How does cryptocurrency work?

The growing popularity of cryptocurrencies has changed the shape of the global financial sector. Investing in them has provided many people with huge profits, even despite a small capital commitment. Some are ardent fans of cryptocurrencies, others on the contrary – their opponents. One thing is certain, virtual currencies have revolutionized the world, and according to experts ‘ forecasts, the crypto market will continue to develop dynamically.

The topic of cryptocurrencies is well known to many people. There are numerous publications and books about them. Often, however, content about virtual currencies is quite biased and emotionally characterized, which is a nuisance for people who want to know the objective face of this market.

In this article, you will learn what cryptocurrencies are, what their phenomenon is, how much you can gain or lose on them, and not only.

What is cryptocurrency?

The last decade has seen a rapid increase in the popularity of cryptocurrencies. The real revolution was the emergence of Bitcoin, which took place in 2009. since then, hundreds of other cryptocurrencies have also appeared, and their impact on the global financial market has been very visible for years.

However, not everyone knows what cryptocurrencies are, what their potential is, and so on. It is worth starting with the fact that they are a form of digital currency that operates on the basis of blockchain technology. Cryptocurrencies are also independent of traditional financial institutions, such as central banks. This means, in short, that they are not controlled by any particular organization or country.

Transactions related to cryptocurrencies are authenticated and recorded in a distributed blockchain registry – it is available to the public. The main feature of cryptocurrencies is their decentralization. In short, there is no single checkpoint, so all transactions using them can be carried out between two people, i.e. peer-to-peer – without the participation of third parties or institutions. This makes virtual currencies resistant to censorship and external interference, which is their huge advantage.

In addition, investing both long-term and short-term in virtual assets can be very profitable.

Cryptocurrencies do not have a physical form, but have a certain value, which is why they are commonly called virtual or digital money. In the event that a seller accepts payments in a particular cryptocurrency, he can pay with it fully legally, that is, in the same way as, for example, dollars, pounds or other fiat currencies.

However, one must be aware that nowadays few people use cryptocurrencies to conduct transactions. They are most often used for investing. Virtual currencies are often seen as financial instruments subject to current valuation. They are distinguished by high investment risk, but thanks to them you can also achieve a spectacular financial return. Cryptocurrencies are bought and sold mainly on cryptocurrency exchanges. Some of them are reminiscent of traditional stock or bond markets.

There are a lot of cryptocurrencies on the market today. Bitcoin as the first and most famous virtual currency opened the way for many other projects.

What is important, each cryptocurrency has slightly different characteristics and goals. Some of the virtual currencies provide the most privacy, while others focus on improving the scalability of transactions or on the implementation of smart contracts.

Cryptocurrencies and blockchain technology

Blockchain technology has become a buzzword in the last decade. A lot of people have heard about it in connection with the development of the cryptocurrency market.

It is widely believed that it was the first virtual currency, or Bitcoin, that gave rise to other cryptocurrencies and blockchain technologies. BTC was created in 2009, shortly after the outbreak of the global economic crisis, which was felt for the next few years.

Blockchain technology is a decentralized ledger system. It allows for secure and transparent transactions without the need for intermediaries.

Blockchain has played a key role in the development and success of the cryptocurrency market. We are talking about an innovative solution that guarantees decentralized registration of transactions. Blockchain technology is a distributed ledger of transactions operating on a blockchain basis. Each block contains a set of transactions. They are authenticated,encrypted, and then added to the chain. Therefore, we are talking here about a revolutionary system that is implemented not only by the crypto market, but also by various financial institutions or banks.

The fundamental feature of blockchain technology and one of its most important aspects is decentralization. Unlike traditional financial systems controlled by central institutions, most often state-owned, this technology does not have a single point of control, which is its undoubted advantage.

Transactions using blockchain are authenticated by a network of computers that operate by consensus. This means, in short, that the system is resistant to censorship and external interference. Therefore, cryptocurrencies are often associated with freedom.

Finally, blockchain technology provides a high level of security. This is due to the fact that all transactions in virtual currencies are authenticated thanks to cryptographic algorithms – they are difficult to falsify. Moreover, the blockchain system is distributed over many nodes, making any attacks and data modifications difficult to implement.

