Questions and Answers About Cryptocurrencies (Virtual Currencies)

Questions and Answers About Cryptocurrencies (Virtual Currencies)

A cryptocurrency (or “crypto”) is a form of digital money that allows individuals to transfer value in a digital environment.

You might be wondering how this type of system differs from PayPal or the digital banking app you use on your cell phone. At first, they certainly seem to have the same usage functions — paying friends, shopping online — but upon closer examination, we can see that there are many differences.

What Makes Cryptocurrencies Unique?

Cryptocurrencies are unique for many reasons. Its main function, however, is to act as an electronic money system that is not owned by any institution or organization.

A good cryptocurrency is decentralized. There is no central bank or subset of users that can change the rules without consensus. Network participants (nodes/nodes) run software that connects them to other participants so that everyone can share information.

Centralized System vs. Decentralized

A cryptocurrency (or "crypto") is a form of digital money that allows individuals to transfer value in a digital environment.

On the left, we have the scheme that is generally used by institutions such as banks. Users must communicate using a central server. In between, there is no hierarchy: the nodes are interconnected and transmit information to each other.

The decentralization of cryptographic networks makes them highly resistant to disconnection or censorship. On the other hand, to harm a centralized network, it is enough to stop the main server.

If for some reason a bank lost/deleted its database, it would be very difficult to determine what the users' balances were unless there was a backup of all the information.

In the case of cryptographic coins, nodes maintain a copy of the database. All effectively act as their own servers. Individual nodes can go offline, but network-connected peers can still get information from other nodes.

In this way, Cryptocurrencies operate 24 hours a day, 365 days a year. They allow the transfer of value anywhere in the world without the intervention of intermediaries. That's why we usually call this system permissionless: Anyone with an Internet connection can transfer funds.

Why is it called Cryptocurrencies?

A cryptocurrency (or "crypto") is a form of digital money that allows individuals to transfer value in a digital environment.

The term “cryptocurrency” was created by combining the words cryptography and currency. This is because Cryptocurrencies use various cryptographic techniques to carry out transactions between users.

What is Public Key Encryption?

A cryptocurrency (or "crypto") is a form of digital money that allows individuals to transfer value in a digital environment.

Public-key cryptography supports networks of criptomoedas. Users will depend on it to send and receive funds.

In a public key cryptography (system of mathematical algorithms), you have a public key and a private key. A private key is basically a huge number that would be impossible to discover. It is often difficult to understand the size of this number.

For the BTC, guessing a private key is just as likely as correctly guessing the result of 256 coin toss. Using today's computers, you couldn't crack someone's key before the universe's thermal death.

In any case, as the name suggests, you should keep your private key a secret. But from that key you can generate a public key. The public key can be revealed without any problems. It is virtually impossible to reverse engineer the public key to obtain the private key.

You can also create digital signatures signing data with your private key. This would be somewhat analogous to signing a document in the real world. One of the main differences is that anyone can tell with certainty whether a signature is valid or not by comparing it to the corresponding public key. This way, a user does not have to reveal their private key, but can still prove that they are the owner.

In Cryptocurrencies, the user can only spend his funds if he has the corresponding private key. By making a transaction, you are announcing to the network that you want to transfer your coins.

This announcement is made through a message (ie transaction), signed and added to the database of that crypto currency (the blockchain). As mentioned, you need your private key to create the digital signature. And since anyone can see the database, anyone can verify that their transaction is valid by checking the signature.

Who Invented the Cryptocurrency?

Over the years we've had several attempts at digital money systems, but the first of the Cryptocurrencies was the Bitcoin, released in 2009. It was created by a person or group of people using the pseudonym Satoshi Nakamoto. To this day, his true identity remains unknown.

Who Invented the Cryptocurrency?

After Bitcoin, many later cryptographic coins emerged — some aimed at competing, others seeking to integrate features not available in the Bitcoin system.

Today, many blockchains (Blockchain) not only allow users to send and receive funds, but also run decentralized applications through smart contracts. Ethereum is probably the most popular example of a block chain of this type.

What's the Difference Between Cryptocurrencies and Tokens?

At first glance, Cryptocurrencies and tokens appear to be the same thing. Both are traded on brokers and can be sent between block chain addresses.

A cryptocurrency (or "crypto") is a form of digital money that allows individuals to transfer value in a digital environment.

