Cryptocurrencies have been a topic that has generated a lot of noise and conversation during the last years, especially Bitcoin. Due to the need of people to know more about this, we have decided to make a detailed article that will be very useful for you.
Before starting to delve into it, it is necessary to define that a cryptocurrency is a digital currency backed by mathematics. And you may wonder, “mathematics?”, yes, because to obtain cryptocurrencies it is necessary to solve several complex mathematical problems, and we will explain more about this later.
What is cryptocurrency?
As we mentioned before, that is a type of digital currency that is backed by mathematics. In order to get access to any crypto, call it a Bitcoin, Ethereum, or any other, it’s necessary to solve a whole bunch of complex mathematical problems before getting rewarded with one of those coins, or with that type of cryptocurrency.
What makes it a currency? They have to meet a couple of components in order to be an actual currency. First of all, it has to serve as a medium of exchange to buy things, or to pay for services. It also has to be portable because, obviously, you have to be able to carry that with you and pay with it anywhere.
Cryptocurrencies have to be durable. One of the examples of prior type of currencies that were used in the past were coffee and tea. Believe it or not, even though they served the purpose as a currency, they were not durable because they could get damaged by the humidity of the area. Cryptos are durable as well.
It has to be divisible because sometimes you just need to buy a little thing, so you have to be able to break it down in a way that will allow you to make that small purchase.
A crypto has to be fungible, it has to be easily interchangeable for something of equal value. Let’s think about the $1 bill, for example. There’s plenty of $1 bills circulating in the market, and $1 bills will always be worth a dollar everywhere you go. Last but not least, cryptocurrencies have to serve as a store of value.
Why do cryptos are attracting so much attention?
Nowadays, cryptocurrencies are everywhere, and that’s happening because society has given them a monetary value, and for many people, it is an opportunity to “make money.”
Besides that, they are also affordable since they can be purchased with a relatively small amount of money. Thanks to their divisibility, you can break the cryptos into smaller fractions so that you can buy a certain amount depending on how much money you have available.
They’re also considered “safe” since they are difficult to counterfeit, unlike the dollar bill that you can just print them out, and there’s a lot of counterfeit currency running around in the market. For that reason, they’re considered safe because cryptos are derived from mathematics and math is always exact.
Where do cryptos come from?
As we mentioned earlier, they come from math. Basically, cryptocurrencies work with a virtual system of blocks linked by a chain. In this ecosystem, each block is in charge of solving a mathematical problem to give out a resolve. This entire network is what is called a blockchain.
That resolve has to reach a consensus with the next block, and the next block, and the next one, all the way until every piece in the blockchain agrees to that solution and has confirmed the accuracy of that solution and as a rework, you will work together in order to get a cryptocurrency. That process of deriving or creating cryptocurrency, it’s called mining.
Who can be participating in the whole mining process?
Anybody can mine cryptos, anybody can participate in the ecosystem. That’s what makes it so unique, because, in order for you to do this, you don’t have to be part of the elite, you don’t have to have a title, or a certificate, or a diploma. As long as you have some knowledge or that you are partnering up with someone who has the knowledge to mine cryptos, you can become a miner yourself.
The word “mining” is used because of the effort you need to make in order to obtain that crypto. Think of it as when you’re mining gold in the field or mining for a natural resource, that’s where the term miner is coming from.
How does cryptocurrency mining work?
Basically, each miner has access to a supercomputer, which will help to solve that mathematical equation or that mathematical problem. Each miner is there working, and they don’t have to know one another, they just have to work together in order to solve that one mathematical problem that’s going to award them that crypto.
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The best part of this process, is that it’s all done decentralized, and that means, outside of government intervention or any financial institution intervention. It will all be done through mathematics.
Is “mining” crypto a simple process?
The process of mining is very complex. You need to solve complex mathematical problems, and it can take you years if you’re doing it at a small scale. Furthermore, it’s very expensive to do that because it consumes a lot of electricity. For that reason, a lot of people have had to look for a mining farm, which basically is a storage center.
What is a cryptocurrency mining farm?
This is basically a hub where supercomputers are working constantly to solve those complex mathematical problems to get access to the crypto. These computers are generally placed in cold spaces, so that the heat does not damage the equipment.
Another way to mine cryptocurrencies is by looking for places around the world where the cost of electricity is actually low. One of those places is Venezuela, where the price of basic services is really cheap, and a study has shown that mining a Bitcoin is cheaper there, compared to other countries.
On the legitimacy of cryptocurrency funds
The verification of the legitimacy of the funds behind the cryptocurrencies occurs in just minutes and in an encrypted form, so the identity of the people who are part of the operation is never involved. During this process, basically the blockchain confirms that the transaction is being carried out correctly and that the funds exist.
For instance, years ago payments with checks were widely used, and many times it happened that when you went to the bank to deposit a check, it had no funds. A process that turned out to be annoying, and that’s something that has changed with digital payments, even with the use of cryptocurrencies.
Bitcoin: the most popular cryptocurrency in the world
Bitcoin is the most popular cryptocurrency in the world. At this point and age, everybody knows about cryptocurrency, but why is bitcoin so popular? First of all, it was the first cryptocurrency to hit the market in 2009, and today, it is the cryptocurrency with the highest value in the entire market.
