Even children can use traditional money today, but not everyone can explain what a cryptocurrency is in simple words. This article will explain how cryptocurrency is produced, why it is needed, and how you can earn it.
What is a cryptocurrency?
A cryptocurrency is a unit of accounting for transactions within a decentralized payment system. We are accustomed to transferring money and making purchases or sales with the help of banks. They are centralized; that is, information about all transactions is in one hand. The bank confirms the fact of transferring money from one account to another. This operation cannot be carried out twice or pretended that it did not occur since the bank is responsible for its confirmation and security. For their work, banks charge commissions from customers and dictate their terms for using financial products.
Cryptocurrency works similarly, but there is no one center. Transaction information is stored on thousands of computers around the world. It is combined into blocks and chains that are protected by cryptographic keys. This technology is called a blockchain. The entire chain will change if you change the information in any of the blocks.
States or central banks do not control cryptocurrency. It makes transaction processing independent, transparent for all participants in the network of computers included in the blockchain, and at the same time anonymous. The legal status of these transactions in many countries is due to how cryptocurrency works. In simple words, we can summarize: cryptocurrency replaces banks and traditional payment systems, removing financial transactions from the control of states and corporations.
What does it mean to “mine cryptocurrency”?
Blockchain is formed continuously with the advent of data on new operations. Processing transactions in the blockchain and selecting keys for encryption require computing power and effort. For this work, the people who do it are rewarded. The unit of this reward is the “coin” – bitcoin, litecoin, Ethereum, or any other. This is an example of how cryptocurrency mining works. In simple words, it can be described as the process of sealing blocks in the blockchain, which supports the existence of the payment system and the cryptocurrency itself. Mining is one of the ways to earn cryptocurrency. You can’t call it simple; we’ll explain in a nutshell why.
Since several computers within the cell are simultaneously calculating the keys, there is competition between them. The reward goes to the one who owns the best equipment and does it faster. Because of this, mining is becoming increasingly expensive and energy-intensive, so individuals are less and less engaged in it. Usually, people or companies get together and buy many computers. They are connected to the network permanently to perform calculations. This is what a cryptocurrency farm or mining farm is.
Cryptocurrency features
The main characteristics are embedded in the very definition of what a cryptocurrency is. In simple terms, there are several critical features for dummies:
Decentralization and lack of control. Information about transactions in the blockchain is stored on a vast number of servers around the world. It is equally available to all participants.
Anonymity. Despite the openness of information about transactions, users see only each other’s wallet numbers (analog of a bank account number). The owner of the wallet remains unknown.
Irreversibility of transactions. A record of an operation in a block leads to a change in the entire chain. Therefore, the process cannot be canceled.
Lack of physical form. All images with coins are nothing more than symbols. This means that cryptocurrency is a computer code; it cannot be touched or put in a pocket. And a cryptocurrency wallet is a storage of information online or on a device; that is, it has nothing in common with a regular wallet.
Despite this, cryptocurrency, like traditional money, has an issue. It can be limited or unlimited. Let’s analyze this cryptocurrency feature in simple words using the example of bitcoin. Its source code states that the total number of coins cannot exceed 21 million. The issue affects the cryptocurrency price: the unit value usually falls if a new cash portion is issued.
How to get cryptocurrency?
Before you can earn cryptocurrency, you need to purchase it. There are several ways to acquire cryptocurrency. Above, we have mentioned mining – the calculation of cryptographic keys for the blockchain for a reward. It is too costly and time-consuming for beginners.
It is much easier to buy a cryptocurrency for traditional money (also called fiat). There are three main types of platforms for buying and selling cryptocurrencies.
Exchanges – often have pretty high commissions due to a large number of intermediaries, but there are many tools for trading and earning. Among the essential businesses today are Binance, Huobi, and Coinbase. When choosing, it is better to focus on the quality of support, ease of depositing and withdrawing funds, and the presence of a Russian-language interface.
p2p platforms are peer-to-peer platforms where sellers and buyers post their ads. This is something like Avito for cryptocurrency. The platform ensures the security of transactions by blocking funds on the buyer’s account until the seller confirms that the transaction has occurred.
Internet exchangers are fast; the rate is less floating than on exchanges, and commissions are small. It is essential to choose carefully because many scammers are online. Do not trust too favorable rates or suspiciously small commissions. This market already has players with a good long-term reputation – for example, the most popular service in Russia and neighboring countries, Shakhta.
Summary
A cryptocurrency is a unit of account of a decentralized payment system. This payment system is a transaction record that is stored on computers around the world. Data is packed into blocks protected by cryptographic keys and combined into a chain – blockchain.
Cryptocurrency has several distinctive features:
Lack of physical form. A cryptocurrency is a code, not a banknote, coin, or card.
Decentralization. States or corporations cannot control it.
Anonymity. Transaction data is available to all network users, but no one knows the identity of the owners of crypto wallets.
Irreversibility of transactions. Changing information in one of the blocks changes the entire chain, so it is impossible to cancel the operation.
Volatility. Most cryptocurrencies are not pegged to traditional (fiat) currencies or gold. Their price is influenced by supply and demand so that the rate can change tens and thousands of times quickly.
Cryptocurrency is a payment and investment tool that serves blockchain projects, computer games, metaverses, mobile applications, and so on.
In many countries, the legal status of cryptocurrency is not fully defined. In simple terms, in Russia, you need to remember that cryptocurrency is not a means of payment. You can own it, buy or sell it, but not exchange it for goods and services.
Cryptocurrency can be obtained through mining, exchanged for goods and services, or fiat money. You can buy a cryptocurrency for fiat on exchanges, peer-to-peer platforms, and exchanges.
