What is cryptocurrency in simple words for dummies?

Cryptocurrency is the result of computer calculations; electronic registers that store information about how much cryptocurrency the user has and where he transfers it. Cryptocurrency is stored in special electronic wallets.

With the advent of the Internet, attempts have been made periodically around the world to create a digital currency. However, no one trusted these projects and they did not gain popularity. They were too easy to fake.

The first cryptocurrency, Bitcoin, was able to solve this problem using the blockchain. This system is compared to a big book containing all the records of what is happening with the cryptocurrency. And each Bitcoin owner has an independent, but identical copy of this book.

The entries in all books are true and identical. Neither banks, nor the government, nor the creator of the cryptocurrency can falsify these records. In other words, there is no single controller in the blockchain; the system is controlled by many participants. The system, built on mathematical calculations, protects digital currency from counterfeiting or hacking.

Today, cryptocurrencies are gradually becoming a serious competitor to the traditional financial system. Conventional modern money issued by central banks is not backed by gold or other precious metals.

Central banks do not control the exchange rate of national currencies, but they can influence the amount of money in circulation and other parameters. Cryptocurrency, compared to conventional currencies, is transparent, and its quantity is limited by mathematical formulas, and not by the interests of states.

Cryptocurrency - what is it in simple words

So what is crypto?

Cryptocurrency is virtual money, which, unlike fiat money, does not have physical expression. The unit of such currency is “coin”, which means “coin” in English.

What does cryptocurrency mean? From English “cryptocurrency” stands for “crypto - crypto” - a word that carries the meaning “something secret, hidden, mysterious” and “currency - currency”.

Cryptocurrencies are protected from counterfeiting and duplication, and their quantity and issue may or may not be limited. For example, for the largest digital asset Bitcoin (BTC), the maximum supply is 21 million coins (i.e., more than 21 million BTC will never be created).

A feature of virtual money is decentralization - the absence of an internal or external regulator. Therefore, banks, tax, judicial and government authorities cannot influence the transactions of users of crypto assets. This is possible because all data with cryptocurrency wallets and transactions is stored on the blockchain.

The transfer of digital coins is irreversible - no one can cancel, block, challenge or force (without a private key) a transaction. However, parties to a transaction may voluntarily temporarily lock up their cryptocurrency as collateral or establish that the consent of all (or optional additional) parties is required to complete/cancel the transaction.

Cryptocurrency storage wallets

Having decided which cryptocurrency will grow or benefit in other ways, you first need to choose a suitable wallet for it. Purchasing a coin is possible by specifying the address of the wallet where it will be credited. A cryptocurrency wallet address is a combination of letters and numbers generated by the wallet based on a pair of public and private keys. The wallet itself is a software or physical device for storing these keys.

All wallets can be divided into hot and cold:

• Hot ones, they are also software, are constantly connected to the Internet while they are working. This somewhat reduces security against hacker attacks, but significantly increases ease of use. Examples of software wallets for PC, mobile devices and browsers: Exodus, Trust Wallet, Atomic, Blockchain.com, Metamask.
• Cold ones can be presented in the form of a physical storage device (Ledger, Trezor), or simply a piece of paper on which keys are printed. Hackers will never get to keys stored offline, but in order to complete a transaction, they will have to connect to a software wallet.

Some wallets give the user the ability to adjust the amount of commission when sending funds. The higher it is, the faster the payment will be confirmed by miners on the network, because they receive their income based on commissions and, therefore, the most expensive transactions are profitable for them. The lowest fee implies minimal costs for the user, but such a payment may never be confirmed at all.

How complex is cryptocurrency - how does digital currency work?

How does cryptocurrency work? Traditional digital assets are completely decentralized, that is, they do not have a single governing body and are not regulated externally by financial institutions. All information about the cryptocurrency is stored in a distributed registry created using blockchain technology. Anyone can view data on financial transactions and wallet balances. Each new block contains records of completed transactions, commission fees and other service information. The process of creating new blocks is called mining.

Anyone who has powerful computing equipment and a stable Internet can participate in coin mining. You just need to set up a mining rig to work with a specific crypto network through a remote server.

