What you need to know about cryptocurrencies: answers to the most common questions

2024 Author: Malcolm Clapton | [email protected]. Last modified: 2023-12-17 03:44

In simple language about what a cryptocurrency is, whether it is possible to make money on it and what risks should be taken into account.

What is Bitcoin?

Basically, it is a currency that is guaranteed to be issued by an algorithm. The rules for its work (like DNA or constitution) were created in advance and do not change. There is no separate company or person behind it who can steal all the money. The best comparison for Bitcoin is digital gold.

Bitcoin is a decentralized, completely transparent system, and each of its participants controls the implementation of the rules by everyone else. It does not interfere with the banking system in any way.

Is Bitcoin a pyramid as it rises and falls so fast?

No. This is an asset with a fixed supply, so the price is very sensitive to an increase or decrease in demand (even more than, for example, oil).

How to make money on Bitcoin?

If you believe that it will grow, then buy and wait. You can also mine.

Will he grow up?

It depends on many factors. Right now, the demand for bitcoin is predominantly speculative. People believe it will grow and invest a percentage of their savings. But bitcoin is already useful in the real (but gray) economy, for example in international remittances, where there were initially large fees. Also, part of the money from offshore jurisdictions flows into bitcoin, since it is anonymous and easier to use. Permits and prohibitions of states, regulation of exchanges will definitely affect the potential of the bitcoin rate.

What is mining and is it worth investing in?

Mining is the process of confirming transactions. Anyone can do it. The purpose of mining is to ensure the reliability of the system. Bitcoin is designed so that those who participate in mining earn bitcoins. Mining requires a lot of calculations and, accordingly, special equipment. Earnings are directly proportional to the power of the latter. In general, you can make money on mining if you have cheap electricity and you perceive it as work.

What is blockchain?

It is a database reconciliation technology between parties that do not trust each other. The peculiarity of the database is that it:

• works only for adding data;
• keeps the entire history of changes;
• uses cryptography to ensure immutability;
• is kept by each participant.

A consensus algorithm is used to reconcile changes (transactions). There are a lot of such algorithms.

How does Bitcoin and blockchain compare?

Blockchain is a database of all bitcoin transfers between accounts. Looking at the blockchain, you can understand how many bitcoins are in each account. Bitcoin uses the Proof of work consensus algorithm.

What are the risks for those who bought bitcoins?

First of all, to lose them due to theft of keys. Owning Bitcoin is like knowing the digital signature for transactions. Keys can be stolen by a virus, you can simply lose your phone with a bitcoin wallet, or your computer can break down. If you store bitcoins on an exchange, then it can be hacked or the owner of the exchange may simply disappear. Due to the fact that Bitcoin accounts are anonymous, there is no way to recover stolen goods.

What is Ethereum?

It is, in fact, a decentralized computer with its own execution environment and programming language. By analogy with bitcoin, it also has a currency (ether) used to pay for operations (processor cycles). You can release your assets on top of it and contract for their behavior.

Why is ether growing so wildly now?

There are several reasons:

1. Banks say they are experimenting with it.
2. People believe that all assets (money, stocks, and so on) will be issued on it and, accordingly, the demand for the currency will greatly increase.
3. Many startups are conducting ICOs on Ethereum, which drastically reduces the supply of ether in the market and increases the demand for it.

What is ICO?

The term ICO (Initial Coin Offering) was formed by analogy with the IPO and means the pre-sale by a startup of its own currency. This currency can have different meanings, but most often it is needed to pay for user actions on the platform that the startup promises to build.

Why do startups raise tens of millions of dollars through ICOs?

There are several reasons:

1. ICOs are a relatively easy way to invest in a startup.
2. People believe that a startup could become another Bitcoin or Ethereum, and they want to invest while it's cheap.
3. Historically, currencies sold through ICOs have only grown.

Is the current ICO state of the art a bubble?

Definitely. The very principle of ICO will lead to positive changes in venture investing, but right now people are indiscriminately buying everything. Everyone is looking for faster ways to make money. Those who made money on Bitcoin invested in Ethereum, those who made money on Ethereum are investing in ICOs, hoping for the same rapid growth. The pyramid will collapse when:

1. Startups will start selling the funds raised in ether en masse. Now they keep them, as the course is only growing.
2. People will understand that startups cannot create the products they promise.
3. States will intervene (now most ICOs are outside or on the verge of the law).

What other cryptocurrencies are there?

There are a lot of them, but basically they are divided into the following types:

1. Fully decentralized.
2. Digital assets backed by someone or something.
3. Doubtful currencies that are issued and controlled by one company and are not backed by anything.

Is it worth creating your own cryptocurrency?

Only if you understand what you are doing.