The purpose of Cryptocurrencies is to serve exclusively as money, either as a medium of exchange, store of value, or both. Each unit is functionally fungible, meaning that one unit of the coin is worth as much as any other unit of the coin.

Bitcoin and other older cryptocurrencies were designed as coins, but later block chains were able to do more. Ethereum, for example, doesn't just provide currency functionality. It allows developers to run code (smart contracts) over a distributed network and create tokens for various decentralized applications.

Tokens can be used like Cryptocurrencies, but they are more flexible. You can create millions of identical tokens or a select few with unique properties. They can serve as anything from digital receipts representing a company's stock to loyalty points for any system.

In an intelligent protocol compatible with contracts, the base currency (used to pay transactions or in applications) is separated from its tokens. On Ethereum, for example, the native currency is Ether (ETH) and should be used to create and transfer tokens on the Ethereum network. These tokens are implemented according to standards such as ERC-20 or ERC-721.

What is a Digital Currency Wallet?

Basically, a cryptographic coin wallet is something that stores your private keys. It can be a device created for a specific purpose (a hardware wallet), an app on your computer or smartphone, or even a piece of paper.

A cryptocurrency (or "crypto") is a form of digital money that allows individuals to transfer value in a digital environment.

Wallets are the interface most users rely on to interact with a network of Cryptocurrencies. Different types of wallets offer different functionality — of course, a paper wallet cannot sign transactions or display current prices in fiat currencies.

For convenience, software wallets are considered the best option for daily payments. In terms of security, hardware wallets are virtually unrivaled for securely storing private keys. Cryptocurrency users generally store funds in both types of wallets.

What is a Blockchain?

A blockchain is a special type of database where data can only be added (not removed or changed). Transactions are periodically added to a chain of blocks within what we call blocks (composed of transaction information and other important metadata).

We call the structure a chain because the metadata of each block includes information that links it to the previous one. Specifically, each block includes a hash of the previous block, such as a unique fingerprint.

The probability of two pieces of data providing the same output from a hash function is infinitely low. For this reason, if someone were to try to modify an old block, the hash of that block would differ, and consequently the hash of the next block would also change, and so on. So, if a block is modified, it will be obvious, as all blocks that come after it will also be modified.

The hash of each block is included in the next block. And so the chain of blocks is formed.

What is a Blockchain?

Network participants download the entire blockchain. As mentioned, any user can validate transactions and signatures with public key encryption. When a node receives a block, it performs several checks. If it finds any invalid information, the block will be rejected.

When a node receives a valid block, it makes its own copy and then distributes that block to other nodes. They do the same until the block is spread across the entire network. This process is also performed for uncommitted transactions — that is, transactions that have been transmitted but not yet included in the block chain.

How are Blocks Added to a Blockchain?

The integrity of a block chain is compromised if false financial information can be recorded. At the same time, there is no administrator or leader in the distributed system who maintains the ledger (book of digital records) — so how do you ensure participants are acting honestly?

Satoshi proposed a Proof of Work system, which allows anyone to suggest a block to attach to the block chain. Proposing a block requires a lot of computing power to find a solution to the challenge proposed by the protocol.

The Proof of Work is the consensus building mechanism that has been most tested and approved among users, but it is not the only one. Alternatives such as Proof of Stake are increasingly being explored, although they have not yet been properly implemented in their true form (although hybrid consensus mechanisms have been around for some time now).

How Does Cryptocurrency Mining Work?

The process mentioned above is known as mining. If the miner finds a solution, the block he created is added to the chain. As a result, he receives a reward denominated in the corresponding block chain's native currency.

A cryptocurrency (or "crypto") is a form of digital money that allows individuals to transfer value in a digital environment.

The cryptographic puzzles miners must solve involve hashing data (repeatedly) to produce a number that must be less than a specific value. Hashing with a unidirectional function means that, given an output, it is almost impossible to guess the input.

But, given an input, it's easy to check the output. In this way, any participant can verify that the miner has produced a 'valid' block and reject invalid blocks. If the miner tries to forge an invalid block, he will not receive any reward and will be wasting time and resources.

This results, in a way, in an interesting game theory that makes attempts to cheat very expensive, while simultaneously providing profits to users who act honestly.

No malicious agent has the resources to attack a well-structured network indefinitely. Consequently, the expected result is that users with more resources, participate in the network correctly and honestly, obtaining a return on their investments.

