – and asymmetric or public key encryption – which assures that the network that the currency runs on remains safe, by making transaction requests secret, verifying and protecting identities, and making double-spending virtually impossible. The system functions in a decentralized fashion on a distributed computer network.

In case of cryptocurrency blockchain it is impossible to cancel or return the funds sent to the recipient. Nevertheless, there are opportunities for transactions involving the intermediary, when the consent of all three or any two parties is required to complete or cancel the transaction. The funds cannot be forcibly frozen or recovered without access to the owner’s private key, although the parties of the transaction may volunteer to temporarily block their funds as collateral.

Explaining the definition of cryptocurrency, as a rule, there is an upper limit to the total volume of coins to be issued. However, some cryptocurrencies do not have such fixed upper limit for the total volume of coins to be issued. They are emitted in function of the available savings and demissioned by mandatory destruction of a small fixed amount in each transaction.

All currently existing cryptocurrencies are used pseudonymously – all transactions are public, but there is no default binding to a particular person, although the user’s identity can be established if the necessary additional information is known. All big cryptocurrency exchange houses ask for some sort of identification. Documents that such exchange houses usually ask are: ID, a banking statement, proof of residency, and/or a picture showing the user’s face.

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Cryptocurrency analysis [ edit ]

Cryptography for the purpose of confidential payments began to be used since 1990, in the DigiCash system of David Chom, whose company went bankrupt in 1998. However, his payment system was centralized, and the term “crypto currencies” was used for the first time after the appearance of the Bitcoin payment system, which was developed in 2009 by a person or a group of individuals under the pseudonym of Satoshi Nakamoto. Bitcoin uses SHA-256 hashing under a Proof-of-work system.

Later, other Bitcoin-based cryptocurrencies (called forks) appeared. Some relevant examples are:

  • Namecoin (decentralized DNS using a cryptocurrency of the same name for registering internal .bit domains)
  • Litecoin (uses Scrypthashing, the upper limit of total issuing is increased, time for confirmation of transaction is reduced)
  • PPCoin (uses a hybrid proof-of-work/proof-of-stake mechanism, does not have an upper limit for the total volume of issuing)
  • Novacoin (similar to PPCoin, but uses scrypt and the emission-related factors are reduced).

How to buy cryptocurrency [ edit ]

Before starting trading the cryptocurrency, a special wallet must be created. Users have an array of wallets from where they can choose one, some of them may even store more than one type of cryptocurrency. They can be downloaded on the appropriate sites, bought to store the coins in a hardware device, stored online, amongst other methods. Wallets that users may acquire can be found on (amongst other sites):

Some of the wallets found here are suitable for storing several coins, called “multi-wallets” . Some others, do not allow for exchange with other cryptocurrencies, which may cause users to have to acquire another one that supports his needs. For a newcomer, the best way is to go through an online cryptocurrency exchange house.

On such sites it is possible to buy, sell or exchange a currency conveniently. Wallets on this sites are more often used by people who just want to buy some coins, make purchases on the Internet, gamble or invest in crypto.

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Criticism [ edit ]

  • The developer of the Bitcoin client, Gavin Andrisen expressed concern about the fact that some cryptocurrencies may be fraudulent. This is mainly because a lot of them are being used to create Ponzi schemes and because they are not backed up by a company or a sustainable product
  • The Central Bank of Russia warned citizens not to use the Bitcoin cryptocurrency.
  • Some economists predict that the bitcoin and cryptocurrencies in general are part of a financial cryptocurrency bubble, that may burst at any time.

Cryptocurrency market capitalization [ edit ]

The market capitalization of all cryptocurrencies in the world was $375 449 753 727 on May 19, 2020. Bitcoin dominance on the market is 37%. Some specialists predict that cryptocurrency is a great way to make investments and earn money as the trading is not as difficult as it looks like, but it is important to know what is cryptocurrency, how to buy it, be able to make analysis and understand the difference between cryptocurrencies.

Cryptocurrency

What Is a Cryptocurrency?

A cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Many cryptocurrencies are decentralized networks based on blockchain technology—a distributed ledger enforced by a disparate network of computers. A defining feature of cryptocurrencies is that they are generally not issued by any central authority, rendering them theoretically immune to government interference or manipulation.

Key Takeaways

  • A cryptocurrency is a new form of digital asset based on a network that is distributed across a large number of computers. This decentralized structure allows them to exist outside the control of governments and central authorities.
  • The word “cryptocurrency” is derived from the encryption techniques which are used to secure the network.
  • Blockchains, which are organizational methods for ensuring the integrity of transactional data, is an essential component of many cryptocurrencies.
  • Many experts believe that blockchain and related technology will disrupt many industries, including finance and law.
  • Cryptocurrencies face criticism for a number of reasons, including their use for illegal activities, exchange rate volatility, and vulnerabilities of the infrastructure underlying them. However, they also have been praised for their portability, divisibility, inflation resistance, and transparency.

