Cryptocurrency – what is it in simple words? Everything you need to know

After the events of 2017, most people on the planet learned about cryptocurrency, but few understand the principle of its operation and the difference from fiat. For most, crypto has remained something incomprehensible, on which one could make good money if they had bought it in advance. We propose to change the situation and still figure out what is cryptocurrency. In simple words, you will better understand its value and significance, understand how to use it, how to make money from it, and perhaps think about investing in digital coins.
From this article you will learn:

Cryptocurrency rates today
What is cryptocurrency in simple words?
Characteristics of cryptocurrency. Advantages
Features of cryptocurrency
Disadvantages of cryptoassets
Where to store cryptocurrency?
How to use cryptocurrency?
How to earn cryptocurrency?
Legal status of cryptocurrencies in the world
Conclusion

What is cryptocurrency in simple words?

Cryptocurrency (English: “cryptocurrency”) is money (digital coins) that exists only in electronic form on the Internet, and the circulation of which is not under the control of states and specific government bodies. Banks do not issue digital money into circulation, as happens with regular fiat currency (dollars, euros, rubles, etc.), and cannot influence transactions between users, which gives the digital asset market complete independence. Decentralization is the main advantage of cryptocurrency, this is its main essence.

The technology on which cryptocurrencies are created and operate is called blockchain. Within this system, emission (the release of coins into circulation) is carried out thanks to mining (the extraction of crypto-assets using computer power). There are also 2 more ways to issue cryptocurrencies: forging and ICO.

To use cryptocurrency, you do not need to disclose your personal data to anyone, as you usually do when registering in fiat payment systems such as WebMoney, Yandex-Money, etc. Crypto transfers are carried out anonymously, and most importantly, quickly within a few minutes (sometimes even instantly) to anywhere on the planet.

The value of a cryptocurrency appears only if there is interest in it from ordinary users. If it is not used, the crypt has virtually zero value.

The essence of cryptocurrency on video

Read further in the article for detailed characteristics of digital assets.

A little history. Who created cryptocurrency?

The word cryptocurrency first appeared in 2011 in Forbes. And this name better conveys the essence of the new type of money - it uses hash functions and encryption, so the prefix crypto is appropriate. But the name “electronic money” confused people; an association was created with cash stored in the wallets of electronic payment systems.

Above is the same publication on forbes.com. Since then, the term cryptocurrency has taken root.

Currently, the most popular cryptocurrency in the world is Bitcoin. This digital currency was developed by a group of people or one person calling themselves Satoshi Nakamoto in 2009. At the same time, bitcoins were launched into the network. This is the world's first cryptocurrency. But the creator himself at first used a different definition; he called Bitcoin electronic money or electronic cash. This name indicated that the crypt does not have a physical embodiment.

Until now, the creator of the crypt, Satoshi Nakomoto, has not revealed his identity and remains unknown to this world.

For the full history of the formation and development of cryptocurrencies, watch the video

Check details

When choosing a cryptocurrency and an exchange, do not get carried away by the fantastically generous offers. Crypt is, of course, a special world, but there is no free cheese here either. If they promise super-income, look for what’s wrong.

Here you can recall the instructive story of the Chinese service PlusToken, which promised investors an income of 10 to 30% per month. More than 3 million people (not only from China) invested in such a tempting thing, and at its peak in the spring of 2022, PlusToken was worth $17 billion.

Early investors did receive the promised interest, but others were not so lucky. The “Revolutionary Platform” turned out to be a banal financial pyramid. Chinese authorities arrested some of the organizers, but most of the money eventually disappeared.

Most fraudulent pyramids, of course, do not reach such a scale as PlusToken, but their creators cannot be denied the ingenuity of their creators. For example, the recently closed XtraderFX service in the UK advertised its services using fakes on behalf of TV stars and famous financial experts.

Characteristic signs of dubious crypto projects:

The people named in the project team have not previously appeared in the news of the crypto world. In some cases, in the project team you can even find the faces of famous actors with completely different names - this, however, is a completely outstanding precedent.
The creators of the cryptocurrency promise guaranteed profits. Most likely it is a pyramid.
The repository with the project code on GitHub is almost never updated. This means that either the project as such does not exist at all, or no one is working on it.

