This article will analyze what a cryptocurrency is and how to earn money on it. Digital currencies appeared not so long ago but have already grown into an entire industry. It has traders and investors, trends and novelties, and its media and opinion leaders. We will talk about everything in the most simple language possible.
The concept of cryptocurrency
Cryptocurrency is a digital payment system. Its main difference from traditional ones is the lack of centralization and a single controlling center. It does not exist physically and is essentially a digital expression of information about financial transactions. Transactions are combined into blocks and blocks into a continuous chain. This technology is called “blockchain.” The information in the blockchain is decentralized and stored on different computers worldwide. This is the reason for its reliability – for hacking, it would be necessary to gain access to a large number of servers at the same time.
About what bitcoin and cryptocurrency are, they first started talking in 2009. The creation of the first digital currency is attributed to a certain Satoshi Nakamoto (this may be a pseudonym). On January 3, the first block was created, and the first 50 bitcoins were mined. And here we come to an important question: how are crypto assets created if they do not have a physical form? To describe this, the concept of mining was introduced.
What is cryptocurrency mining?
Mining is the creation of new blocks in the blockchain or other structures needed to store information about transactions. Information about operations is combined into a block, and then a unique key is calculated to seal this block. Whoever finds the right key first gets a reward. This is mining. Since the number of transactions is enormous and cryptographically protected, mining requires serious computing power, and the process is very labor-intensive.
Cryptocurrency features
To explain cryptocurrency in simple terms, let’s look at the key feature of blockchain technology. Most cryptocurrencies are based on it. Blockchain implies the irreversibility of transactions – information is immediately written to the block and changes the data in the entire chain. To change or rеplace an operation, you need to interfere with the data on millions of computers, which is impossible.
This implies an essential feature of the cryptocurrency – decentralization. Thanks to it, banks, states, or regulatory authorities cannot track the movement of funds within the network. This is partly why cryptocurrencies have an ambiguous or controversial status in most countries.
Anonymity is another essential characteristic of cryptocurrencies. All network members have access to transaction data, while only wallet numbers are public, but not their owners. You can own any cryptocurrency wallet, make transactions from anywhere, and be anyone.
Some cryptocurrencies, such as Bitcoin, have a limited supply. This means that the source code contains the maximum number of coins that can be mined. You cannot endlessly issue new coins, reducing their price, as is often the case with traditional money.
Where to get cryptocurrency?
So, we briefly figured out what cryptocurrency is. For dummies, mining is not the easiest option for mining coins. It is much easier to buy them for fiat money or exchange them for goods and services. Some companies already accept cryptocurrency as a means of payment and keep it on their balance sheets.
When it comes to buying crypto assets, there are three main options:
Cryptocurrency exchanges. Large platforms where sellers and buyers place their offers. You can find a reasonable exchange rate on the stock exchange. The minus of deals for beginners is the complexity and variety of functionality. To buy a cryptocurrency on a sale, you need to register on it, verify your identity, study the commissions of the exchange, and also understand the methods of selling and buying (there are several of them on each sale). We wrote more about this in the article “How to buy cryptocurrency on the exchange.”
P2P platforms. It’s kind of like a buy and sells classifieds site. Unlike the exchange, there are no intermediaries; commissions are minimal or absent. The disadvantage of such platforms is that you are not immune from unscrupulous sellers. P2P platforms usually ensure the security of the transaction but do not verify the seller’s identity and methods of receiving funds.
Exchangers. The easiest option is to buy a cryptocurrency for a beginner. The rate here is somewhat lower than on exchanges, but the buying process is fast, and the functionality is simple. The main thing is to choose a reliable service with a good reputation. Buying cryptocurrency in the Mine guarantees quick receipt of coins and high-quality technical support on any issues.
In the exchanger, it is enough to fill out a simple form and pay for the exchange application. A few minutes – and coins in your wallet. Photo from Mine.exchange.
How to store cryptocurrency?
Cryptocurrency does not have a physical expression in the form of banknotes or metal coins. But to store it, you also need a wallet. A wallet is a combination of public and private keys for accessing transactions. You can transfer the first one to counterparties so that they send you money. And only you have the second one, which gives you access to transactions. Possession of a private key from a crypto wallet is essentially the possession of the coins that are stored in it. Lose the key – lose money.
Keys can be stored anywhere: even in your head or on paper. This is one of the most reliable methods since it excludes the presence of your keys online and access to them by outsiders. There are also special devices that resemble a flash drive – hardware wallets. They can be connected to a computer when you need to send funds to another user or, for example, credit them to your account on the exchange. All of these methods apply to cold wallets.
Hot wallets are online. Such a wallet can be created in your account on a cryptocurrency exchange or, for example, in a mobile application. Since they are constantly online, they recommend storing only a small amount of coins you need online access.
Summary
We told what a cryptocurrency is in simple words. For dummies, the most obvious comparison would be with an electronic payment system. Cryptocurrency is an encrypted record of financial transactions. The totality of these records is collected in a chain and cannot be changed without affecting the rest of the documents. Therefore, cryptocurrency transactions are irreversible and very difficult to hack.
The people who process transactions and look for the keys to encrypt them are mining. They receive remuneration for their work. However, this method of mining cryptocurrency is quite tricky for a beginner.
It is much easier to buy cryptocurrency on exchanges (for example, Binance or Huobi) or in exchangers (for instance, Shakhta).
It would help if you stored cryptocurrency in your wallet. You will have a private key that is known only to you and gives you access to the coins. In addition, there is a public key – an analog of the bank account number you transfer to the one who sends you coins.
Cryptocurrency is decentralized: transaction information is stored on millions of computers worldwide. This ensures its reliability and the impossibility of control by authorities or states. This critical difference between traditional currencies and financial systems helps to understand what a cryptocurrency is and why it is needed. Crypto enthusiasts believe that cryptocurrency can rеplace conventional money in the future, but so far, its legal status in most states is ambiguous.