Cryptocurrencies and Scalability

As you could probably see, distributed networks aren't very efficient. Unfortunately, cryptocurrencies will only be secure and resistant to censorship if all nodes (nodes) can synchronize a copy of the block chain. The lower the requirements to follow the network, the easier it will be for people to participate.

This illustrates why a block chain that adds only one small block every ten minutes is preferable to a block chain that adds a huge block every five minutes. A larger block would require nodes, the use of high-powered computers to keep in sync, and pressure the low-powered ones to remain offline. This would result in more centralization as there would be fewer peers in the network.

However, with smaller blocks, we cannot get many transactions per second (TPS). That is, during periods of high network movement, transactions can take a while to be added to the block chain. This is a disadvantage if the user wants to make a quick payment, but it is the price to pay for decentralization.

We call this problem the scalability dilemma. A system that scales well is one that can be easily adapted to increase productivity with minimal downside. Block chains don't scale well — as we explained, simply increasing production with larger blocks undermines the entire distributed network proposition.

To increase TPS in a way that does not hinder network decentralization, scaling outside the chain appears to be a viable approach. It encompasses a wide range of solutions—both centralized and decentralized—that allow transactions to be made without being recorded in the block chain.

Who Makes Decisions About Currency Software?

Cryptocurrency networks are Opt-in. Nobody is forcing you to run software you don't want. In a good protocol, the code will be completely open source, so users can be assured of the fairness and security of the system.

Generally, cryptocurrencies allow any user to participate in their development. New features or code edits are checked out by a developer community before being published. From there, users can review the code and choose whether to run it or not.

Some updates will be backward compatible, meaning that the nodes updated will still communicate with older ones. Others will not be backward compatible — older nodes (nodes) will be “removed” from the network unless they are upgraded.

Which Cryptocurrency Should I Buy?

This is solely your decision — you must do your own research (DYOR Do Your Own Research) and decide based on your own analysis. There are many tools available to help you make decisions.

 

 

In order for you to decide which cryptocurrency to buy, it is first essential to understand how Bitcoin works.

What should I know before starting to invest in cryptocurrencies?

Where do we start? There are many ways to analyze financial markets, and generally most professional investors use many different strategies. However, at a high level, there are two main schools of thought for evaluating an investment: fundamental analysis and technical analysis.

Fundamental analysis is a method of valuing an asset based primarily on economic and financial factors. Analysts using this method consider macroeconomic and microeconomic factors, industry conditions, or the underlying business of the asset (if any). In the case of Cryptocurrencies, they can also analyze public blockchain data, called “chain metrics”.

This can involve analyzing the number of transactions, addresses, top holders, network hash rate and many other information. The purpose of this analysis is to create a valuation of the asset and compare its appraised value to its current value. This approach aims to determine whether the asset is undervalued or overvalued.

That said, it's important to remember that Cryptocurrencies are a new and emerging asset class. Fundamental analysis takes up less space when it comes to determining its value. In other words, there is no standardized structure for determining the value of Cryptocurrencies and many of the existing models are not very reliable.

The success or failure of a cryptocurrency project can depend on many different factors for which no current structure can be held responsible.

Technical analysis takes a different approach. Unlike fundamental analysis, technical analysis does not attempt to determine the intrinsic value of an asset. Rather, it evaluates trading and investment opportunities based on the history of trading activities.

To do this, this type of analysis focuses on price movements, chart patterns, indicators and various other charting tools to assess the strengths or weaknesses of a market.

In summary, technical analysts believe that an asset's past price movements can be very valuable in trying to predict its future movements.

As technical analysis can be applied to virtually any market that has historical data, it is widely used by cryptographic currency traders.

So what technique should you learn? Why not at two? Most market analysis tools work best when used in combination with other tools. In either case, it's absolutely vital to understand financial risk and risk management and never invest more than you can afford to lose.

Where to Buy Cryptocurrencies?

There are several ways to buy coins. The first thing you need to do is convert your fiat currency (money) into cryptocurrency. Then you can choose to HODL (store them), trade them in other currencies, or borrow and earn interest. Let's check out different types of crypto-asset brokers.

Centralized Exchange Dealers (CEX)

You may find the concept of a centralized brokerage odd, as we often refer to Cryptocurrencies as decentralized. In short, centralized crypto-asset brokers are online platforms that facilitate trading by connecting buyers and sellers.