If any of this applies to the cryptocurrency you've been considering investing in, you might be better off choosing another, safer target.

Characteristics of cryptocurrency. Advantages

The properties listed below are typical for most types of cryptocurrencies:

anonymity – as long as you don’t transfer the crypto to fiat, anonymity really exists. When cashing out, it becomes possible to track the recipient and sender, but this is more difficult to do than with fiat. Well, you understand that you usually enter your data in exchangers when you change something, and also indicate the number of your fiat wallet. In the end, this turns out to be quite enough to reach the recipient. Another question is if you are withdrawing coins to offshore wallets (for example, AdvCash, Perfect Money), or simply anonymous (for example, Payeer), in this case everything is much more difficult, and with some privacy-oriented coins (for example, Monero), tracking something practically impossible;

Anonymous transactions
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lack of physical embodiment - in essence, the crypt is an entry in the register. This is not a banknote that you can put in your wallet. Currently, various companies often issue crypt coins in small editions, but these are nothing more than souvenirs;
decentralization and lack of regulation . The Central Bank regulates financial life within the state, but crypto does not have a regulator or a single center responsible for issuing. Uncontrolled release of crypto is impossible; in most projects, even at the stage of creating the code, a limit value of tokens is set, and it cannot be exceeded;
There are no geographical restrictions on the transfer of tokens. Cross-border fiat transfers take more than one day; in the case of cryptocurrency, it all depends on how quickly the transaction is confirmed by the network. In normal mode it takes up to 10-20 minutes, usually faster.

Relationship between network load and transaction confirmation time
low fees for crypto transfers . Below is an example for Litecoin; even during the period of high demand for cryptocurrency, the transaction fee did not reach $2;

Please note that when making a transfer in many cryptocurrencies, the user himself sets the amount of the commission. The higher it is, the faster the transaction will receive the required number of confirmations and the block will be added to the blockchain.

Litecoin fees

transparency . Complete transactions are recorded in the blockchain and do not disappear anywhere. In the same Bitcoin you can see the very first transaction that Nakamoto himself made;
universality of application - blockchain can be implemented in all areas of human activity without exception. Hence the confidence in the future of crypto.

These properties, with minor reservations, are inherent in all existing cryptocurrencies.

The reason for the emergence of electronic money

Cryptocurrency is, in simple words, digital money that exists only in virtual space. Already in 1998, Nick Szabo created an algorithm for the so-called digital gold; the scientist digitally created something that has the same characteristics as the real yellow metal. There was an attempt to launch a crypt in 2005, but it was only 2009 that was successful, when Bitcoin launched.

Initially, the crypt was created to eliminate the shortcomings of the conventional financial system, such as:

high commissions;
restrictions on transfers between countries, long approval times for cross-border transfers;
lack of anonymity. The bank always knows when, how much money and to whom you transferred;
restrictions on the size of transfers.

Bitcoin and altcoins lack this, which is what led to their popularity. At the same time, any crypt is not a value in itself; developers must convince the crypto community that they are solving a specific problem. Only under this condition does the cryptocurrency have a chance to grow in price.

The ratings on coinmarketcap are full of so-called shitcoin (garbage coins). Formally, they are not bad, but the coins simply got lost among the rest. Some of them were created as copies of well-known projects in order to make money on hype. The value of a cryptocurrency is determined to a large extent by the confidence of the crypto community in its future .

Junk coins

Not only the technical implementation is important, but also the idea itself; if a crypt is created solely as a speculative instrument, it has no future. Let's give a couple of examples:

a platform for creating decentralized applications is being created . To access its functionality, you need to own a certain number of tokens. This idea has a future - it offers a real product, and cryptocurrency is a tool that allows you to use it;
a crypt is created with a rigid exchange rate pegged to the dollar, euro or other fiat currency, with each token backed by fiat in bank accounts . The idea is original, many people want to protect their capital from declines in the value of crypto, but they also have no desire to convert it into fiat.

