Cryptocurrency - what is it?

Cryptocurrency, or digital money, is a virtual means of payment and an investment resource whose operation is based on a distributed accounting system. As interpreted by the Court of Justice of the European Union, cryptocurrencies are full-fledged means of payment and are therefore exempt from VAT, which applies to goods and services.

What are cryptocurrencies?

In the cryptocurrency market we currently have over 10,000 functioning coins and projects. Each of these projects represents a certain vision and different mechanisms of action, but what are cryptocurrencies? Virtual money or digital currencies is of course an apt name, while we cannot stop at this simplification.

All because of the sophisticated nature of cryptocurrencies. As I managed to mention, crypto is based on a distributed, or in other words decentralised, accounting system. What is the unusual specificity of this solution?

The philosophy of cryptocurrencies - You are your bank

In the world of cryptocurrencies there is no overarching authority - such as a central bank - that can stop or reverse transactions. Everyone is their own bank, which in addition to the independent and completely free transfer of funds means that the funds of each user are as safe as the user himself will take care of this safety.

Cryptocurrencies mostly use advanced encryption algorithms that prevent unauthorised access to funds. The only circumstances that may contribute to the loss of virtual money is a gap in the security of a given cryptocurrency, which allows the theft of funds (which happens very rarely, it is even a margin), and the second possibility - which is 99% of cases of loss of funds, that is the loss of access to the wallet combined with the publication of data to operate the wallet, or private key.

An open and decentralised accounting system

This is what the blockchain, or Blockchain, is. Transactions stored on the chain are irreversible and anonymous - the block that contains information about transactions contains encrypted data, such as wallet addresses or keys needed to carry out the transaction.

The blockchain of each cryptocurrency has a unique specification. The bitcoin blockchain, despite many similarities, is different from the blockchain technology used for Litecoin or Ethereum.

What are the differences?

The best example of the differences, are the creation times of new blocks, which has a significant impact on the speed of transactions. With Bitcoin, a block is created every 10 minutes, while with Litecoin this time is reduced to 2.5 minutes.

Blockchain technology does not have an overarching authority - we are back to the principle of being your own bank. Instead of one strong authority that has the power to confirm or reject transactions, blockchain is based on independent nodes - Nodes, which take care of confirming users' transactions, thus preventing the problem of double spending, meaning that a user cannot spend the same money twice.

Confirming transactions can be done on a variety of consensuses - the most common is PoW - or proof-of-work, but an increasingly popular solution, especially due to its low resource requirements, is PoS - or proof-of-stake.

To understand exactly how Blockchain works, be sure to check out our article on the subject.

An alternative to Blockchain

The cryptocurrency market has already seen the emergence of technologies that have the potential to lead a revolution in the payments industry - digital currencies based, for example, on DAG (Directed Acyclic Graph). In this solution, it is not the nodes that confirm users' transactions, but the transactions confirm each other. Every transaction carried out in a currency that uses DAG, for example IOTA, must confirm two transactions.

DAG, unlike blockchain, scales with the number of transactions, which in theory means it makes no difference whether it handles 100, 1,000 or 1,000,000 transactions per second. By comparison, Bitcoin handles about 5 virtual payments per second.

What cryptocurrencies do DAG use?

In addition to IOTA, we still have NANO and OBYTE, among others. While the DAG model has the potential to become Blockchain 3.0, developers still need time to master the new technology and realise its full potential. Currently existing solutions are vulnerable to attacks and have baby-age defects, which means that we will have to wait for the revolution of the good old Blockchain technology, despite its scalability problems.

A brief history of cryptocurrencies

Everyone has probably heard about the beginning of Bitcoin (BTC) - 2009, Satoshi Nakamoto... Of course. These are very important moments in the history of crypto - even groundbreaking (and that's why we'll come back to them), but they are not the actual beginnings of an idea or a working concept that could claim to be the actual pioneer of the field.

Cryptocurrencies could have been born in the Netherlands!