A distinctive feature of the blockchain is that once entered data can neither be deleted nor changed.

Cryptocurrencies and anonymity

Cryptocurrencies have millions of followers not only because they can make a lot of money. Their undoubted advantage is fast, secure and above all anonymous payments. Especially this last issue is very relevant for many users.

Anonymity is one of the main ideas behind the development of Bitcoin. However, whether the oldest cryptocurrency fully provides this feature is a matter of dispute. It turns out that, according to numerous experts, BTC can not be considered a fully anonymous digital currency. Bitcoin is now considered to be a pseudo-anonymous cryptocurrency. This is due to the fact that each user has a public address, which can be very easily traced and linked to an IP address or a stock account.

Many users wonder to what extent the most popular cryptocurrency provides anonymity. As it turns out, compared to traditional cash or fiat currencies in general, Bitcoin has many advantages. One of them is anonymity, which is incomparably greater than in the case of the above.

First of all, elements of Bitcoin such as addresses, public keys or transactions are stored in text strings – they do not lead directly to any person or institution. This means they cannot be identified immediately.

Traditional financial institutions and state authorities are concerned that the anonymity of BTC can develop terrorist groups and conduct illegal transactions. In practice, however, the blockchain network stores information about all transactions using cryptocurrencies. They are widely available and anyone can check which addresses were associated with the transfer of specific funds.

While bitcoin addresses provide anonymity, if you can link them to a specific person or company, BTC no longer guarantees virtually any privacy.

The privacy associated with cryptocurrencies is guaranteed by blockchain technology. In fact, it only provides pseudonymity of transactions. In short, this means that when you sell, buy, or pay for a crypto, your data is linked to your cryptocurrency addresses, not your personal identity. Therefore, a certain degree of privacy is provided for users of virtual currencies.

It is worth noting that some cryptocurrencies, especially new ones, have introduced additional privacy mechanisms. We are talking here about the so-called mixers, which additionally increase the level of privacy of crypto users.

Cryptocurrencies with the highest level of anonymity

Bitcoin does not completely provide anonymity, so along with the development of the virtual currency market, cryptocurrencies began to appear that offer a higher level of privacy than BTC. It is worth mentioning here, for example, Dash or Monero. Zcash also offers more anonymity than the world’s oldest currency.

Dash is the oldest of the altcoins that debuted on the cryptocurrency market in 2014. a high level of privacy is guaranteed by the PrivateSend protocol. Dash is now considered one of the most anonymous cryptocurrencies.

The high level of privacy of the Dash cryptocurrency is associated with the so-called Mixer to increase anonymity. This option causes cryptocurrencies to be mixed with those of other users-they are deposited at New addresses. The result of this is that determining the original origin of a given coin is very difficult.

A very high level of anonymity is also guaranteed by the Monero cryptocurrency. It introduced private transactions in 2017. it works similar to the virtual currency Dash, that is, it uses the same method of mixing crypto. Thus, the actual sender of the cryptocurrency can be one of several people. In addition, Monero transactions are broken down into smaller amounts, which is why they are presented as different – they go to a lot of addresses. Therefore, tracking the user of this cryptocurrency is very difficult, even impossible.

How much does 1 cryptocurrency cost?

Cryptocurrencies have been quite popular for several years and are an important topic in the world of Finance and investment. They can generate huge profits. Along with their growing popularity, more and more people are wondering how much 1 cryptocurrency costs.

The price of a virtual currency is a key factor attracting the attention of not only experienced traders or investors, but also people who are just starting their adventure with crypto.

The price of a single cryptocurrency is influenced by many factors. First of all, its cost is determined on the basis of supply and demand for a specific unit of virtual currency.

In the event that the demand for a given cryptocurrency exceeds the supply, its price usually increases. This is a traditional market mechanism. However, if the situation is reversed, the price of cryptocurrency falls.

The cost of an individual cryptocurrency can vary significantly from one another. For example, for one BTC you have to pay tens of thousands of dollars, and for another only a couple of zlotys.

For example, the price of one Bitcoin at the beginning of June 2023 was about 28,907 thousand. USD.