Information protection is guaranteed by a cryptographic code. Most blockchain systems use Proof-of-Work to protect against abuse of services. Miners, by processing transactions and creating new blocks, ensure the functioning of the network and receive a reward for this in crypto coins.

The generation of new blocks of the chain occurs in a strictly defined time interval. Its duration is built into the program code of each system. Each new block is interconnected with the previous one in a single chain and the correctness of its hash signature must be confirmed by all network nodes. Invalid blocks are eliminated and cannot affect the functionality of the system. The hashing sequence and digital signature ensure that each transaction is unique and secure.

History of the creation of cryptocurrency

How did digital currencies come about? The idea of ​​online payments was first proposed in 1983, when entrepreneurs David Chaum and Stefan Brands created the concept of “electronic” money. However, a more than serious project did not work out then.

In 1997, Adam Bakov already continued the development of this technique, when, in the wake of the progress of computers and electronics, it became clear that a system for making secure payments was required. The Hashcash platform laid out the formation of blocks in the blockchain chain, although its real focus was against spamming DoS attacks. Next, Hal Finney introduced the hash block chains of the Hashcash system.

And only in 2007, Satoshi Nakamoto organized work on the creation of digital coins, which were supposed to work on the principle of a peer-to-peer network. In 2009, the first block and 50 coins were prepared, and the transaction was carried out. The amount was 10 BTC.

In 2009, Marty Malmi exchanged crypto money for fiat money. In 2009, cryptominers appeared and attracted other people to the development of the platform.

In 2010, Bitcoin version 0.3 was released, where the mining process was complicated, which involved the use of more and more computer resources. That same year, the first mining pool was held, after which a huge income was generated for a group of miners who joined forces.

In 2011, Satoshi Nakamoto left the project.

Types of cryptocurrencies and their rates today

What types of cryptocurrencies are there and how many are there in total? According to the Coinmarketcap resource as of July 29, 2021, there are 5,835 cryptocurrencies. The total market capitalization of virtual assets is $1.55 trillion, approximately 75% of this amount falls on the 20 largest blockchain projects.

What is cryptocurrency for? Crypto has many useful features. Quite a large part of the tokens are used to pay for services in a certain network, are not sold on exchanges, and are of no value to investors. Other coins can be used as investment objects. Crypto is both a means of payment and an asset for trading on an exchange; you can also use digital assets to make a profit from staking, etc. What types of cryptocurrencies are there?

All cryptocurrencies can be divided into the following types:

1. Currencies Coin or payment system coins. They are intended to pay for goods and services and can serve as an investment. They are characterized by complete decentralization, anonymity and ease of use. The most popular among these is Bitcoin.
2. Platforms Coins or internal tokens of crypto platforms. They are financial instruments that users of networks designed for the development and execution of smart contracts cannot do without. A smart contract is a program that automatically controls the transfer of assets between two or more parties to the contract under predetermined conditions. The most famous platform crypto coin is Ethereum. In addition to its main purpose, ether is used as electronic money along with Bitcoin. People invest in the infrastructure of the Ethereum network, confident that they are not investing in a marketing trap, but are increasing their capital by contributing to the development of innovative projects.
3. Cryptocurrency Exchanges or internal trading platform tokens. Reputable crypto exchanges issue their own digital currency. Thus, the administration accelerates the turnover of funds and increases the liquidity of little-known assets on its trading platform. Users can sell this or that coin for an exchange token at any time, with a minimum service fee, which significantly reduces the risks of investing in young projects. Digital coins of crypto exchanges are completely centralized networks, this is their main difference from traditional virtual money. They have good liquidity, but only as long as the platform that issued them successfully develops. The most popular exchange tokens are Binance Сoin and Exmo Сoin.
4. Utility Tokens or service tokens, also called App Coins. They are released in limited quantities for ICOs. After completing a fundraising campaign, teams sometimes try to promote blockchain projects as an investment option. But such practices are now strictly regulated by the US Securities and Exchange Commission, so to be a successful investment you need to be an expert in the field of economics.
5. Security Tokens or hardware tokens are a direct analogue of securities. They are distributed among investors to enhance the financial security of investments. A Security Token is a kind of digital token that each depositor receives. Dividend payments are distributed based on cryptographic tokens; they themselves can be invested in other projects. The rights of the STO owner are recorded in a smart contract, and the tokens themselves are sold on trading platforms. STO turnover is monitored by financial regulators, such as the US Securities and Exchange Commission (SEC) or the Swiss Financial Market Supervisory Authority (FINMA).
6. Crypto Commodities or crypto goods. A generic name for a tradable or exchangeable asset in the real or virtual world that can be obtained through a blockchain network using exclusive digital tokens. Crypto commodities tokens are used to pay for hosting on a remote server, media content and other goods and services within a specific platform. For example, coins from the Aeron blockchain network can be used to pay for access to a database related to air transportation safety. Self-regulation and execution of financial transactions in Crypto Commodities is embedded in the program code in the form of a smart contract. Unlike Platforms Coins, Crypto Commodities tokens are never used as regular money outside of the project.
7. Stable Coins. They are the least volatile assets because their value is always tied to a physical asset. The company issuing stablecoins must have an amount in fiat funds, for example, in US dollars, on its reserve fund balance to guarantee the value of the token. The most famous coin of this type is Tether, but there are other stablecoins backed by the dollar and eurocurrency. El Petro is the first government-owned stablecoin issued by the Venezuelan government. It is backed by the country's oil and mineral resources. Government agencies of China, Russia and many other countries are working on similar projects. All stablecoins have one obvious drawback: the centralized mechanism for maintaining the exchange rate comes into clear conflict with the decentralized nature of the crypt.

Now you know how cryptocurrencies differ and what unique features each type has. Below is a list of TOP 10 cryptocurrencies with rates as of December 28, 2022.

Why is cryptocurrency needed?

Many people wonder, what is the point of cryptocurrency? The essence of the crypt is simple and clear. Decentralized peer-to-peer systems are transparent, trustless, and not subject to external control. If you answer the question: “Cryptocurrency - what is it in simple words?”, then we can say this: “This is a convenient alternative to bank transfers.” The distributed ledger system does not require intermediaries, which greatly simplifies trading and financial transactions. And records in the blockchain cannot be accidentally or intentionally destroyed or falsified. Crypto can also be used as a means of accumulating capital. First of all, Bitcoin is suitable for this, which many experts already call “digital gold”.

The entire financial system essentially works on trust; failures and even outright fraud often occur. Top managers receive huge bonuses for manipulating clients' assets in their own interests. In 2008, the failure of four banks could have brought down the global economy. A decentralized network, having lost one or even ten nodes, will not disappear anywhere and will function fully.

Cardano (ADA)

Another cryptocurrency that enjoys significant popularity among investors and large companies. In 2020-2021, the value of ADA increased by hundreds of percent. Potential growth in 2022 is from 100% and is due to:

• rapid growth of token capitalization;
• DeFi and NFT support;
• ADA transaction fees are significantly lower, and the processing of financial transactions is hundreds of times faster than in the Ethereum network;
• A thorough audit is carried out before updates are implemented.

Among the disadvantages of Cardano, one can note the relatively slow pace of development of the project, compared to other cryptocurrencies.

During 2022, the value of the ADA cryptocurrency increased by more than 1000%.

What are the advantages and dangers of cryptocurrency

We looked at what cryptocurrency is and why it is needed. Now it’s worth talking about its pros and cons. The popularity of crypto is explained by distrust of government and traditional money. People began to become disillusioned with monetary policy, so they resorted to using a decentralized payment system. The main advantages of cryptocurrencies:

1. Reliability. Encryption algorithms, blockchain and computing power make it difficult to hack or falsify money data.
2. Open source. This allows anyone to explore the software, look for bugs, and suggest improvements to the network.
3. Limitation. The quantity of some issued coins is limited and known in advance. The setting can only be changed with the consent of the majority of users on the network.
4. Cross-border payments. There is no longer any need to use banks or expensive intermediaries to transfer money to other countries.
5. Control over funds. In the event of a bank bankruptcy, no one guarantees the safety of funds or the possibility of their return. The holder of the crypt is personally responsible for the digital money.
6. Earning opportunity. The popularity and development of new technology allows for greater returns on investment compared to traditional tools.

