What is cryptocurrency?
In the 21st century, with the growth of technology, the needs of users have also increased. Now more and more people refuse cash, a simple trip to the bank or to the store for shopping. In general, a person's life has moved online. "Lockdown”, "microfinance", "trading" and so on - words that 10 years ago seemed inappropriate to us in everyday conversation, now are found almost in one in two newsworthy events.
Almost every second financial news is related to cryptocurrency, blockchain and bitcoin. There is a lot of news about virtual currency, but how difficult it’s to find detailed and, most importantly, simple answers to the questions “What is it?", "How does it work?", "Why is there so much hype around this currency?"
For a better understanding, let's first compare the cryptocurrency with cash and non-cash currencies we are already familiar with.
Cash or fiat money (dollars, rubles, euros etc.) is the currency of a state. The value of this currency directly depends on the central bank and on the policy of the state to which it belongs. The state can start printing cash at any time, thereby increasing their number in circulation. Due to these factors, the currency is constantly depreciating.
Digital currency is an analogue of fiat currency, which is stored on servers.
Example: WebMoney. All information about accounts, owners and currency is stored centrally on the company\bank's server. Therefore, if an attacker gets access to such servers, then he can "draw" any number of zeros on his account, block transactions and transfers, in general, do anything.
Cryptocurrency is also digital money. But their storage, creation and control are usually carried out at the expense of a decentralized blockchain system. Due to the principle of operation, the system is practically not subject to hacker attacks, and isn't controlled by the state or any bank.
Until 2011, attempts were made to create a reliable virtual currency, but it wasn’t very popular due to general distrust and ease of copying.
Success and the well-deserved title of "The First cryptocurrency" was received by Bitcoin, which was based on blockchain technology. 11 years after its creation, this currency has the greatest popularity and capitalization on the market (more than 40%). The second place is "Ethereum" (more than 20%).
At the moment, there are about 2000 types of cryptocurrencies on the market and the total capitalization of cryptocurrencies is more than $2.3 trillion, and these numbers are growing every day.
So why do people today increasingly prefer to pay with crypto to conventional digital currencies?
1. Safety
Cryptocurrencies, as a rule, are created on the basis of blockchain technology. This is a rather complicated technical process. In a nutshell: information, transactions and time are recorded in separate "blocks”, which are further combined into "chains” of blocks. The received registers of cryptocurrency transactions aren’t stored on the servers of companies, but on the device of each user of the blockchain. If in the first case it‘s enough for scammers to hack the servers, then with a decentralized system, hackers need to get into every computer of every user.
Moreover, if you use a decentralized crypto wallet, when you log in, you are asked for a login and a unique 12-word code that only you can know.
Read more about Types of crypto wallets here!
2. Low commissions
The amount of bank and intermediary commissions for transferring funds depends on many things: maintenance of physical facilities, salaries of employees, political and economic factors, etc. In the case of cryptocurrency, the commission from transfers is spent only on maintaining the system and rewarding miners. Therefore, the cost of the transfer depends solely on a couple of factors.
- The first is the number of ongoing operations.
If a large number of transactions occur simultaneously on the network, the transaction code increases. With each new cryptocurrency transfer operation, a few bytes is added to the transaction code. When the code grows by a thousand bytes, the commission for currency transfer increases by 0.0001.
- The second factor is network load.
The more transactions that occur in a period of time, the higher the commission for the transfer. Due to this fact, the network is self-regulating. The higher the commission, the less the desire of users to transfer currency at the moment.
Here is a practical example of the difference in commissions.
In September 2021, a certain user transferred 45,500 bitcoins (about $ 20 billion), paying a commission of only $6.5.
Let's compare: if you transfer $100 using the usual Western Union, a commission will be about $ 5.
3. Lack of control by the bank or the state
This fact can be considered an addition to item No.2. Due to the fact that the storage and transfer of assets is carried out through the blockchain, you don’t give huge commissions to banks. Due to the absence of intermediaries, the transfer of assets is made instantly, which is very convenient when you travel, move or when an emergency situation occurs. No longer need to be afraid that the money will “hang” for several days or weeks “in the air”.
The absence of intermediaries also means that no one but you will have access to the information about where and why you sent any assets.
You decide to send your parents $20,000 for their wedding anniversary? Most likely, you will attract the attention of the bank. Employees will call you to find out all the information. And if they are not satisfied with the answer, they will be able to block the transfer.
What contributed to the emergence of cryptocurrency?
1. Unlimited currency printing, which leads to inflation
Historically, in order to prevent the uncontrolled release of money, the monopoly on their printing was entrusted to the Government.
As we can see now, the Government is engaged in the uncontrolled release of money. This is done to cover up its inefficient financial policy. All this leads to huge inflation and impoverishment of the population.
Example, Venezuela, Zimbabwe
2. Governments' rejection of the "gold standard”
The gold standard is a system in which gold is equated with money issued by a state. Printing money was limited by the amount of gold reserves.
That is, as much gold there is, so many pieces of paper are printed.
In the XX century, most states abandoned the gold standard, because the amount of goods, services and paper money produced became so huge that neither the available reserves nor the gold that was mined were enough.
Cryptocurrency is now a digital analogue of gold. According to the system's restrictions, the number of bitcoins cannot exceed 21 million. At the moment, just over 19 million have been mined. Every 4 years, the amount of the miners' reward decreases by two. Therefore, it is easy to draw an analogy: bitcoins are like gold. Its quantity is getting smaller, and the complexity of mining (extraction) is growing.
Maybe bitcoin is really the gold standard, and crypto is the currency of the future?