The exchange rate of an individual cryptocurrency is influenced not only by supply and demand, but also by general market trends. For example, we are talking about economic and political events. Government regulations, etc., also have a significant impact.

No less important in the context of the rate of cryptocurrency is its degree of acceptance and adaptation by the community and companies. It turns out that the more places where transactions with a particular cryptocurrency are supported, the more its value can grow.

What are tokens? How are they different from cryptocurrencies?

It is a common mistake to refer to all virtual assets as cryptocurrencies. It turns out that there is still a division into tokens.

Tokens and cryptocurrencies have slightly different definitions. The latter, for example, BTC or Ethereum are digital currencies that act as means of payment and store their value (their payment function is widely used). They have their own blockchain, there are fewer of them than tokens, and they act like virtual money – they perform a payment function.

Tokens, on the other hand, are units of value that are issued and function on existing blockchains of these cryptocurrencies. In addition, they are also created to represent certain resources or access to certain services.

Another feature of tokens is that they can be created very easily – almost any person can do it. You can create a lot of them on the basis of the underlying blockchain.

The main difference between a token and a cryptocurrency is its purpose. The latter was created as a means of payment and store of value. The primary purpose of cryptocurrency is to function as an alternative form of currency that operates independently of traditional financial systems.

However, when it comes to tokens, they often have more specific uses. They are created to represent certain assets. It is worth mentioning here at least shares in the project, the right of access to the service and not only.

Using some simplification, cryptocurrencies are best compared to money. Tokens are used for various purposes, for example, as a reward for network users. They also make it possible to raise funds.

So-called utility tokens are often used to lower exchange fees. They can also take a form similar to shares – then we are talking about investment tokens.

There are many different tokens. It is worth mentioning Binance Coin (BNB). We are talking here about the tokens of the Binance platform, which is the most popular cryptocurrency exchange in the world today.

Binance Coin is a token that is used for payments on the Binance platform. Thanks to it, you can pay a commission or participate in the tokenization of projects. Another popular token is Chainlink (LINK).

Stablecoins and tokens

When discussing the differences between cryptocurrencies and tokens, it is also worth mentioning stablecoins. Knowledge about them will be useful in the crypto market. Stablecoins are a type of payment token. They are designed to maintain a stable value against other assets, such as traditional fiat currencies.

The role of stablecoins is to ensure price stability. They are secured by a certain type of asset. Most often, a currency, commodity or other cryptocurrency is exchanged here.

Stablecoin is a cryptocurrency that is not subject to exchange rate fluctuations. Moreover, its price volatility is minimal. Thanks to stablecoins, the level of security of investing in other virtual currencies increases.

If an investor wants to exit the stock exchange, stablecoins exempt him from the requirement to switch to fiat currency (fiat money).

All digital currencies can be converted into stablecoins. Thanks to this, you can avoid the wealth tax.

Popular stablecoins include:

  • Tether (USDT),
  • TrueUSD (TUSD),
  • Paxos Standard (PAX),
  • USD Coin (USDC),
  • Dai (DAI).

How much do I have to pay for cryptocurrencies?

For several years, investing in cryptocurrencies has become popular all over the world. More and more people are wondering how much they need to pay to start investing in digital assets. It is difficult to answer this question unequivocally. The amount you need to deposit to be successful on cryptocurrency exchanges depends on many different factors.

If the goal is to invest in cryptocurrencies, you must first start by choosing a platform. It is best to invest in digital currencies on cryptocurrency exchanges. The largest and most popular of them is Binance. You can also bet on others, such as Kraken, Coinbase or Coinmama.

To make a deposit by card, for example, on the Binance cryptocurrency exchange, you need to deposit at least 15 euros.

You can also buy cryptocurrency at special exchange offices. The cryptocurrency market has developed significantly in recent years, so we have a lot of interesting options to use. However, it is through cryptocurrency exchanges that users most often trade their virtual currencies.

Investing in Bitcoin for many people is an excellent proposal. It is the most well-known cryptocurrency in the crypto world and has allowed many people to make a lot of money.

It is worth noting that currently there are already a couple of hundred crypto exchanges that differ not only in the level of security, but above all in the amount of transaction commissions and the offer of available digital currencies and tokens.