This must be taken into account if you are planning to become a crypto investor. You can’t invest in the first coin you come across.

Above, we mentioned the term blockchain several times; to understand the principle of operation of a crypt, you need to understand this definition. Blockchain is a derivative of the words block (block) and chain (chain). Transactions are combined into blocks and linked into a chain, each new block is added to the chain once confirmed and cannot be changed in the future.

Since there is no single center, the blockchain is stored on users’ computers. This makes it protected from outside interference. If it is deleted on some devices, 1 PC with the remaining blockchain is enough for all data to be saved.

Where does digital money come from?

To better understand what cryptocurrency is, you need to understand where it comes from, i.e. who issues cryptocurrency. There is no emission center, so all network participants are involved in the production of crypt. The mining process is called mining or "digging".

How does mining work?

Let's look at an example of crypto mining using the example of military-technical cooperation:

transactions are combined into blocks. The miners' job is to confirm the block, after which it is added to the chain;
Due to the hashing operation, arbitrary input data is converted into a bit string of a certain length, it is called a hash;
the block is considered confirmed after the hash corresponding to the new transactions + secret key is found. The miner who completes this task receives a reward, which decreases over time. Previously, they gave 25 BTC, then they halved, and in the future the reward will decrease even more.

In simple words, the process of mining cryptocurrency can be represented as follows:

there is an array of source data;
there is a set of instructions, they say what actions need to be performed with the source data;
there is a known answer. The miner’s task is to select, by simple search, a set of initial data corresponding to the answer known in advance.

The process described above is valid for the PoW (Proof of Work) consensus algorithm; it is quite energy-intensive and requires enormous computing power. There is PoS - the so-called wallet mining, in which profit depends on how much crypto you store, there is DPoS, hybrid consensus algorithms.

The difference between cryptocurrency and money in electronic wallets

These are fundamentally different things:

Cryptocurrency is electronic money, it does not physically exist, that is its essence. We discussed how they are obtained above;
money in the wallet of a payment system, for example, WebMoney, is not a cryptocurrency, although they also exist in the digital space. WebMoney creates title units, for example, WMZ to indicate dollars on a wallet. This is the same fiat currency, it is simply represented virtually. Each title unit is backed by real currency in accounts with guarantor banks, and you can always exchange title units for regular money at a 1 to 1 rate.

Virtual money WebMoney
This is a common misconception among beginners, do not fall for it.

Stablecoins

A stablecoin is a cryptocurrency whose value is tied to the value of a real asset. A striking example is the Tether coin (USDT), the rate of which is always 1 dollar, plus or minus a fraction of a percent.

The purpose of creating such currencies is to eliminate volatility - one of the main disadvantages of digital money. However, this also has its drawbacks: the principles of decentralization and free price formation, originally inherent in the idea of cryptocurrencies, are violated.

Features of cryptocurrency

digital money is not subject to the concept of inflation;
your cryptocurrency is in your sole possession . No one will be able to seize your coins, seize them, etc. Even if your coins are seized by a court decision (which in theory could be), the bailiffs will not be able to do this, since they will not have access to your wallet until you yourself give them your key (set of characters). In the case of regular fiat, the bank will instantly seize your money and you will not be able to use it;
the issue of coins is limited . Basically, cryptocurrencies have a pre-programmed emission. So, for example, for Bitcoin this number is 21 million. That is. In total, 21 million Bitcoin coins can be issued, and no more. The same applies to other altcoins, only each of them has its own limitation. This feature has a positive effect on the price of crypto assets, since any scarce product has increased demand and cost. However, there are also coins whose emission is not limited, for example Dogecoin.

Technical analysis

To make money from trading, you need to know everything about previous price movements. The tradingview website has all the necessary tools for analysis : chart, drawing tools, indicators, trading volumes, price movement history. If you are a beginner, you can look at the ideas and notes of other users. You can also run a market simulation to test your trading strategy. The site is complex, but very useful . Perhaps in the future I will write a complete guide on developing your own trading strategies.

Disadvantages of cryptoassets

extremely high volatility . In theory, any crypto can either soar to sky-high heights or fall to zero. It all depends on its demand. This is not very good for ordinary people. However, in some ways, greater volatility is an advantage for speculators, who can make big money on such races;
problems with regulation . Currently, the legal status of cryptocurrency has not been fully determined. In some countries, crypto is prohibited, in others it is not regulated in any way, some countries have taken the path of legalizing cryptocurrencies, and in others they are even imprisoned for their circulation;
a lot of scammers . With the advent of digital coins, hackers have proliferated, who continually steal huge amounts of coins on cryptocurrency exchanges, and simply from the wallets of ordinary users. However, if you follow basic rules of behavior on the Internet, you can easily avoid hacker attacks and save your coins.

use of cryptocurrency in criminal activities . Criminals took advantage of the decentralization and anonymity of cryptoassets. Crypto is often used in the financing of terrorism, the sale and purchase of narcotic drugs, laundering criminal proceeds, etc. In general, the darknet does not sleep. By taking advantage of the properties of crypto, criminals often go unpunished.

Where to store cryptocurrency?

Having what a cryptocurrency is , the issue of storing the crypt remains unclear. These are not paper bills and cannot be placed in a regular wallet.

Crypto wallets are used to store tokens - they are produced both as separate software and as devices that, if necessary, connect to a PC. Let's briefly go through the types of wallets:

hot (online crypto wallets) – the wallet is created through a browser, there is no need to download the blockchain, and the process of creating a crypto wallet takes less than a minute. This is the most dangerous way to store cryptocurrency, since in the process of work you come into contact with the Internet network, which, if you are inexperienced, can result in a hacker attack. In addition, there is a risk that companies supplying these types of wallets will simply close down and you will lose your coins;
cold ones are separate software, installed on the user’s computer and require downloading the blockchain, which can become a problem. For example, in the case of Bitcoin, the volume of the blockchain amounts to hundreds of gigabytes. There is also a compromise option - thin wallets, in which there is no need to download the entire blockchain. Reliable ones include Exodus, Jaxx, Electrum. This is a more reliable option for storing cryptocurrency;
paper – suitable for long-term storage of cryptocurrencies. Through a special website, the login data for the wallet is encrypted in the form of a QR code. The code is printed on paper, but the site itself does not save this information. One such wallet is BitAddress. Among the disadvantages of this approach, we note the possibility of losing access to the wallet. Lose a piece of paper with your login information and you can say goodbye to your crypto.

Paper wallet
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hardware crypto wallets – a small device that connects to a PC if necessary. Maximum reliability, suitable as a portable safe for storing large sums in the crypt. Well-known manufacturers – Ledger, Pi Wallet, Trezor. The safest way to store cryptocurrency.

Hardware wallet

Many wallets are multi-currency, that is, if you have formed a portfolio of cryptocurrencies, you do not need to open a separate crypto-wallet for each.

And yet, when to buy crypto?

In fact, it was necessary to buy crypto after the previous strong fall, which happened at the beginning of 2022. There was plenty of time, because... at the bottom, the entire crypt was trading literally ALL of the last 3 years, and only in December 2020 did it start to grow well. As they say, where have you been before?

Purely theoretically, of course, you can still buy a couple of top coins at current prices in the hope of scenario #1. BUT I would NOT recommend that you do this, because... The likelihood that you will be able to make money on this is extremely low!

If your hands are itching, I can’t help it and you really want to buy cryptocurrencies right now, then the MAXIMUM you can allocate for this adventure is 1% - 3% from your investment bank! No more!

And in general, make it a rule to buy assets at low levels and sell when there is good growth. A useful rule and it does NOT only apply to cryptocurrency! ッ

How to use cryptocurrency?

