Since then, a real financial revolution has begun in the financial world. It is recommended to use the official Defiway website. This is a unique platform that allows you to understand everything in more detail, study all the tools for work and start working with cryptocurrencies. Come in and start earning already.
What is cryptocurrency?
Cryptocurrency is digital, completely virtual money, the emission and operations of which take place using cryptographic methods based on asymmetric encryption. No bank is responsible for the issuance and circulation of cryptocurrency. The functioning of the system takes place in a digital network completely independent of any government – decentralized.
The basis for the creation of cryptocurrency is a new way of recording and transmitting data called blockchain, which literally means a chain of blocks. Cryptocurrency emission (mining) occurs using open-source software.
What is special about cryptocurrency?
The main feature of cryptocurrency is complete independence from any financial institution. Theoretically, there is no need to trust money and transactions with it to third parties. All responsibility for issuing and keeping money is transferred to a special mathematical algorithm – a cryptographic model.
To understand the main difference between cryptocurrency and ordinary electronic money, let’s look at the modern money transfer system. Money in a regular bank account is just an entry in the ledger.
A “third-party” – a banking institution that we trust – is responsible for issuing, exchange rates, safekeeping, and transactions with our money. But can we always trust banks? Programmers have come up with a kind of digital analog of the ledger, which is called a blockchain.
Cold wallets can be paper or hardware.
- Paper wallets – this is the name of a digital wallet number written on paper and an access key to it, or a QR code printed on a printer.
- Special hardware wallets are digital carriers created for cold storage of digital coins, similar to a regular flash drive, but much more reliably protected from damage. Connect to a computer via USB, for example Trezor, Ledger.
- USB flash drive – can be used for cold storage of any cryptocurrency. You can download a software wallet, a key or a hint that will help you remember it on the flash drive.
- Desktop (computer) wallets are light and heavy. Heavy software wallets (thick) – store coins and the entire blockchain (chain of transactions) since 2009. Their disadvantage is that for their installation and use, a digital medium with a large capacity, more than 100 GB, is required. For example, BitcoinCore. Light wallets (thin) – store only part of the code, and take the other part from additional services.
Online wallets that store keys for accessing the Internet are called hot. The following hot wallets exist:
- Online wallets are available only when connected to the Internet from any device. Function as an online service (website) to which users trust their personal keys and service account operations.
Using such a wallet is simple, transactions are very fast, it is easy to restore access using personal data. But the online wallet is the most vulnerable to hacker attacks, so we do not recommend storing large amounts of cryptocurrency in such a wallet.
- Mobile wallets are installed on a smartphone in the form of a mobile application, and work by analogy with an online web wallet, without downloading blockchain chains.
This is the most convenient way to store cryptocurrency and carry out transactions with it. But the principle of its operation is similar to computer wallets.
What can you buy with cryptocurrency?
In theory, you can buy anything with cryptocurrency if there is a seller who is ready to accept it. Now there are already trading points that accept virtual currencies. Also, in some countries, ATMs are installed for exchange.
The status of cryptocurrencies is not yet defined by the legislation of most countries. Some governments recognize digital money as a virtual asset and equate it with valuable puppets. Others, on the contrary, prohibit the circulation and use of cryptocurrencies.
Does cryptocurrency have signs of a pyramid scheme?
A sign of a financial pyramid is that the profit of old participants in the system increases due to the funds invested by new participants. Cryptocurrency does not have these characteristics because its price depends on demand, and it grows due to the limited volume of issues.
The value of any cryptocurrency depends only on the willingness of people to buy it. As long as there is demand, crypto has its value. But there are no guarantees that this will always be the case. Investors invest their money in cryptocurrencies at their own risk.
Should you invest in cryptocurrencies?
Since its appearance, the first cryptocurrency, Bitcoin, has risen in price significantly, and its market capitalization has almost reached 3.8 billion dollars. The market rate of Bitcoin and other digital currencies constantly fluctuates and depends only on the demand for them.
Some see digital money as the best hedge against inflation and hope to make good money from the growth in its market value. On the other hand, there are no guarantees that Bitcoin will be used in the future, and no one can predict what its market rate will be.
At the beginning of 2022, the market rate of Bitcoin reached a new peak of $70,000 per coin. Although, over the past two years, the exchange rate of cryptocurrencies has experienced significant fluctuations. But in recent years, new cryptocurrencies have been constantly appearing, so there are doubts that Bitcoin itself will turn into a universal international money.
The use of cryptocurrencies as a payment instrument is currently quite limited. If you plan to invest money in one of the cryptocurrencies, do not forget about the long-term risks.
What is a cryptocurrency backed by?
Unlike ordinary money, the value of which is provided by state guarantees and laws, cryptocurrency is provided only by people’s trust in the new decentralized system, that is, in the cryptographic code and the system of recording and storing information.
The value of cryptocurrency lies in the material costs of its extraction.
Besides, computing equipment that runs on software consumes a relatively large amount of electricity. The infrastructure to service cryptocurrency transactions also requires costs!