Despite a number of advantages, cryptocurrencies have significant disadvantages:

1. Risk of losing all your money. To access money stored in the wallet, you must enter a private key. It cannot be restored or changed. If you lose your login information, your funds will be frozen in your account.
2. Attack 51%. The security of digital currency lies in the decentralization of computing power. If one person or group of people gains access to 51% of the network resources, this will allow any changes to be made to the operation of the blockchain. However, the more computing power a cryptocurrency has, the more difficult it is to implement this plan.
3. Exchange rate volatility. The value of digital coins is influenced by the level of user confidence and demand. The market also reacts unpredictably to changes in the policies of leading countries regarding cryptocurrencies.
4. No guarantees. All risks fall on the shoulders of investors. In case of loss of money, theft of funds, or lack of access to the wallet, nothing can be done.

Legal status

States have different attitudes towards Bitcoin - from complete rejection and even ban to encouragement. In those countries where transactions with crypto are legalized, digital money is regarded as investment assets or goods. In Germany and Japan, BTC is recognized as a unit of account. But in China, cryptocurrency transactions are allowed only to individuals.

Switzerland is considered the most loyal, where Bitcoin is accepted on the same terms as foreign currency. It is believed that Switzerland is the most favorable environment for launching blockchain startups.

In Russia, discussions about cryptocurrencies have been going on for a long time, but they have not yet been assigned a specific status, although most officials speak in a negative way.

How is cryptocurrency different from regular (fiat) money?

Fiat money is used by people to pay for goods and services in everyday life.
This could be funds on a bank card, banknotes or coins. In other words, fiat money is issued by the state, which sets its value and guarantees its value. Confidence in funds is reinforced by the number of purchase and sale transactions and the payment of taxes in state currency. Note: fiat currencies are not backed by anything other than people’s trust.
Currently, there are no standards requiring the use of gold or other precious metals to provide value for money. The exchange rate of fiat money depends on the government’s guidelines and the economic situation in the country. If necessary, the government can print an unlimited amount of money and put it into circulation. This increases the rate of inflation and reduces confidence in money. What's happening with cryptocurrency?
Digital assets are issued by network participants. The maximum number of coins is known in advance, which indicates the deflationary nature and increase in the value of the asset in the future. Miners are responsible for issuing new coins - they process transactions and mine new blocks, for which a reward is provided. Although the value of digital coins is not backed by anything, it directly depends on the level of demand. The more people become interested in crypto and start using it, the higher the price. The market is self-regulated. Help: one of the key differences between fiat money and cryptocurrencies is the impossibility of canceling the operation. In case of an erroneous transaction into someone else's bank account, there is a refund procedure. There is no such possibility with cryptocurrencies.

Where to buy cryptocurrency

There are several ways to purchase digital assets:

1. Exchange sites or platforms. These are special resources that analyze reviews, reliability, solvency and reserves of sites. You can buy cryptocurrency using dollars, euros or rubles. It is worth considering that exchangers sell the most popular coins. If you need to buy promising assets or cryptocurrencies with a small capitalization, only exchanges will do.
2. Direct purchase. On special forums you can meet cryptocurrency holders and directly make an exchange. Before a transaction, you need to study information about the person and make sure of his honesty. The main advantage is the absence of additional commissions.
3. Cryptocurrency exchanges. Designed for both trading and purchasing digital assets. After replenishing your account with fiat money, you will be able to purchase and withdraw cryptocurrencies.

You can quickly and conveniently buy cryptocurrency without leaving our website. Everything is accessible, simple and understandable even for a beginner. You can select the cryptocurrency you need from the list.

buy BTC

To make a purchase of cryptocurrency, you just need to click on the “buy bitcoin/any other presented cryptocurrency” button, select the purchase details, indicate the wallet address and determine the payment method.