It works like this: Users deposit their money or cryptocurrencies with the broker and trade using their internal systems. If you are familiar with the workings of Cryptocurrencies, you know that, in this case, your cryptocurrencies are in the custody of the broker. But if you want to withdraw your funds and keep them in your own wallet, it's probably a simple process.

Many may prefer to keep their funds with the broker because they trade on a regular basis or simply for convenience. However, if the brokerage is invaded, your funds could be at risk.

Decentralized Exchange Operators (DEX)

Decentralized brokers are different. When you are using a DEX, there are no custodians involved. A more accurate way to refer to this type of broker would be non-custodial exchange.

When you do business using a DEX platform, the following happens. Instead of depositing your funds in the broker's wallet, you are trading directly from your own wallet. When a trade is executed, funds are transferred directly to the block chain using smart contract.

As there is no entity that acts as a custodian, some consider this choice to be safer than CEXs. Another advantage is that most DEXs do not require you to provide any personal information other than a blockchain wallet address.

At the same time, however, custody of your own funds (requires) a certain level of technical expertise, and the responsibility is entirely yours.

P2P Brokers

A peer-to-peer (P2P) broker is also a platform that connects buyers and sellers, but it differs from a CEX or DEX. In this case, the brokerage itself does nothing but connect buyers and sellers.

They can carry out the transaction any way they want. Therefore, the deposit and settlement method can be decided by buyers and sellers for each transaction individually.

Is Cryptocurrency Legal?

Very few countries completely prohibit the purchase, sale and storage of Cryptocurrencies. In most parts of the world, Bitcoin and other virtual currencies are perfectly legal. In any case, before starting to invest, check if your jurisdiction allows it.

It is important to remember that each country has a different approach to regulating cryptocurrency-related activities. Make sure you don't break any rules relating to taxation or compliance.

Are Cryptocurrencies Dead?

bitcoin
bitcoin

Bitcoin (BTC)

Price
$ 29,655.00

In recent years, the media has repeatedly declared that cryptocurrencies are dead. However, they continue to work exactly as they did in 2009. That's not to say they're not volatile — the price fluctuates a bit. For those just trying to make a profit, bear markets can be daunting.

However, it would be a mistake to describe Cryptocurrencies as "dead". They continue to attract new users and their technology, and infrastructure is becoming increasingly sophisticated.

Major Bitcoin and Ethereum innovations will undoubtedly play an important role in reshaping our currency systems to be more suited to today's era.

Immutability, resistance to censorship, lack of trust (no need for trust), or almost instantaneous transactions using a public money system, are characteristics that can completely renew economic activities on the Internet.

Are Cryptocurrencies Safe?

There is a certain degree of risk inherent in cryptographic coins. If you forget your bank account password, you can reset it through customer support. However, if you forget or lose the private keys that give you access to your cryptocurrencies, no one will be able to help you.

Using a reputable broker can be an interesting option — it requires trust, but you don't risk losing your private keys.

The public key cryptography system has not yet been breached. With good security measures, you are more likely to have your other online accounts hacked before your funds are stolen.

We recommend that you be aware of common scams (social engineering, phishing, etc.), keeping your private keys offline at all times, and keeping your backup in a safe place.

Are Cryptocurrencies Anonymous?

Your name is not tied to your cryptographic addresses—addresses are random strings of numbers and letters in the block chain. However, it is important to be careful about considering them anonymous.

Are Cryptocurrencies Anonymous?

They are, in fact, pseudonyms — although they are not directly linked to your real-life identity, they still represent a type of identity in the chain.
There are some methods that allow people to link IP addresses to their activities.

In these cases, things like attacks dusting and other analysis techniques can be used to identify you, compromising your anonymity. Remember that blockstrings are basically huge public databases.

If you are concerned about your privacy, try to make it as difficult as possible for others to link their transactions to your name. Digital currencies such as Bitcoin are not private by default, but methods such as coin mix and CoinJoins can make it difficult to discover and analyze your information.

A small subset of cryptocurrencies (known as privacy coins) are able to hide the source, destination and amount of funds of transactions using methods such as Confidential Transactions. They have, by default, more privacy, but they are not entirely resistant to the removal of anonymity process.

Are Cryptocurrencies Valuable?