Understanding Cryptocurrencies

Cryptocurrencies are systems that allow for the secure payments online which are denominated in terms of virtual “tokens,” which are represented by ledger entries internal to the system. “Crypto” refers to the various encryption algorithms and cryptographic techniques that safeguard these entries, such as elliptical curve encryption, public-private key pairs, and hashing functions.

Types of Cryptocurrency

The first blockchain-based cryptocurrency was Bitcoin, which still remains the most popular and most valuable. Today, there are thousands of alternate cryptocurrencies with various functions and specifications. Some of these are clones or forks of Bitcoin, while others are new currencies that were built from scratch.

Bitcoin was launched in 2009 by an individual or group known by the pseudonym “Satoshi Nakamoto.”   As of Nov. 2020, there were over 18 million bitcoins in circulation with a total market value of around $146 billion. 

Some of the competing cryptocurrencies spawned by Bitcoin’s success, known as “altcoins,” include Litecoin, Peercoin, and Namecoin, as well as Ethereum, Cardano, and EOS. Today, the aggregate value of all the cryptocurrencies in existence is around $214 billion—Bitcoin currently represents more than 68% of the total value. 

Some of the cryptography used in cryptocurrency today was originally developed for military applications. At one point, the government wanted to put controls on cryptography similar to the legal restrictions on weapons, but the right for civilians to use cryptography was secured on grounds of freedom of speech.

Special Considerations

Central to the appeal and functionality of Bitcoin and other cryptocurrencies is blockchain technology, which is used to keep an online ledger of all the transactions that have ever been conducted, thus providing a data structure for this ledger that is quite secure and is shared and agreed upon by the entire network of individual node, or computer maintaining a copy of the ledger. Every new block generated must be verified by each node before being confirmed, making it almost impossible to forge transaction histories.

Many experts see blockchain technology as having serious potential for uses like online voting and crowdfunding, and major financial institutions such as JPMorgan Chase (JPM) see the potential to lower transaction costs by streamlining payment processing.   However, because cryptocurrencies are virtual and are not stored on a central database, a digital cryptocurrency balance can be wiped out by the loss or destruction of a hard drive if a backup copy of the private key does not exist. At the same time, there is no central authority, government, or corporation that has access to your funds or your personal information.

Advantages and Disadvantages of Cryptocurrency

Advantages

Cryptocurrencies hold the promise of making it easier to transfer funds directly between two parties, without the need for a trusted third party like a bank or credit card company. These transfers are instead secured by the use of public keys and private keys and different forms of incentive systems, like Proof of Work or Proof of Stake.

In modern cryptocurrency systems, a user’s “wallet,” or account address, has a public key, while the private key is known only to the owner and is used to sign transactions. Fund transfers are completed with minimal processing fees, allowing users to avoid the steep fees charged by banks and financial institutions for wire transfers.

Disadvantages

The semi-anonymous nature of cryptocurrency transactions makes them well-suited for a host of illegal activities, such as money laundering and tax evasion. However, cryptocurrency advocates often highly value their anonymity, citing benefits of privacy like protection for whistleblowers or activists living under repressive governments. Some cryptocurrencies are more private than others.

Bitcoin, for instance, is a relatively poor choice for conducting illegal business online, since the forensic analysis of the Bitcoin blockchain has helped authorities to arrest and prosecute criminals. More privacy-oriented coins do exist, however, such as Dash, Monero, or ZCash, which are far more difficult to trace.

Criticism of Cryptocurrency

Since market prices for cryptocurrencies are based on supply and demand, the rate at which a cryptocurrency can be exchanged for another currency can fluctuate widely, since the design of many cryptocurrencies ensures a high degree of scarcity.

Bitcoin has experienced some rapid surges and collapses in value, climbing as high as $19,000 per Bitcoin in Dec. of 2020 before dropping to around $7,000 in the following months.   Cryptocurrencies are thus considered by some economists to be a short-lived fad or speculative bubble.

There is concern that cryptocurrencies like Bitcoin are not rooted in any material goods. Some research, however, has identified that the cost of producing a Bitcoin, which requires an increasingly large amount of energy, is directly related to its market price.

Cryptocurrency blockchains are highly secure, but other aspects of a cryptocurrency ecosystem, including exchanges and wallets, are not immune to the threat of hacking. In Bitcoin’s 10-year history, several online exchanges have been the subject of hacking and theft, sometimes with millions of dollars worth of “coins” stolen. 

Nonetheless, many observers see potential advantages in cryptocurrencies, like the possibility of preserving value against inflation and facilitating exchange while being more easy to transport and divide than precious metals and existing outside the influence of central banks and governments.

Cryptocurrencies

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