A cryptocurrency is a type of digital money created with computer code. They operate autonomously outside of government systems and traditional banking.
Cryptocurrencies employ cryptography to guarantee transactions and regulate the creation of new units. Bitcoin is the original cryptocurrency and by far the best known, and was launched in January 2009. Currently, there are over 1,000 kinds of cryptocurrencies available for online trading and cryptocurrency’s value has increased rapidly. Cryptocurrencies differ significantly from traditional fiat currencies. However, you can buy cryptocurrencies and sell them just like any other asset. Now you can also take advantage of the price fluctuations of various cryptocurrencies with our financial products, through trading CFDs.
Cryptocurrencies fall within the group of digital, alternative and virtual currencies. They were initially designed to create an alternative payment method for online transactions. However, cryptocurrencies are still not widely accepted by businesses and consumers and are currently too volatile to function as a means of payment. These are decentralized currencies, developed outside of government influence or control. The cryptocurrency economy is controlled by P2P internet protocols. The units that make up a cryptocurrency are encrypted data strings that are encoded to represent a unit.
Bitcoin is considered to be the first decentralized cryptocurrency to trade. Like all cryptocurrencies, it is controlled through a blockchain transaction database that functions as a ledger open to the public. Bitcoin was created by Satoshi Nakamoto. It is unknown if this name belongs to a person or a group.
A characteristic of a large part of cryptocurrencies is that they are designed so that their production slows down little by little. Consequently, the number of coins in circulation will be limited. This quality is reminiscent of raw materials, like gold and other precious metals. For example, the number of bitcoins is expected to not exceed 21 million. On the other hand, there are cryptocurrencies, such as ethereum, that work slightly differently. Ethereum issuance is limited to 18 million units per year, which is equivalent to 25% of the initial offering. Limiting the amount of bitcoins creates scarcity, which helps increase their value, and the price of cryptocurrencies is constantly on the rise overall. Some claim that the creator of bitcoin tried to replicate the situation of precious metals with the cryptocurrency. As a result, mining is getting more and more complicated as the reward halves every few years until it finally reaches zero.
Characteristics of cryptocurrencies
There are several key principles that govern the use, exchange, and transactions of cryptocurrencies. These characteristics are unique to these currencies and when it comes to investing in cryptocurrencies, every trader needs to take them into consideration.
Cryptography
Cryptocurrencies use advanced cryptography in various ways. Cryptography evolved thanks to the need to protect communications in World War II, in order to convert easily readable information into encrypted code. Modern cryptography has come a long way since then, and in today’s digital world, it relies heavily on computer science and mathematical theory. It is also derived from the science of communication, physics, and electrical engineering. There are two main elements of cryptography applicable to cryptocurrencies: hash functions and digital signatures:
- Hash: The hash functions verify the integrity of the data, maintain the structure of the blockchain and encode transactions and addresses of personal accounts. They also generate the cryptographic puzzles that make block mining possible.
- Digital Signatures: Digital signatures make it easy for anyone to demonstrate that they have a unit of encrypted information without revealing the information. In the case of cryptocurrencies, this technology is used to sign monetary transactions. It shows the network that the owner of an account agrees with the transaction.
Blockchain technology
Blockchain is the list or the decentralized public ledger of the transactions of a cryptocurrency. The complete blocks, which are made up of the latest transactions, are recorded and added to the blockchain. They are stored in chronological order in open, permanent and verifiable records. A P2P network of market participants manages the blockchain system with an established protocol to validate new blocks. Each node or computer connected to the network automatically downloads a copy of the blockchain. This makes it easy for anyone to track transactions without having a centralized ledger.
Blockchain technology creates a record that cannot be altered without the agreement of the rest of the network. The concept of blockchain is attributed to the founder of bitcoin, Satoshi Nakamoto. It later served as inspiration for other applications beyond money and digital currencies.
Mining cryptocurrencies
Block mining is the process of assigning new transaction records to the blockchain in the form of blocks. In the process (let’s use bitcoin as an example), new bitcoins are produced which are added to the total number of bitcoins in circulation. Mining requires a specific computer program that is used to solve mathematical puzzles, which validates the legitimate transactions that make up the blocks. These blocks are added to the public ledger (blockchain) every 10 minutes or so. As the program resolves transactions, the miner receives a certain amount of bitcoins as a reward. The faster the miner’s computer equipment is when it comes to processing math problems, the more likely it is to validate a transaction and get the reward of bitcoins.
Cryptocurrencies ranking
Bitcoin
Bitcoin is considered the original and the best-known cryptocurrency. It could be said that to some extent its characteristics are more similar to commodities than to conventional currencies. This is reflected in the fact that it is currently used more as an investment than as a payment method, given that the price of bitcoin is so high. In June 2018 there were about 17 million bitcoins in circulation and there may be a finite number of 21 million bitcoins available. It is possible to buy bitcoin directly or to speculate on its price fluctuations through CFDs.
Ethereum
Ethereum is one of the relatively new cryptocurrencies since it was launched in 2015. It operates in a similar way to the bitcoin network; It is possible to send and receive units representing the value of cryptocurrencies through an open network. These units are called ethers, which are used to pay online. However, the main use of Ethereum is the operation of smart contracts and not a mode of payment. Smart contracts are code scripts that can be deployed on the ethereum blockchain. The ethers limit works somewhat differently than bitcoin. Ethereum issuance is limited to 18 million units per year, which is equivalent to 25% of the initial offering. Therefore, since absolute issuance is fixed, the relative inflation is declining year after year and the price of ethereum is declining.
Litecoin
Litecoin is one of several clone cryptocurrencies produced from bitcoin. At the end of 2011, it was separated from the bitcoin ledger. Charlie Lee, the creator of Litecoin, aimed to achieve a faster version of bitcoin with shorter transaction times. It also increased the maximum number of coins that could be achieved through mining. The total of litecoin stands at 84 million compared to 21 million for bitcoin.
Alternative cryptocurrencies
There is an infinite number of cryptocurrencies available to trade, including Dash, NEO, and Tron. You refer to them as alternative cryptocurrencies. Since the crypto market is so volatile for trading beginners, we offer a range of financial instruments to trade, some of which are less volatile than others and carry less risk.
The future of cryptocurrencies
Bitcoin and other cryptocurrencies can actually be described as potential currencies. As mentioned above, to this day, they are not widely accepted as a means of exchange. They suffer from significant limitations that prevent them from developing as fully operational currencies. Questions also arise about the possibility that cryptocurrencies are only part of a financial bubble. However, it is possible, though unlikely, that they will become more widely used as a medium of exchange in the future. The potential of blockchain technology that underpins cryptocurrencies is also attracting interest. This technology may be adopted for other purposes, such as legal transactions, security programs, and voting systems.
