Cryptocurrencies are a type of digital money based on an algorithm that has revolutionized financial markets around the world. What is cryptocurrency and can bitcoin function as regular payment? What influences the exchange rate?
What are cryptocurrencies?
Cryptocurrencies can be simply described as virtual currencies. This means that the cryptocurrency has no physical form and is only a digital record based on a specially developed algorithm. Virtual currency has become established as a means of payment that can be used to pay for any goods and services where such means of payment are acceptable. Due to the growing popularity of such solutions and the value of the cryptocurrency itself, virtual money is also purchased as part of the investment.
The crypto prefix in relation to cryptocurrency comes from cryptography, which is the digital way to encrypt money. The encrypted strings of data create the units of the cryptocurrency, giving it a specific value. The driving force behind the creation of the digital currency was the desire to provide an alternative method of making online payments. The first currency to appear on the market was Bitcoin. The cryptocurrency entered circulation in January 2009. The creator of Bitcoin is Satoshi Kakamoto. It is not certain, however, whether this is a person, or rather a group of economists and programmers.
How do cryptocurrencies work?
Cryptocurrencies are digital alternative currencies (altcoins) that do not exist in the metal, but only in a virtual form. Their value is determined by free market mechanisms, which means that the current cryptocurrency exchange rate depends on supply and demand. The exception is Bitcoin due to the top-down limitation of cryptocurrencies of this type available on the market.
The essence of cryptocurrencies is a decentralized system based on technology called blockchain. Blockchain is a type of digital ledger that collects a record of all transactions performed within the network and provides public access to the collected data. Virtual transactions are verified and grouped into specific blocks, and then encrypted using cryptographic methods. The encrypted entities are appended to an already existing transaction chain. Hence the name of the blockchain. The very process of creating blocks and connecting them to the blockchain is called mining. Along with the new block, a new cryptocurrency unit is created, which is referred to as a reward. It is also a remuneration for people who deal with network operation.
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Blockchain technology works in a way that effectively prevents counterfeiting of currencies and operations. Unlike traditional banking solutions, cryptocurrency transactions take place without intermediaries. This means that the funds from the sender of the transfer directly affect the recipient’s virtual account. The details of the operation are known only to the participating parties. On the other hand, the transaction register and basic data are saved in the general ledger of a given cryptocurrency and as such are publicly available, which is related to the issue of financial supervision within the network.
Bitcoin and not only – types of cryptocurrencies
Several years have passed since the launch of BTC. Currently, the cryptocurrency market is extremely vast, and there are over 1,000 virtual currencies in circulation. It is also predicted that the intense growth characteristic of recent years may continue. What are the most popular types of cryptocurrencies?
The most famous cryptocurrency is the aforementioned Bitcoin. The currency was created in 2009 as a result of the work of Satoshi Nakamoto or a group of people behind that name. The creator of Bitcoin has never made himself known to the public. The concept of BTC comes closer to a commodity than the currency used to trade. Cryptocurrency is mainly purchased as an investment of funds. Its value is determined by the supply and demand as well as the stock exchange. Protection against significant impairment is a limit on the amount of Bitcoin that can be put into circulation with cryptocurrencies. For this reason, investing in Bitcoin carries the lowest risk on the part of investors. Bitcoins can be purchased on an exchange or speculate with CFDs.
Litecoin is a peer-to-peer cryptocurrency that was created as a byproduct of traditional Bitcoin. Initially, Litecoins were used to handle transactions for smaller amounts within the Bitcoin network. Later, Litecoin emerged as a standalone cryptocurrency. The algorithm used allows for block processing up to four times faster than in the case of Bitcoin. The currency is also based on much more complicated methods of mining and chain building. The cryptocurrency does not have large mining limits, so there are currently around 84,000,000 Litecoins available on the market, which is four times more than Bitcoin. The CMC Markets broker offers its clients the opportunity to speculate Litecoin prices on LTC, thanks to which the currency has a high investment potential.
This is a relatively new digital currency that was introduced into circulation in 2015. Currently, however, it is one of the financial leaders in the available digital currencies, and its prices are constantly growing. Ethereum works similar to Bitcoin, giving you the opportunity to sell and buy virtual tokens of a certain value. The tokens belonging to the network are called ethers. Unlike other currencies, Ethereum crypto acts not as a means of payment, but a form of contracting. The instruments here are complex ETH code scripts that can be implemented into the blockchain as separate elements on the basis of which a given user or provider can be identified.