Regulation

The legal regime for cryptocurrencies varies significantly around the world. An interesting resource for assessing the regulatory situation is https://coin.dance/poli/legality

Regulation of cryptocurrencies

The map shows areas of different colors:

• Green – cryptocurrency is legal, regulated in some way, and there are certain legal regulations regarding it.
• Light green – cryptocurrency is not regulated in any way.
• Orange – use of digital assets is available with restrictions. For example, in China, the central bank is launching its own cryptocurrency, but many international exchanges and exchangers are banned.
• Red – cryptocurrency is illegal, its use is equivalent to a criminal offense.

Countries for which there is no data are indicated in grey. As you can see, everything is most difficult with digital assets in Africa and Asia. As for European countries and the American continents, they found it best to legalize cryptocurrency in order to keep it under control.

How to make money on cryptocurrency

Currently, there are a number of ways to make money on bitcoins and other virtual currencies:

1. Buying and selling cryptocurrency. This is done on special exchanges or electronic money exchangers. The principle of operation is to buy a currency when its value decreases, and sell when it increases. Most often, such trading is associated with bitcoins, since their cost is higher than other types of cryptocurrency.
2. Cryptocurrency investments. Investments are made by transferring a certain amount of electronic money from one person in trust to another. Typically, brokers deal with trust management issues. You can also invest on your own.
3. Extraction of electronic money (mining). Cryptocurrency mining, in simple words, is the process of extracting cryptocurrency using special software. It will not be possible to produce large volumes of cryptocurrencies on an ordinary home computer; quite significant power is needed - so-called mining farms or ASIC devices.
4. Cryptocurrency distribution. Such services are usually provided for attracting referrals or entering letters from pictures (captcha), that is, in fact, for increasing site traffic. These are the so-called gateways, taps or distributors. There are also special Bitcoin games in which you can earn electronic money. Earnings on such services are small: a small portion of Bitcoin (Satoshi) is distributed per hour.

Chainlink (Link)

Quite an interesting cryptocurrency from the point of view of medium-term investments. This project is closely related to the development of the Ethereum infrastructure. Large investors do not question whether Chainlink's value will rise or fall. The question is how high Link's price can rise in the foreseeable future. Experts predict that the value of the token will increase to 60 USD over the next 3-5 years. During 2022, the price of Link was able to rise by 80%:

At the time of writing, Chainlink is trading at 22.19 USD. If we talk about medium-term investments, then this asset value is optimal for purchase. Please note that in April 2022, the token price tested the absolute correction level of 15 USD. Today, the asset is trading in a sideways trend, overcoming the resistance line of which should be interpreted as the starting point of a new upward movement. In other words, after fixing the ChainLink price at a level above 25 USD, it is advisable for traders to open Buy orders with a minimum target level of 33-35 USD. If you carry out such a transaction through CFD with one of the reliable Forex brokers, then, taking into account leverage, the profit potential can be 100-300% (the risk per order should not exceed 10% of the deposit).

How to think about cryptocurrency

Globalization and integration are two processes prevailing in the world economy, and they require a new approach to the financial system. Humanity needs funds that would not be tied to either a country or a bank, while being reliably protected and anonymous.

Crypto money meets these requirements. Anonymity is maintained during operation - no one will receive information about the payer or recipient during transactions, since these transactions only require a wallet number.

There are still mixed feelings about digital money. Many authors of projects related to economics, banking, law or medicine integrate the strongest aspects of blockchain into their work:

• safety;
• decentralization;
• transparency.

Most likely, in the near future these technologies will become part of the international banking system, various cloud services and other areas.

We looked at what cryptocurrency is and why it is needed, as well as what cryptocurrencies are. This information should help you become more familiar with the world of digital assets.

Flaws

• High volatility. The inability to predict how much the coins at your disposal will cost tomorrow;
• The precarious position of cryptocurrencies in the Russian Federation and tense relations with the state;
• Unprofitability of mining for individual coins.

Controversial characteristics include decentralization and anonymity. On the one hand, there are advantages to the lack of control; no one can influence the coin, but on the other hand, it gives scope for crime and tax evasion. No one will return your funds if the exchange goes bankrupt or they are stolen from your account by criminals.