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What is Cryptocurrency: Definition & How it Works 2022 (Simple)

Cryptocurrency

Through 12 years of existence cryptocurrencies, which initially were accepted as hobbies for computer maniacs, the camp of sensible distribution, which is considered a new stage in the evolution of financial instruments.

That is why now anyone who wants to be clear about technological innovations that are radically changing our world must know what cryptocurrency is, at least in general terms.

What is virtual currency

Cryptocurrency is a type of virtual money, which relies on blockchain technology. The requirements entail that cryptocurrencies have no physical form. However, they can access corresponding records in a distributed register that are subject to complex cryptographic rules.

gold bitcoin on crypto mining gpu computer


The concept of cryptocurrencies was first used after being published in 2011 in Forbes’ write-off titled “Cryptocurrency” (Cryptographic currency). The material focuses more on bitcoin, which is determined by the hatred of the creator, Satoshi Nakamoto, like “electronic money”.

An important feature of cryptocurrency networks is the fast and cheap transfer of funds directly between users, without the participation of intermediaries known to us in traditional payment systems.

Assets of this type of currency are managed using electronic wallets, which are accessed using a pair of unique keys – public and private. The cryptocurrency is sent through transactions, the execution of which is recorded in the blockchain. And because one of the main features of this technology is irreversibility, all cryptocurrency transactions that have taken place are reliably protected from the possibility of counterfeiting.

bitcoins as symbol of electronic virtual money


To date, there are thousands of cryptocurrencies, each of which is an independent blockchain project.

TOP cryptocurrencies

The most important indicator of the popularity and relevance of a cryptocurrency is its exchange rate.

Bitcoin

Bitcoin cryptocurrency (BTC) is a unit of account for transactions for the exchange of value between participants in a peer-to-peer payment system. The creator of bitcoin is a person or group of people known by the pseudonym Satoshi Nakamoto. The purpose of bitcoin is to allow electronic transactions without relying on trust, centralized systems or third-party service providers. This decentralized network is maintained by its users through a blockchain, an online public ledger in which all confirmed transactions are added in chronological order and can never be changed. Its implementation relies on the use of cryptography.

bitcoin


The first mention of the Bitcoin electronic payment system dates back to the fall of 2018, when a document was published describing the purpose and operation of the project, which was later destined to become the ancestor of all cryptocurrencies that exist today.

Bitcoin’s birthday is January 3, 2009, when the genesis block was excavated with the first 50 BTC coins. And the first transaction in the history of cryptocurrencies was the transfer of 10 bitcoins on January 12 of that year to Hal Fini, Nakamoto’s closest associate.

Unlike fiat currencies, bitcoin has a limited supply of 21 million coins, which solves the problem of inflation in the long run. In addition, this cryptocurrency is decentralized, which means that there is no single control center and its viability is maintained only by the participants in the system.

golden bitcoin virtual money


The emergence of new BTC coins is due to the work of the consensus algorithm PoW (Proof-of-Work, proof of work). At the same time, participants in the system, using special equipment and software for digging based on the SHA-256 hashing algorithm, compete in solving complex mathematical calculations to find the hashes of new blocks, for which they receive a reward in bitcoins.

To date, bitcoin is considered “digital gold”, ie the main cryptocurrency asset used to accumulate value.

Ethereum

The cryptocurrency Ethereum (ETH) is an internal exchange unit, as well as the “fuel” for the operation of the blockchain platform of the same name, launched in the summer of 2015. In the Russian-speaking community it is often called “Ethereum” or “ether”.

ethereum coin with bull


The creator of Ethereum is the Russian-Canadian programmer Vitalik Buterin. He proposed the original idea for his blockchain platform back in 2013 under the name Bitcoin 2.0, which shows his intention to launch an improved version of the main cryptocurrency.

Unlike most other coins, Ethereum not only performs a payment function, but is also used to create and activate smart contracts. The latter are a unique tool for implementing decentralized applications (dApps) on the Ethereum platform.

Today, Ethereum ranks second in the ranking of cryptocurrencies (after bitcoin). This position has remained almost undisputed since Ethereum became the main cryptocurrency for raising funds through initial coin offerings (ICOs) on many blockchain projects in 2017.

ether cryptocurrency


The supply of ETH is unlimited, but the rate of emergence of new coins is constantly slowing down, thanks to the mechanism for increasing the difficulty of digging, which is still based on the PoW algorithm. In the future, the rules for digging the cryptocurrency Ethereum will change drastically, as the introduction of PoS (Proof-of-Stake, proof of ownership) is planned.

Ripple

The domestic currency of the blockchain platform Ripple is today called XRP and is ranked 3rd in the cryptocurrency rating.