In financial systems, value is a shared belief. Like any item of value, value is not inherent in the digital currency itself — it is assigned by people. In other words, something will only have value if people believe in it. This is true whether the object of value is a precious metal, a piece of paper, or a few pieces of a database.

A cryptocurrency (or "crypto") is a form of digital money that allows individuals to transfer value in a digital environment.

Taking all of this into consideration, some consider virtual currencies, and Bitcoin, to be something akin to a scarce digital commodity. Due to the predictable issuance rate and monetary policy, some believe Bitcoin could act as a store of value in the future, similar to gold. Since Bitcoin has only been around for a little over a decade, it's still hard to say whether it will be able to do that.

Are All Virtual Currency Cryptocurrencies?

No. You may have heard that many nations and central banks are working to create their own versions of digital currency. However, they are just Cryptocurrencies. They are commonly called Central Bank Digital Currencies (CBDCs).

They are essentially digital versions of trust money and lack many of the features and benefits of Cryptocurrencies. They are legally issued and declared by a central government. Also, they typically do not use a distributed logging, such as in a block chain, to record transactions.

You may also have heard about Facebook Libra, another type of digital currency. The good thing is that it was designed on an open source blockchain system.

However, it is not without permission, like Bitcoin or Ethereum, which means that participants would need more than a simple Internet connection to use it. In addition, the project and activities related to this currency would be carried out and managed by a selected group of members.

So while CBDCs and other forms of digital money use blockchain or cryptography, they are quite different from cryptocurrencies like Bitcoin.

What is the market capitalization of a virtual currency?

When you look at the price of a virtual currency (cryptocurrency), you only see part of the whole context. One important metric is the supply of that virtual currency, that is, how many individual units of it are out there.

More specifically, to assess the values ​​inherent in a virtual currency network, you need to know how many individual units are out there at that moment. This is called a rolling supply.

Different cryptocurrencies can adopt different issuance schedules, so it is important to understand how the issuance process works for each network.

The market capitalization (or market cap) is the price of an individual unit multiplied by the current supply.

Market capitalization = outstanding offer * Price

As we can see, the market capitalization of a network of cryptographic currencies is a more accurate representation of the value in the network when compared to the price of a unit.

A network with a cheaper currency, but with more offer in circulation, may have a higher total value (market limit) than a network with a more expensive currency, but with less offer in circulation. The opposite may also be true in some cases.

However, it is worth noting that market capitalization does not represent how much money has entered a specific market. For example, it is a common misconception among newbies that the market value of Bitcoin (BTC) represents the total amount of money invested in Bitcoin. This doesn't make sense, as the market value depends on the price and the total offer.

Why do I have to pay transaction fees?

If you send Bitcoin to another address, you will notice that the address receives a little less than the amount you sent. This is because you pay a small fee to reward the miners, who work to add your transaction to the block chain.

Many cryptocurrencies use a similar mechanism to encourage users to secure and keep the network running. In Proof of Work systems (Proof of Work), transaction fees are usually bundled with newly created coins (the block award), generating the block reward.

depending on the need of your transaction, you can adjust the fee amount. Miners always try to profit as much as possible, so they prioritize transactions with higher fees. You can do transaction analysis unfinished to get an idea of ​​the average rate and then set your own rate accordingly.

I lost my key. Can I get my funds back?

If you've lost your keys, you probably won't be able to get them back. The great benefit of Cryptocurrencies is the removal of depositaries and intermediaries in managing financial transactions.

The downside, however, is that the responsibility is entirely in your hands. Therefore, you need to be very careful not to lose your private keys as they give you ownership of your funds.

What is the Future of Cryptocurrencies?

The answer about the future of virtual currencies will depend entirely on who answers the question. Some believe Bitcoin will continue to grow and, in the digital age, replace gold and move away from the current financial system.

What is the Future of Cryptocurrencies?

Others argue that virtual currencies will always be a secondary system, existing as a niche market. There are also people who believe that Ethereum will become a distributed computer system, serving as the core of a new Internet.

Skeptics predict that the industry will eventually collapse, while enthusiasts are satisfied with cryptocurrencies acting as a niche in the current monetary system.

There are many possibilities — it is too early to say for sure what will happen a year from now. But we cannot deny that there is enormous potential for growth.

5 / 5 - (5 votes)

Related Posts

error: