Cryptocurrency: basic principles and features

5 min read
Cryptocurrency: basic principles and features
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Most people who have used electronic payment systems at least once have heard about such a type of virtual money as cryptocurrency.

At the same time, not everyone can explain the principles of operation of this digital asset and, moreover, earn money with it. However, given the high popularity of using cryptocurrency, it is worth knowing in simple terms for every Internet user who uses the network not only for entertainment, but also for making money.

Payment history

The first ideas about creating a completely new principle for accounting for electronic currency appeared in 1992 from an ex-employee of Intel, Timothy May. He and several like-minded people wanted to create a completely anonymous means of payment, thanks to which it would be possible to avoid the participation of the state in any financial transactions.

In 1998, another group of activists put forward a proposal to create a free, tax-free money system. Around the same time, the concept of BitGold appeared, which could have outpaced the emergence of Bitcoin, but due to a number of problems it was put into effect only in 2014.

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In fact, the first popular cryptocurrency was Bitcoin. The payment system was launched in 2009. At the same time, one of its main creators, Satoshi Nakamoto, has not been involved in the project for several years. Although he owns about a million bitcoins, which in 2017 is equivalent to more than a billion US dollars.

How it works

The main principle of earning and making financial transactions using cryptocurrency is the absence of a centralized system for storing foreign exchange reserves. The proof that a user of such a system has a certain amount of payment means is a special account – blockchain.

Cryptocurrency
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And the electronic money themselves are stored in the wallets of their owners, who make the exchange among themselves. Instead of the usual monetary units provided by the gross national product of specific states or gold, the cryptocurrency consists of several entries:

  • sender address;
  • money transfer amount;
  • cryptocurrency recipient’s address.
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Confirmation of an application for the transfer of a virtual means of payment is carried out using a special cipher-key, which is known only to the owner of the electronic wallet. Codes can be stored on any medium, including hard drives, flash drives, and even virtual wallets, in the form of a wallet.dat file. And to complete the operation, it is enough for the owner of the cryptocurrency to use a pair of keys – private, the size of which is 256 bits, and 512-bit open ones.

Popular old and new virtual cryptocurrencies

The number of cryptocurrencies today has almost reached a hundred. And the most popular among them are:

  1. Bitcoin (BTC), the most widely used cryptocurrency, valued at up to $1,200. The capitalization of the currency is about $20 billion;
  2. Ethereum (ETH). The popularity of cryptocurrency has grown after the permission of the owner of the payment system, the eToro trading and investment network, to trade the ETH/USD pair on the exchange. The cost of one Ethereum is now about $32;
  3. Dash (DSH) is a relatively new project with a capitalization of $7111 million. The price of the cryptocurrency is about $100;
  4. Monero (XMR) is a system included in the TOP-5 virtual money systems due to the high level of security and anonymity of the operations performed. The currency price is $18.
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The fifth popular cryptocurrency can be called Ripple (XRP). The principle of operation of this payment instrument is based on trust between users and a high exchange rate. One click is enough to complete the operation. The unit price is about 0.6 cents.

Cryptocurrency mining rules

The process of obtaining cryptocurrency by a participant in the system is called mining. It is based on the existence of an electronic journal that stores information about all transactions in the corresponding system. Data on transfers goes to users who must choose a combination that opens access to cryptocurrency.

Cryptocurrency
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So, for the Bitcoin system, each participant (miner) can receive up to 25 bitcoins in each block using a secret key. But, since the struggle for access is carried out simultaneously by several users, the entire amount is divided between them. The process of obtaining cryptocurrency takes place on the computers of miners without the use of centralized servers.

Pros and cons of the system

The benefits of using cryptocurrencies include:

  • open code, allowing any Internet user to start creating virtual coins;
  • anonymity of all transactions and lack of control of transfers by banks, governments or other structures;
  • minimum inflation. On average, most cryptocurrencies have only risen in price since they were issued;
  • security of information that cannot be copied or stolen.
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However, cryptocurrencies also have certain disadvantages. These include a lack of guarantees and a high level of exchange rate volatility. In addition, in some countries, operations with cryptocurrency are officially prohibited. And the profit from mining, which is large enough when new means of payment appear, falls over time.

Features of earnings

There are three ways to make money with cryptocurrency:

  1. Mining, that is, using the power of your computer to determine the secret code and create new virtual money. In this case, you can use someone else’s computer technology. Such a system is called cloud mining and involves renting more powerful computing equipment to increase the speed of obtaining cryptocurrency;
  2. Earnings on the exchange, involving the conversion of virtual currency into real money;
  3. Bitcoin faucets – receiving cryptocurrency for viewing ads or entering a certain code (captcha).
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The last option is passive – that is, it does not require additional actions from the user. However, the amount received with its help is an order of magnitude lower. Therefore, bitcoin faucets should only be used as additional income.

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