Besides that, it is available only in limited quantities, which means that there is only a limited amount of bitcoin circling around the world. Think about the analogy of gold and diamonds, the amount of that metal and that precious stone in the world is limited, and therefore their value is very high. The same goes for cryptocurrencies. The less you have available in the market, the more valuable it becomes because people are willing to pay top dollars in order to access that.
Another point is that there’s no infinite “printing” of Bitcoin, and that’s what makes it so popular. An example of infinite printing is the US dollar. The government just prints it left and right, and the more currency is available in the market, the higher the inflation, and the less value it gets.
On the other hand, the value of the reward of Bitcoin is reduced to half of it every four years approximately, which is a process called halving, and the last one occurred in May 2020. The halving occurs because the system is looking to control the number of bitcoins in circulation and thus, the inflation. Remember, the least amount that is available in the market, the least that impacts inflation. Bitcoin is actually considered as digital gold.
Bitcoin is also known as people’s money, because it is free of government influence or intervention. It’s free of central banks’ control and also free from regulators, at least until now. However, some of you may have already heard that in El Salvador, they are adopting bitcoin as their legal currency in addition to the dollar, and they are proposing bitcoin mining using volcanic energy.
Our opinion about cryptos
Cryptocurrencies, in our opinion, are not an investment, and the reason is because for an asset to be called an investment, it needs to generate money, that is, cash flow while you’re having that asset in your hand.
A great example of investment is real estate. You buy a house, you put it on the market for rent, and it generates cash flow for you every single month. Every time you collect rent, that’s money, and it’s also an asset.
If you have an asset that you have to sell in order to make money, then that is not an investment. Instead, it is an asset that’s going to help you store value.
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An example of that is gold, which doesn’t create money for you, you have to sell it to have an income. Another instance would also be the stocks. Not all stocks are the same. If you have one of those stocks that doesn’t generate dividend, then once again, that’s more a store of value. If you do have a stock that generates dividends, that will be the equivalent of cash flow in real estate.
The main function of cryptocurrencies is to fix problems through technology
When you purchase a crypto, what you’re investing in at the end of the day is in its technology. The technology is here to make your life easier or to fix problems. In the case of bitcoin, it’s looking to eliminate the need to use an intermediary, call it a bank or the government, to execute financial transactions.
Every time we use a third party to send money, they know who is it coming from, the address where you live, and all your details. They have to know where you’re sending it to, so that way, you also have to disclose the information of that other person at the other end of the spectrum. That’s what this technology is trying to resolve.
We also have Vechain, which is looking to improve supply chain management and business processes. We can also talk about ZCash, which increases the privacy of its users to provide anonymity.
Basic tips to take into account before buying a cryptocurrency:
- You have to solve a problem or simplify processes.
- Pay attention to the circulation of the currency.
- Analyze if it works as a store of value.
- Check the volatility of the currency and how its price behaves.
However, these tips that I just shared with you do not guarantee that you will make money due to the volatility of the cryptocurrency, and also the inflation. You have to understand the risk and that you could make some money out of it, but you can also lose money.
Another thing that you need to look into, to see if the crypto is actually worth buying, is at the volume. How much of it is in circulation and is it even limited? Are we talking about a limited volume, or something that has unlimited value? We have a tool that helps us to get all that information, and we’re going to share it with you right away.
There is a website called CoinMarketCap, which is like the Google of cryptos. Anything you will ever need to find out about crypto, it’s all here. They have information about more that 5,000 cryptos.
Some of the most popular cryptocurrencies that you will find on this website, in order to see all their information and analyze different aspects about them, are Ethereum, Cardano, Bitcoin, and more. Also, you can read about the technology that is related to each cryptocurrency, and what kind of problem it seeks to solve. You can also find:
- The exchanges.
- Tools to educate on any crypto.
- News about cryptocurrencies.
- All about portfolios.
- The watch lists
- Calendars of when they generate new coins.
If you want to know in more detail how to use CoinMarketCap and everything you can do with it, watch this video in which we explain it to you in more detail and show you the tools available on the website.
How can I store cryptocurrencies?
The fact that a cryptocurrency is digital does not mean that it does not need a storage place. It works the same way as banknotes, gold, jewelry, watches, and other physical products: you need a place to store them.
You can store cryptos in a nice and safe way through hot wallets or cold wallets. The difference between hot and cold wallets is the amount of security that they offer for your cryptos.
What is a crypto wallet?
Crypto wallet allows you to store, send and receive cryptocurrency. It is essentially a digital account for your cryptocurrency. These wallets work with a software that stores the public and private keys that enable you to manage your digital currency holdings and interact with blockchain networks.
Hot wallet is just another term to call anything that is software related, anything that you install in your desktop or your mobile phone. A cold wallet is basically something that looks like hardware, something that you can take everywhere with you.
A very popular one is the Electrum Bitcoin Wallet, a software that you can download and use as a wallet to store your cryptocurrencies.
Other wallets that are very popular are:
- Best Wallet Armory.
- Trezor.
- Ledger Nano.
If you want to find more information about wallets to store cryptocurrencies, we recommend you go to this website.
Now that you have more information about cryptocurrencies, we hope you can make a very good financial decision. Likewise, if you are looking to invest wisely, on our blog you will find dozens of articles where we talk about this topic, and many more.
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