Therefore, currently in the crypto world, the choice of platforms designed to invest in cryptocurrencies is disputed. However, it is worth betting on reputable ones, such as Binance, Coinbase, or Kraken. These are very intuitive platforms where you do not need to deposit a lot of money for cryptocurrencies to start an adventure with investing.

On the largest cryptocurrency exchanges, it is enough to deposit a few / dozen USD or EUR to start investing in digital assets.

For novice investors, it is recommended to invest only such amounts, the loss of which will not have serious financial consequences. Therefore, at the very beginning it is worth investing several dozen / several hundred zlotys.

However, for experienced investors, we are often talking about larger amounts. Traders often invest significant amounts in cryptocurrencies, which allows for greater profits. Of course, this is also associated with a huge risk of losing money, which must always be borne in mind.

How much can you lose by buying cryptocurrencies?

Investing in cryptocurrencies is always associated with a certain degree of risk, which can cause financial losses to the investor. You need to keep this in mind and invest in crypto such amounts that will not upset the portfolio.

The increased risk of loss on the cryptocurrency exchange is mainly due to the volatility in the prices of virtual currencies, which can drastically increase or decrease in the short term.

The cryptocurrency market is still relatively young. Virtual currencies are subject to considerable fluctuations in exchange rates, much larger than shares on traditional exchanges.

It turns out that in the cryptocurrency market, the standard is a situation where during one day a given cryptocurrency can rise or fall by 30-50 percent.

Therefore, in extreme cases, in one day you can lose up to half of the money invested in cryptocurrencies. Of course, this situation may reverse the next day – the exchange rate will start to rise again, which will make up for the losses.

Similarly, you can earn tens of percent in one day. In the world of crypto, there are huge fluctuations in exchange rates, which every investor should remember.

Many people wonder why this volatility in the crypto market. First of all, he is very sensitive to manipulation. There are two most common types of manipulation in the cryptocurrency market. The first is the so-called whales.

A common manipulation in the crypto market is when big players trading in millions or even billions start selling their Bitcoins to make the rate go down. Why are they doing this? The so-called whale selling its cryptocurrencies is a sign for people that bessa is coming, the crisis of a given virtual currency, etc.

In the event that the fat fish begins to sell out of his portfolio, other investors also begin to sell their bitcoins before they suffer significant losses. In the crypto market, panic is observed, and the cryptocurrency exchange rate drops drastically. Then the fat fish is satisfied that he sold Bitcoin at a still high rate, and then waits until the panic reaches its apogee, and the rate will be at a very low level – then he will buy back even more cryptocurrency at a record low price. This situation can apply to various cryptocurrencies, not just Bitcoin.

After a momentary panic, the cryptocurrency again begins to bounce upwards, enters the Hossa, and the fat fish can enjoy huge profits.

Another type of manipulation is information manipulation. For example, we are talking about fake news, which can cause not only dynamic declines, but also increases. For example, Elon Musk via tweets ignited the cryptocurrency market with the information that his company (Tesla) will accept Bitcoin payments. This information manipulation caused a significant increase in the exchange rate of this cryptocurrency.

After a few months also through tweets, he reported that Bitcoin is not environmentally friendly and panic began on the cryptocurrency exchanges, which caused significant drops in this virtual currency.

Therefore, the cryptocurrency market is very susceptible to various types of manipulation techniques. You can lose a lot in a day. For many people, this is a game of nerves.

How much can an investor potentially earn during a downturn?

The turmoil in the cryptocurrency market, as well as in the financial market in general, is a cause for joy for investors. This is a time when virtual currency rates are rising significantly and the market is becoming more lively.

During the boom, many investors can count on significant profits. Especially in the crypto market, price increases can be huge. Investing even during a boom period comes with a lot of risk. It can end at an unexpected moment and enter Bessa.

The cryptocurrency market is still a fresh market, especially when compared to the stock and bond markets. Therefore, the world of virtual currencies is characterized by great variability. This gives not only great earning opportunities, but also the risk of loss.

It is worth mentioning the charts of Bitcoin in the period 2019-2021. At that time, this most popular cryptocurrency grew to skyrocketing prices.