Bitcoin cash is a slightly different solution based on the Bitcoin network, as a result of a hard fork in the blockchain in 2017. A hard fork is a phenomenon that occurs when cryptocurrency miners dig two blocks simultaneously and try to put them in the chain at the same time. The non-compliance may concern, inter alia, excessively increasing the block, as was the case with Bitcoin Cash. The solution was to isolate a separate currency and leave the users to decide which one they want to use. The possibility of speculating Bitcoin Cash BCH, as in the case of other cryptocurrencies, is provided by the CMC Markets broker.
Does the USD and EUR exchange rate affect the value of cryptocurrencies?
The value of any cryptocurrency is primarily influenced by supply and demand. This is a general rule that applies to most goods. Digital currencies as decentralized systems are much more resistant to macroeconomic factors than traditional currencies such as USD or EUR. For this reason, cryptocurrencies are perceived by investors as a much more secure investment. The probability of loss is much lower here than in the case of fluctuating rates, provided that you choose a stable cryptocurrency.
This does not mean, however, that the exchange rates of USD, EUR or other currencies have no effect on cryptocurrencies. This is particularly important in the case of information that a given country or a significant institution uses a given cryptocurrency or its technology. The media envelope accompanying such information may cause fluctuations in the value of the cryptocurrency or affect the decision to exchange virtual money for traditional ones. As a rule, however, there is no close correlation between the exchange rate of traditional currencies and the value of the cryptocurrency.
Cryptocurrencies and the issue of financial supervision
Cryptocurrencies are a type of decentralized currencies, which means that virtual money is not subject to interference by the government and other financial institutions. The cryptocurrency market is monitored using the peer-to-peer internet protocol and open source technology. The decentralized system is based on blockchain technology, i.e. a chain of blocks, which is a kind of general ledger on which transactions are recorded. The list of operations and basic data on transactions are publicly available as part of the general ledger belonging to the network of a given cryptocurrency.
Cryptocurrency network users called miners (from the word mine) are responsible for handling transactions and storing information about operations. The process of verifying, supplementing information about transactions and introducing new cryptocurrencies into circulation is called mining. The efficient and smooth operation of the cryptocurrency network is possible thanks to the work of the entire team of miners. Thanks to this, when one of them ceases to provide the computing power of their computer, the others are able to meet the network requirements, so that the functionality of the entire cryptocurrency system is not affected.
Is it profitable to invest in cryptocurrencies?
Cryptocurrencies are a relatively new payment technology. While in the case of networks such as Bitcoin or Litecoin, we can talk about stabilization and safe investment, the purchase of cryptocurrencies that are just entering the market is burdened with considerable risk. The risk, however, is proportional to the potential financial benefits that the investor may obtain.
New digital currencies that are just entering the market tend to have a much lower initial value than expected. This is due to the fact that cryptocurrencies are a market that is still under development and has not yet become saturated. On the other hand, not every cryptocurrency has the appropriate clout or innovative structure that would allow it to quickly gain more value on the market. Investing in new cryptocurrencies can therefore both turn out to be very lucrative and result in the loss of money in the event that the system does not catch on or its value drops significantly.
There is also a high risk that the speculative bubble, which is generated by investors themselves, that may burst at any moment. There may also be a situation in which buyers from previous years will want to profit from their investment and start selling cryptocurrencies, which, at a large scale, may lead to large drops in the value of virtual money. Therefore, the cryptocurrency market requires certain knowledge and knowledge of a wider context.
However, experts point out that despite large price fluctuations and market instability, the cryptocurrency technology definitely has great potential for further development. It is also not without significance that the popularity and share of this type of transactions in payments is constantly growing, as is the trust of users.
Investing in cryptocurrencies still offers a disproportionately greater possibility of profit than in the case of capital deposited in a bank. Experts indicate that it is now safest to invest in the most famous cryptocurrencies, such as Bitcoin or Ethereum, whose value is constantly steadily growing. Investors should, however, research the platforms that enable the purchase of cryptocurrencies and choose a proven company so as not to fall victim to a fraud when buying.