Discover what cryptocurrencies are, where they come from and why they have become so popular.
What are cryptocurrencies?
The cryptocurrencies are virtual coins. They can be exchanged and operated like any other traditional currency, but they are beyond the control of governments and financial institutions.
There is a large number of cryptocurrency available, all with their own characteristics and applications. Those that have greater market capitalization are – at least for now – a minority, which includes bitcoin, bitcoin cash, ether, litecoin, ripple and dash.
Currency or raw material?
Cryptocurrencies can be considered as an alternative to traditional currencies, but in reality, they were conceived as a completely conventional payment solution. At this time, many stores accept cryptocurrency as a form of payment.
Although it is true that its validity as a method of payment is fundamental to its value, cryptocurrencies are usually more similar to commodities such as gold than to the forex market. As the raw materials:
- The value of a cryptocurrency is not exclusively linked to the behaviour of a specific economy
- Changes in interest rates and the increase in monetary reserves only have an indirect effect on their value
- The value of cryptocurrencies depends on the commitment of users to maintain their price when converting them to traditional currencies
This means, at least for now, that cryptos are treated mainly as a raw material: an investment whose return comes from speculation around the ups and downs in value.
What is mining cryptocurrencies?
Mining cryptocurrencies is the process through which cryptocurrency transactions are verified and new units/blocks are offered.
The objective of the miners is to collect the latest transactions in blocks (that is, verified sets of transactions) and find a solution to a complex algorithm. Doing this you get a reward: a fixed amount of cryptocurrency. This amount varies according to the cryptocurrency in which you work; The bitcoin reward, for example, is currently 12.5 bitcoins.
The solution to this algorithm is a continuous process and depends on the results of previous algorithms to perform the following calculation. In the same way, the difficulty of the algorithm can be (and is) adjusted frequently, in order to make the work of the miners constant – and even if the processing capacity is improving. This is similar to the rate at which raw materials such as gold enter the market (hence the term ‘mine’).
What is blockchain?
The blockchain is a shared digital book that records all the transactions of a cryptocurrency determined between two parties. These transactions form groupings known as “blocks”, which in turn are coded and linked to each other. (More info in videos below)
The information registered in the chain of blocks is stored in millions of computers and is open to everyone, instead of being stored in one place. This makes the process transparent and immutable to modifications, without weak points vulnerable to human or computer error. Once the data is verified, it can no longer be edited without the consensus of the majority of the community.
Keep in mind that cryptocurrencies is just one of the many applications that block technology uses. The blockchain is mainly a digital platform in which all types of programs can be created (including identity management, security software and transaction processing).
Cryptocurrencies: benefits and risks
Cryptocurrencies are global currencies, much less susceptible to the economy or policies of a specific country. Everyone can access them and can be instantly transferred to anyone anywhere in the world
Cryptocurrencies are decentralized: there is no official market, which means that they can be operated 24 hours a day, seven days a week
Cryptocurrencies usually experience significant price movements suddenly. This makes them problematic as a currency but very interesting because of the trading opportunities they offer
All transactions are recorded in a shared book and are operated on a mechanism that ensures that the recipient only receives the information they need from the issuer (not all of their data)
Volatility can lead to both risks and opportunities: large price fluctuations can bring hundreds of dollars in losses during the night
There is no perfect way to protect against human error, technical failure or fraud – and there is no system in place to compensate you for your losses
The cryptocurrencies have the value that they want to give: despite its growing popularity, there are still doubts about its long-term future
| Regulatory changes
Cryptocurrencies are exempt from regulation for now, but if new mechanisms are introduced, many of their advantages over traditional currencies can be reversed
Traditional currencies vs cryptocurrencies
Linked to a specific country or group of countries
|Issued by governments||Offered through mining|
|The offer is controlled by central banks||The offer is controlled by miners and mining technology|
|They are injected into the economic system through bonds and other securities||They are injected directly into the cryptocurrency market|
|They are greatly influenced by inflation and interest rates||Little influence of monetary policy|
An ICO (Initial Coin Offering) is the way in which the founders of a new cryptocurrency obtain capital (in the form of ether or bitcoin) for their project, in exchange for tokens in their currency. The project may be exclusively for your new cryptocurrency or may cover other blockchain applications.
ICOs are fast becoming the preferred way to launch a new cryptocurrency to the market. The hope is that, if the new cryptocurrency becomes the new success, it will be available. They are, however, a risky bet: unlike what happens with listed companies, the new cryptocurrencies are not proven in the market and do not confer property rights. This makes the investment purely speculative.
- What is a bifurcation or fork in cryptocurrency?
A fork is a process through which a chain of blocks – or transaction book – is divided into two. It happens when the software used among the miners becomes misaligned. The cryptocurrency miners must then decide which version of the chain must be accepted as valid and which one should be discarded.
- Is it possible to trade downwards in cryptocurrencies?
Yes. When you invest in cryptocurrencies, you can open a position if the value falls, not only when it increases.
- Can cryptocurrencies replace cash?
It is not impossible, but it is unlikely to happen in the short term. There are several reasons why they need time, including:
• Cryptocurrencies are not yet accepted worldwide, affecting both individuals and companies
• They are too volatile: suppliers would have to check their prices every day to adjust to fluctuations in their value
• A virtual currency would suppose a complete revision of the current economic infrastructure
• A transition would have to be planned, to prevent the redundancy of traditional currencies and the loss of assets
Even so, this idea has several benefits:
• They cannot be manipulated like traditional currencies, due to public access registration
• Without intermediaries, costs are lower and obstacles in international transactions are reduced
• They lend themselves to a universal basic income