Since March 2020, there has been a record hossa in the cryptocurrency market. It was in such a big upward trend that many investors made huge money. At that time, Bitcoin fluctuated from 5 thousand. Up to $ 64,000. USD.

It is during the boom period that investors can earn a lot of money. Sometimes the rate of return on investment reaches several hundred percent. Therefore, in the world of cryptocurrencies, hossa is the perfect time to invest. During this period, you can count on record profits.

What is cryptocurrency mining?

Cryptocurrency mining is a process that is extremely important for the functioning of the blockchain network and secure transactions of virtual currencies.

The term “cryptocurrency mining” first appeared during the creation of the first Bitcoin blockchain. This happened in 2009. Mining at that time was modeled directly on the work of miners looking for gold.

Cryptocurrency diggers instead of picks and shovels are equipped with a computer with high computing power.

In the beginning, cryptocurrency mining meant single hardware made available by system maniacs who counted on profits from mining. With Bitcoin, success in digging was very easy to achieve. Of course, this was due to the growing value of the first cryptocurrency.

The specialized term for mining in cryptocurrency mines is called “proof of work”. Thanks to it, the block chain is secured. Cryptocurrency miners differ from traditional miners in that they do not seek gold, but rather create it.

The term hidden under the name “crypto” means in short that the information is encrypted inside the virtual currency. Encryption is done through blockchain technology. Of course, we are talking about building a chain of blocks.

Cryptocurrency mining is not only about creating new units of a particular cryptocurrency, but also ensuring the security of the network. Blockchain operates on the basis of a distributed ledger of transactions. This means that each transaction is confirmed by a very large number of network nodes.

Mining involves solving complex mathematical problems that maintain the integrity and security of the network. Miners, by engaging their computing power to maintain network consistency, prevent double spending and transaction manipulation.

Of course, cryptocurrency mining is primarily about creating new units of a particular cryptocurrency. In the case of Bitcoin or Ethereum (the most popular virtual currencies today), mining is a process in which miners compete to solve a mathematical problem. It will allow them to mine a new unit of a given cryptocurrency. We are talking about a difficult process that requires a lot of computing power of the computer.

The goal of the miners is to win a prize for mining a new unit of cryptocurrency. They receive a portion of the newly created crypto units.

Mining in a cryptocurrency mine is an activity whose purpose is to record transactions on the blockchain. For this purpose, specialized computer equipment is used, with high computing power.

It is worth knowing that today crypto mines, which operate on the principle of using personal computers, are no longer as profitable economically as a few years ago. For some time, the so-called mining pool has been operating. We are talking about places where miners combine the computing power of their computers to mine blocks together.

In the case of mining cryptocurrency in the mining pool, the prize is divided equally to the contribution made. Currently, a cryptocurrency miner using an Application-Specific Integrated Circuit is the optimal solution. We are talking here about efficient and expensive equipment, which is designed to dig a single cryptocurrency. Such an excavator is often used to dig BTC.

Current cryptocurrency miners also use a GPU, which is a card that allows you to extract various currencies, and a CPU – a powerful processor with many cores.

Halving and digging cryptocurrencies

Halving is a term related to cryptocurrencies. This process involves reducing the block reward that diggers receive for solving a cryptographic puzzle and adding a block to the blockchain.

Interestingly, in the case of the most popular currency, which is BTC, the reward for the block was 50 bitcoins at the very beginning. Every four years, this award is reduced by 50%. This means that after the first halving, it fell from 50 to 25 BTC, and then from 25 to 12.5.

In June 2023, the block reward is 6.25 BTC. The purpose of halving is to control the supply of cryptocurrency on the market and prevent inflation. A decrease in the reward for digging cryptocurrency means that there will be fewer new units of BTC, which can affect the higher exchange rate of this virtual currency – provided that the demand for it remains the same or increases.

It is worth knowing that in the past, the so-called halving was often associated with the growth of the Bitcoin exchange rate. Of course, there is no guarantee that overfishing will have the same effect in the future.

The next halving of Bitcoin will take place in April or May 2024, when the reward for the block will be 3,125 BTC.

When it comes to mining, it is also worth knowing that cryptocurrency mines can extract only 21 million Bitcoins. Halving will continue until 2140, when the process of awarding cryptocurrencies will be suspended.