One of the earliest approaches, which bore a striking resemblance to the virtual money concept we know today, began in the Netherlands and that was some 20 years before Satoshi's work!

Dutch petrol stations were facing a huge problem of night-time thefts, but instead of investing in security guards, a group of developers tried to create smart-cards, which were modern at the time, with which payments could be made instead of cash. The cards operated on the basis of electronic money, which makes them one of the first examples of functional cryptocurrency.

B-Money

In the late 1990s (1998), American developer Wei Dai created a concept for an anonymous electronic money system called B-Money. Ultimately, the concept turned out to be a failure, but it laid the foundations for Bitcoin. As for the importance of this project, it is worth mentioning that the creator was honoured in Bitcoin's whitepaper, and by Vitalik Buterin, who named one of Ether's fractional parts after Wei.

Satoshi Nakamoto - The Era of Bitcoin (BTC)

The history of Bitcoin began on December 18, 2008. On that day the domain Bitcoin.org, which is still active, was registered. Oddly enough, we still don't know the identity of the person who registered the domain.

Shortly afterwards, on 31 October 2009, a group using the pseudonym Satoshi Nakamoto announced via a mailing that they were working on an electronic money system that was fully decentralised (free from master entities) and based on a peer-to-peer solution.

On January 3, 2009, Block 0, known to the crypto community as the Genesis Block, was excavated, which contained the text The Times 03/Jan/2009 Chancellor on brink of second bailout for banks. The content of the block was both a sign of the times as well as an important political commentary, but also a sign of a new era!

5 days later - on 8 January 2009 - the first version of bitcoin's software was unveiled, and a day later Block 1 was dug, marking the start of bitcoin mining.

The story leaves one mystery still unsolved.

Who was Satoshi Nakamoto?

Nobody knows who invented Bitcoin. Satoshi Nakamoto, the username under which the creators hide, can mean both creators and one creator. We can also link the name to a Bitcoin whitepaper that was published in 2008.

Why is Satoshi unknown?

The answer to this question may be incredibly simple - the creators did not want publicity. Taking a closer look at the history of similarly anti-systemicists, we can only guess that Satoshi wanted to avoid the attention of the media and the world's governments - after all, he created a currency that was meant to bypass centralised banking entities - which provides the user with anonymity.

As a currency that could threaten traditional finance, linking it to specific individuals could lead to the project's rapid disappearance, but the reason could also be another - security.

Looking at 2009 alone, 32,489 blocks were dug up, which at the time translated into 1,624,500 Bitcoin. A person with such a huge hoard of digital currency could be a greedy morsel for all sorts of criminals.

Contemporary history

Today, the cryptocurrency market, despite its young age, is already fully adapted to the world. From a resource for eccentric idealistic investors, bitcoin has become a widely respected investment asset whose properties in storing value are compared to gold.

We now have 10,000 different cryptocurrency projects in the cryptocurrency market. Its capitalisation at its peak was larger than any existing company - at the beginning of May 2021, the cryptocurrency capitalisation was $2,310,000,000,000 when the highest valued company - Apple Inc. $2,200,000,000,000.

How to get cryptocurrencies?

There are a couple of paths leading to the possession of virtual currencies. One of them leads through a complicated process of mining, which requires a rich wallet to buy cryptocurrency miners. Another, much simpler - is the way of buying.

We can buy cryptocurrencies on a cryptocurrency exchange, in an exchange office and from another user. The safest options are of course the first two, because in the anonymous world of virtual currencies it is easy to carry out fraud.

When it comes to cryptocurrency exchanges, it is worth betting on proven solutions and using the secure and instant Bitclude marketplace. With the help of a trivially simple interface, an instant registration process and a quick purchase process, the Bitclude cryptocurrency exchange is the best solution for an investor who wants to come into possession of cryptocurrencies.

How to store cryptocurrencies?

Now that you know that you can buy cryptocurrencies on a cryptocurrency exchange, now you're probably asking yourself - where to store them? The first thought that probably comes to your mind is a wallet.

This is a very good connotation, but unfortunately with bitcoin and other cryptocurrencies the matter is a little more complicated - while we do indeed use something of similar utility to a wallet, unlike a real wallet, no funds are stored on this cryptocurrency!

What is a cryptocurrency wallet?

The cryptocurrency wallet plays a somewhat abstract role, because instead of the funds themselves, it acts as an intermediary that, based on cryptographic keys - public and private - proves ownership of the funds. The wallet is a kind of link between us, the blockchain and our funds.

With the wallet, we can receive, store and transfer virtual money in a simplified way.

In order to be able to point to and access the assets on the blockchain, we need a public key, a private key and an address, on the basis of which we can dispose of the assets. Despite the fact that all data is public, theft does not occur in blockchain. All thanks to excellent mixing algorithms (for Bitcoin SHA-256), which protect cryptocurrencies from unwanted behaviour.

Types of cryptocurrency wallets

Cryptocurrency wallets fall into two basic categories - Cold and Hot. Of course, this is not the end of the story, as we are still dealing with subcategories - wallets are further divided into full and light wallets. Then there is a more detailed division, i.e. desktop wallets, mobile wallets, web wallets, hardware wallets and paper wallets. Each of these wallets has unique characteristics, which you can read about here.

When talking about the most popular cryptocurrencies, it will be easiest to use the ranking by capitalisation, which shows how much investors believe in a particular currency and how popular it has become over the years. Interestingly, the specific dynamics of the cryptocurrency market means that there is a huge turnover of different projects - some fail due to lack of sufficient support from the community and investors, others turned out to be simple scams - like Bitconnect.

Currently, the top five cryptocurrencies include Bitcoin (BTC), Ethereum (ETH), Binance Coin (BNB), Cardano (ADA) and Ripple (XRP).

Their combined capitalisation represents on average 70% of the total value of the cryptocurrency market. A valuable indication for investors is the market dominance indicators, which we refer mainly to the giants with larger capitalisation. Typically, the information only applies to Bitcoin, as it alone accounts for around 40-50% of the cryptocurrency market value.

Over time, the difference between Bitcoin and Ethereum may start to blur, thus changing the weight of the available data. Currently, Ethereum, which is the second largest cryptocurrency only accounts for about 10-15% of the total market value.

Applications of cryptocurrencies

Cryptocurrencies, apart from their basic function of money transfers, also carry advanced technological solutions. The revolutionary blockchains of many of them can be used for many different purposes. We will mention a few of them below:

  • By making blocks irreversible and non-editable, a voting system built on such a solution would be fair, transparent and anonymous. There is already a project of this kind - FollowMyVote;
  • Data storage systems can be built on top of blockchain to provide increased security in the event of hacking or attempts to modify data. Example systems for PeerNova and NXT;
  • Copyright protection in terms of protecting against intellectual property theft, by demonstrating the original author and the priority of adding content;
  • Still a pipe dream are transactions within the internet of things, where devices will be able to make payments directly between each other. A project that aims for anecdotal payments between a car wash and a car is IOTA.

Summary

Cryptocurrencies are currently the most technically advanced means of payment. As one of the few payment methods, a transfer in cryptocurrencies will always get from point A to point B - no one or nothing can stop them. In the case of Bitcoin (BTC), we have seen the efficiency of this solution for 12 years now.

Remember that cryptocurrencies are not only a means of payment, but also a very interesting investment asset, store of value and technological value that can revolutionise many areas of our lives. Imagine a world in which the window of your house independently summons a cleaning robot, then pays it for the service performed using cryptocurrency - amazing, and already possible!

If you want to join this fascinating cryptocurrency world, register on our cryptocurrency exchange. From registration, it will only take 3 minutes to purchase - and there is still identity verification on the way. BitClude is the fastest cryptocurrency exchange. Buy Bitcoin on Bitclude!

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