In this article you will learn what cryptocurrencies are, mining, blockchain, why they change their value, and more. So read until the end to get rid of all your doubts!
New technologies have many advantages and among them is access to information. You no longer have to go to a library to look for information in books; now you have all the information you need at the reach of a smartphone. That’s great!
However, the facility we have to find data, we also have to create it. In this blog I can write almost anything. From real facts, completely irrefutable; even opinions leveraged on truths or lies.
For this reason it is so important that all of us, who live bombarded by information that in most cases we are not looking for, have the ability to discern between what is correct and what is not. And to achieve this, it is vital that we educate ourselves and not settle for just one source of information; regardless of whether the topic is political, sports, entertainment, or this time: what are cryptocurrencies.
Answering what cryptocurrencies are is not easy. Additionally, concepts like mining and blockchain are even more complicated to explain in simple terms.
This makes it difficult for people to acquire the necessary knowledge to give them an idea of what cryptocurrencies are , and to decide for themselves whether or not it is worth investing. However, in this article we will do our best.
If you are completely new to this topic, here you will find answers to the most common questions and what you are probably doing; Starting with the most obvious…
What are cryptocurrencies
In a nutshell, cryptocurrencies are just like regular currencies, except that they are completely digital. Each cryptocurrency is fundamentally just a collection of numbers and letters. This sounds complicated, but in reality it is very similar to what happens with current currencies (dollar, euro, etc.)
Physical money bills usually have a unique serial number. This serial number corresponds to information such as when and where it was printed. In theory, a central bank keeps track of all the banknotes that have been printed.
With debit and credit cards, branches know the account number and name of the cardholder because they had to provide their personal information to open that account. This information is shared with the Central Bank and the government.
So… with the information of the serial number of the ticket and the account number, everything can be tracked and validated for the transaction.
If you deposit a note in your account, the central bank and the government will know that note X entered account X. And cryptocurrencies work in a very similar way, but with a fundamental characteristic that gives it enormous value: decentralization.
What is decentralization in cryptocurrencies
The definition of decentralization is as follows:
“Decentralization is the process of distributing or dispersing functions, powers, people, or things away from a central location or authority.”
In the case of cryptocurrencies, decentralization refers to the fact that the responsibility for monitoring and validating the transaction is carried out by several computers distributed in different parts of the world (completely opposed to how banks currently do it). And that is when cryptocurrency mining is born.
What is cryptocurrency mining
As you know, the best known cryptocurrency is Bitcoin and it is the one we will use to explain mining.
Bitcoin will have a maximum of 21 million coins, that is, its quantity is limited, like gold. In addition, the process to “extract” it requires effort, but in the case of Bitcoin, it is carried out by computers that must solve “mathematical problems” and, as with gold, it is called “mining”.
The first computers to solve the problems have the right to track and validate the transactions, and in doing so, they mine bitcoin.
In this way, decentralization is encouraged, because more people want to have the option of earning Bitcoin through mining.
This helps make the entire network more secure because there is no single point of failure. Additionally, the information of the transactions is housed in something called Blockchain, or chain of blocks, which is public and all people can review it (Going against what traditional banks do)
Although we use Bitcoin as an example, many cryptocurrencies also have a limited amount and use the same method of validating transactions called “proof of work”. But let’s remember the title of this article: What are Cryptocurrencies (Beginner’s Guide), so we won’t delve into this topic.
The next thing we will see is one of the places where you can host your cryptocurrencies: Wallets.
What are cryptocurrency wallets
We already know what cryptocurrencies are: A digital asset. So one way to store them is in digital wallets, which consist of an address like this: 4253bf446tp547e50226f8c5cc221ba0f11dc5267a358efc005b57b70a78fa7f
A cryptocurrency wallet address is just like a bank account, except there is no physical card to go with it; it is just an account number, which unlike a traditional account, does not require personal information to open it. This means that your identity is not attached to your digital wallet.
What is more important is that whatever cryptocurrency is stored in your wallet, you have it. Not a bank, like today’s money. This gives a very important freedom and that is that no one can block your transactions.
However, there is a counterweight to such independence and that is that if you lose the password to access your wallet and the other security methods; you will lose your cryptocurrencies.
Next I am going to explain the difference between 2 words that you have probably heard but do not know how they differ: Currency and Token, and I will do it with the sole objective of clarifying how much security exists in the cryptographic world, so I recommend read to the end.
But first, I want to ask you a favor. Just vote from 1 to 5 to know how you have liked this article so far. Thanks a lot!
Types of cryptocurrencies.
To understand what cryptocurrencies are, it is necessary to clarify that there are 2 types of cryptocurrencies:
Coins (COINS)
Coins have 2 main characteristics:
- They are mainly used for transactions.
- They are created under their own blockchain.
The vast minority of all cryptocurrencies are coins. Since it takes a lot of time, and possibly a lot of money, to create an entire network from scratch.