It first appeared in 2013, following the launch by Ripple Labs (then Opencoin) of an innovative blockchain-based payment system for the banking sector.

ripple xrp coin on black gravel background


The cryptocurrency XRP has become a major digital asset, enabling fast international transactions through the Ripple network in a matter of seconds, far exceeding the capabilities of both standard banking systems and most cryptocurrencies.

Despite the fact that XRP was created on the basis of the RipplePay service launched in 2005, which is positioned as an alternative to banks, now this cryptocurrency is actually helping the banking system to improve.

The supply of XRP is limited to 100 billion coins, all of which have already been issued. Therefore, this cryptocurrency has no digging. There are currently about 42 billion XRP in circulation, and the rest is kept in Ripple’s reserve.

Litecoin

The cryptocurrency Litecoin (LTC) is one of the first branches of bitcoin, ie it was created based on its code, but with some technical improvements that provide safer, cheaper and faster transactions.

crypto currency gold litecoin on dollar banknote


LTC was founded in October 2011 by former Google employee Charlie Lee, who continued to develop his project on his own for several years.

Until January 2013, Litecoin was not a well-known cryptocurrency, but then rose sharply 20 times and exploded in the market leaders with a market capitalization of $ 1 billion. Since then, LTC has stubbornly refused to leave the top 10 cryptocurrencies, mostly 5-6 positions.

As with bitcoin, Litecoin mining is based on the PoW mechanism, but the hashing algorithm is used differently – Scrypt instead of SHA-256. The maximum issue of coins is limited to 84 million.

From the very beginning, the speed of transactions using the cryptocurrency LTC was 4 times higher than that of Bitcoin. But in 2017, with the introduction of Lightning and SegWit technologies, the Litecoin network began to run even faster.

NEM (XEM)

nem


New Economy Movement – this is how the name of the NEM platform is deciphered, whose national currency is the XEM token. According to the developers, this project embodies one of the most effective technologies among the existing blockchain.

The launch of the XEM cryptocurrency network took place in May 2015. But the real popularity of the project came only 2 years later, after entering into partnerships with a number of major banks in Japan. Against the background of these events, NEM managed to enter the TOP-10 in the rating of cryptocurrencies, but now its position has deteriorated significantly (25-30 place).

NEM (XEM) cryptocurrency transfer transactions are processed ten times faster than Ethereum’s. At the same time, its network does not suffer from problems with resistance to excessive loads and scalability.

XEM cryptocurrency does not have the usual digging – all coins are issued once in the amount of 8,999,999,999. And their distribution is carried out according to the collection model, which is based on taking into account the reputation of the accounts of network members.

Stellar

what are stellar xlm feature


Stellar (XLM) is a branch of XRP. It was created as a rethinking of the Ripple platform by one of its developers, Jed McCaleb. The Stellar cryptocurrency, which was later renamed Lumens, is based on the same idea of ​​providing fast and cheap interbank payments, but unlike XRP, it is completely decentralized.

XLM transfers are confirmed in a record 3-5 seconds. At the same time, the network can withstand a load of several thousand transactions per second and can be used to transfer or sell almost any asset, cryptocurrency and tokens.

Instead of digging, XLM has its own Star Consensus Protocol (SCP) with unique rules for checking node transactions and reallocating fees between them. A total of 100 billion XLMs were issued during the launch of the cryptocurrency. At the same time, an additional 1 billion coins are issued annually in support of the 1% inflation pattern.

Zcash

zcash cryptocurrency on the tablet


Zcash (ZEC) is an anonymous cryptocurrency created in the fall of 2016 as a bitcoin tool using the Zerocash protocol and zk-SNARK technology, which uses a zero-knowledge cryptographic protocol.

The main feature of the ZEC cryptocurrency are completely confidential transactions. This means that by default, only the very fact of transferring coins is recorded in the Zcash blockchain, without specifying the details of the transaction (addresses of the participants in the transaction, amount, etc.). However, if you wish, users can create public transactions.

Zcash cryptocurrency mining is based on the Equihash algorithm. At the same time, a block is created every 2.5 minutes and 20% of the miners’ remuneration is deducted from the project’s founders. ZEC’s maximum issue is limited to 21 million coins, just like bitcoin.

Monero

close up of monero physical coin


Like Zcash, the cryptocurrency Monero (XMR) is a branch, but not of Bitcoin, but of the anonymous coin Bytecoin (BCN). Launched in the spring of 2014 by a group of unknown developers.

The privacy technology used in Monero is based on ring transactions – before reaching the recipient, the funds move between randomly generated addresses, mixing with other transfers. In addition, ring signatures of user groups are used, which makes it impossible to identify the real sender. As a result, transactions are completely anonymous without the ability to track transaction participants and the amount of XMR coins moved.

The CryptoNight PoW algorithm is used to dig up the Monero cryptocurrency. There is no limit to the number of coins issued. It is only planned to reduce the prize per block by 10 times after digging up 18.4 million coins.

Cryptocurrency rate

bitcoin cryptocurrency gold coin trading


Each of the existing cryptocurrencies has a certain value. The price of those that are not yet traded on the exchanges is determined by the project team or the level of investor confidence. In other cases, the cryptocurrency exchange rate is a weighted average calculated on the basis of the supply-demand ratio on trading platforms.

On most exchanges, the best cryptocurrencies are traded in pairs with the US dollar or its digital counterparts – stablecoins. For example, the current Bitcoin rate is $ 9400, Ethereum is $ 185, NEO is $ 11. In Asian countries, this role is taken over by national currencies – yuan, yen, etc. Trading pairs of altcoins to bitcoin, ether, lightcoin are also popular.

To track cryptocurrency rates in real time, you can use charts on exchanges or specialized services such as Coinmarketcap, Tradingview, BitInfoCharts, CoinGecko and others.

Capitalization of cryptocurrencies

golden coin with bitcoin symbol and dollar banknot


The concept of capitalization came in the cryptocurrency industry from the field of financial markets. However, if for stock assets this indicator is calculated on the basis of their trading turnover on the exchanges, the capitalization of cryptocurrency is determined by a simplified scheme – the total number of all existing coins is multiplied by their price.

When it comes to the total market capitalization of cryptocurrencies, the value of absolutely all issued blockchain-based digital assets is summed. Currently, this parameter is equal to $ 250 billion.

It is capitalization that is taken into account when building ratings of cryptocurrencies, as it most accurately reflects their value. In addition, this is one of the key indicators that investors pay attention to. After all, the higher the capitalization of a cryptocurrency, the less its exchange rate is subject to sharp jumps, which means that the lower the risk of investing in it.

golden coin with bitcoin symbol


For example, in order to seriously affect the price of Ethereum, which ranks second in the ranking of cryptocurrencies with a capitalization of $ 20 billion, it will be necessary to conduct transactions in the market with assets worth millions of dollars. But for some, shitcoin, which ranks 1,500, a few thousand will suffice.

You can check the capitalization of cryptocurrencies in real time through the websites Coinmarketcap, CoinGecko, Binance Info, OnChainFX and other similar services.

Profit from cryptocurrency

The easiest ways to earn from cryptocurrency without investment are:

  • All types of cranes that charge a small amount of coins to visit a site or view advertisements;
  • Airdrops of new blockchain projects with distribution of cryptocurrency for subscription, liking or republishing on social networks and other simple tasks;
  • Referral programs of various cryptocurrency services and exchanges, providing a reward for inviting new users;
  • Prize campaigns in which coins are given to perform a set of tasks by users.
taking profits from investing


It is true that in all these cases it will not be possible to win much. At best, it will be about a few tens of dollars of income.

But if we talk about real profits from cryptocurrency, then its source is primarily volatility – frequent significant fluctuations in exchange rates. First, a good trader can benefit from both the difference in the price of the assets acquired and the trade in leverage, which makes it possible to generate income even in a non-declining market.

And second, even if we are not talking about active trading, a long-term investment in a promising cryptocurrency project can also bring in a very decent income of hundreds and even thousands of percent.

You can also try your luck in the field of cryptocurrency digging. It is true that in order to start digging and earning, you will need a good start-up capital to buy the right equipment.

crypto trader investor using computer


Cryptocurrency in Russia

Despite many years of attempts to legalize the status of cryptocurrencies in Russia, this has not yet happened. The latest, the Digital Financial Assets Act, which was passed at first reading in March this year, has not yet been finally approved. In theory, this should happen on November 1, but since the deadline was July 1 before that, there may be another postponement of the deadline.

But even if the bill is approved, Russian crypto enthusiasts are unlikely to sigh with relief, as it does not describe concepts such as “cryptocurrencies” and digging. We are talking only about tokens, digital assets and rights, as well as the category of “other property”, which supposedly includes coins from blockchain projects, but there is no specific mention of them. It turns out that this is not about legalization, but there is no specific ban on cryptocurrencies in the Russian Federation, and it seems that there will still be none.

bitcoin cryptocurrency coins on national flag of russia


If we go back to earlier documents, then in the letter of the Russian Ministry of Finance, published in the fall of 2017, cryptocurrencies are called a surrogate for money and therefore their use as a means of payment is prohibited. In fact, this means that they simply cannot pay directly for goods and services.

But the problem can be completely solved by pre-converting into rubles, which will already be used for payment as a legitimate financial asset. That is, until the immediate ban on bitcoin in Russia, there can always be legislative loopholes for the use of cryptocurrencies.

In the meantime, we can only hope that Russian officials will come to their senses and follow the example of the authorities of most developed countries around the world, who, while not always in support of cryptocurrencies, but at least they don’t pretend they don’t exist.

Last but not least if you want to learn more, can check the latest news about crypto and blockchain.

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