There are several options:

use it as a regular means of payment. Some stores accept electronic cash as payment. The list of available payment methods may not include an option with Bitcoin or altcoins; check with technical support and the store’s operating rules;

Accepting payment in cryptocurrency in an online store
invest in electronic money . The method involves working on a Buy & Hold strategy - we create a portfolio of several coins and wait 5-10 years (or better yet longer) until the cryptocurrency increases in price;
make money on cryptocurrency . You can make good money on digital coins. All available ways to make money on crypto are on our blog, including trading coins on Forex, on a cryptocurrency exchange, making money on faucets, mining, etc.
use crypto to raise funds through crowdfunding. ICOs still attract good money, so if you have an original idea, but no funds to implement it, try to get money this way. It is not necessary to go to the bank for a loan;
storing money. The option is risky; due to volatility, you can lose a lot in a short period of time. But if you have extra money, you can transfer it to crypto and, if necessary, withdraw it back to fiat.

So far, crypto is not universally recognized as a full-fledged means of payment. This significantly restrains its spread and penetration into all areas of our lives.

Structure

Information about all transactions is stored on the blockchain. An article will be published soon about what blockchain technology is with a detailed description of how the entire system works. To put it very simply, using the records in the blockchain you can track all the coins and find out the balance of any wallet . This way you can do without a central server - the closest participants in the system can confirm that there is money in the wallet, confirm the transaction and add it to the next block to complete the transfer. a commission for transfers ; the size of the commission affects the speed of the transaction.

Legal status of cryptocurrencies in the world

Cryptocurrency is something that takes away the regulatory role of the state . It becomes more difficult to control cash flows, and doubts arise about the feasibility of the existence of banks. This explains the slow acceptance of cryptocurrencies in the world; few people want to independently limit their power and influence.

The legal status of crypto in the world ranges from recognition of it as a full-fledged means of payment to a complete ban. There are still countries where you can get a prison sentence for mining or simply using electronic cash.

To understand the complexity of regulating the crypto industry, let’s look at the situation in the United States:

the IRS (Tax Administration) described cryptocurrencies as having no legal status regardless of jurisdiction;
The IRS considers transactions with crypto as barter;
FinCEN reported in 2013 that a business related to the exchange of cryptocurrencies must register according to the rules of a business operating in the field of providing monetary services. It is also mandatory to comply with the Bank Secrecy Act, that is, FinCEN indirectly confirmed that crypto = money;
in this case, the crypt is considered a taxable base. A tax is charged on the value of the crypto at the time of its creation and sale;
the SEC previously stated that mining should not be taxed if conducted by a private individual;
The US Accounting Chamber reports that the tax is not paid if the crypt is not withdrawn into fiat and real values are not purchased. That is, you can exchange crypto for other electronic money and other virtual things;
add to this the SEC's controversial stance on crypto trading. Crypto futures were launched at the end of 2022, but the creation of ETFs linked to cryptocurrencies has already been rejected several times;
All this is subject to a bias towards electronic money due to the Silk Road story, when criminals then actively used Bitcoin for mutual settlements.

There is no unity even in the position of what crypt should be considered. In some countries it is an analogue of foreign money, in others it is a commodity, in others they generally prefer to turn a blind eye to its existence. Many have taken a wait-and-see approach; it is more convenient to wait until someone else develops legislation and then adapt it to suit themselves.

Who releases?

Someone has to make money. The Central Bank prints rubles, hunters get skins, divers look for shells, and crypts are mined. Mining is inextricably linked with decentralization and blockchain. Blockchain is an archive that consists of sequential blocks . Each block contains information about transactions in the cryptocurrency network, that is, the blockchain stores information about the movement of all coins during the existence of the crypt. Each block also has a hash sum of the previous blocks. If you change one block, the hash of subsequent blocks will no longer match it, making it impossible to hack or change the blockchain . The blockchain is simultaneously stored by all participants in the system. The structure of the blockchain is in the picture.

Mining is the process of finding and signing new blocks. To do this, miners run a program on their computer that searches and hashes random numbers until one of the miners finds a number that matches the condition. Conditions are selected automatically to ensure a certain speed of mining blocks depending on the power of the computers involved in mining. For the number found, the miner receives a reward in crypt. If you want to learn more about mining, watch the video.