Tokens
Unlike coins, tokens are easy to make and can often be created in a matter of minutes with little to no effort and run over an external network. For example, many tokens work on the Etherium network. That is why there are thousands of tokens.
It is usual that after the creators of the Token see that there is acceptance and interest in their project, they create their own network. This is the case of VeChain. A token created to facilitate the flow of data in the supply chain of business processes.
To give you a rough idea, imagine you have a high-end watch assembly factory. On Mondays you get the hands imported from China; on Wednesdays the leather straps; on Fridays the gears and on Sundays the compartment where the battery is inserted. VeChain‘s function is to make all the information on the same network so that you are aware of the status of each shipment.
This way you can better manage your assembly and delivery times. Since you will not get any surprises that make you lose time or money.
Another example is the Audius project, a music streaming platform that works like Spotify but in a decentralized way. That is to say that it is controlled by a community of artists, fans and independent developers; but not by a single corporation or record labels.
Are cryptocurrencies safe?
As I mentioned before, it is important to take into account if it is a coin or a token. As the tokens are easier to create, it is easier for a scammer to create one, design a web page, pay advertising on social networks saying that their token has great functionality and this will be enough to fool the unwary.
Once you understand what cryptocurrencies are, you know that not necessarily because they are a token, they are talking about a scam. There are quite a few that have completely incredible projects that are already realities and others have enormous potential. How to thoroughly recognize that a crypto is good and safe is a topic for another occasion, but I can advance 2 variables.
First, cryptocurrencies that have been around for the longest time have fallen victim to attacks by hackers looking to steal them, and this has allowed them to increasingly improve their security.
Second, being decentralized (most cryptocurrencies), if a hacker wanted to break security they would have to hack quite a few computers, in different parts of the world, at the same time. And doing this for fairly large networks, for example the Bitcoin network, is practically impossible.
How risky are cryptocurrencies?
As we have seen, the risk in terms of security is low as long as you know which one you invest in. The real risk lies in volatility.
In the same day the value of a cryptocurrency can vary 40%, 50%, even more! Suppose you buy $100 worth of ABC cryptocurrency and the next day its value grows by 50%. You would have earned 50 bucks.
Now imagine that you buy $100 worth of ABC crypto but its value depreciates by 50%…it doesn’t seem that interesting anymore, does it? This gives rise to another quite logical question: What makes the value of a cryptocurrency change?
Why does the value of a cryptocurrency change?
Initially the banknotes were backed by gold. Since it was not practical to carry gold everywhere, bills were an excellent way to represent a certain amount. But to the extent that governments have printed money like crazy, the amount of gold is not enough to back them.
In this order of ideas, the only thing that supports banknotes is trust. In addition, unprecedented inflation has been created. It is for this reason that cryptocurrencies arouse great interest.
It is worth clarifying that the value changes depending on which cryptocurrency we are talking about. Bitcoin was valued because its currency (BTC) has a similar economic profile to gold. It has a maximum supply, only a small amount of BTC is created (or mined) each day, and that amount is halved every four years. Assuming the demand for Bitcoin stays the same over time, this would lead to the price of Bitcoin doubling every four years.
However, the demand for Bitcoin has increased over time as we realize how weak regular currencies (dollar, euro, etc) can be.
Think about it, when something is in limited supply but demand continues to rise, prices inevitably rise. Many investors also see Bitcoin as a safe place to house their capital outside of the current financial system.
One important thing to note is that most other cryptocurrencies are highly correlated to Bitcoin, meaning their prices depend on what BTC does.
Although that is the case, some cryptocurrencies like Ethereum also change their value due to the utility they have…
Tokens, smart contracts, and more can be created on the ethereum network. This allows it to have great potential and as new improvements are made to the network, investors buy more Ether and increase its value.
Also, some of the volatility we talked about earlier is largely because no one really knows how much these technologies are worth.
The prices of stocks, gold, and even regular currencies, fluctuate every day for the same reason; but cryptocurrencies are much more volatile because what they do is revolutionary.
Cryptocurrency networks make it possible to lend, save, and borrow without an identity, credit score, or bank; They allow you to do business directly with other people without the intervention of an intermediary.
All that potential is another cause of volatility as it makes investors much more sensitive to all news – both good and bad. For example, when the Chinese government announces that it will ban BTC mining, it creates a general panic that causes the price of all cryptos to plummet.
And for example, if a government says that it will accept the use of BTC, investors get excited and the price rises like foam.
Conclusion.
Cryptocurrencies are gaining more and more strength, it is undeniable. Not in vain every day there are new crypto millionaires. That is why I recommend that you look for more information if this complete guide on what cryptocurrencies are piqued your curiosity.
As I told you before, the best thing you can do is consult different sources of information that see the subject from different points of view; Only then will you get a complete idea and form your own opinion.
If you want to be aware of the value of the vast majority of cryptocurrencies, the coinmarketcap portal is a great platform to do so. And if you decide to invest, the Binance platform is the one that handles the most daily transaction flow worldwide.
