In 2020, only the lazy did not hear about cryptocurrency. Now the market is not in such an active stage as in 2017, but it continues to develop. The number of projects where this technology is applied, and of course the “players”, is increasing. Traders, investors, venture funds are all investing in the cryptocurrency market.
The latter operate with a clear understanding that the direction has great potential. In order not to be an outside observer, but to take an active part, you should first understand what cryptocurrency is, how it works and how exchanges, currency exchanges, and other services function here.
- How does cryptocurrency work?
- How does mining work?
- How do cryptocurrency wallets work?
- How do exchangers work?
- How do cryptocurrency exchanges work?
How does cryptocurrency work?
In simple words, it was initially seen as a digital-analog of money with a decentralized management system. Due to this, manipulations with assets should be minimized, as well as the security risks of the system as a whole. Now, there are many projects where the crypt performs other tasks.
Something that will never change is the blockchain technology that will always lie at the core. Any project has a chain of blocks with certain data related to each other. Thanks to the algorithms by which subsequent blocks are generated, transparency is ensured (you can track any transaction and which node it belongs to) and data immutability. You can’t hack into the system and overwrite any block. It will be rejected by other network members as invalid.
Given that not only financial information can be stored in blocks, but also any that has value, a logical question arises, where does cryptocurrency appear here? For the blockchain to work and new blocks appear, a resource is needed in the form of computing power. Those who provide it and receive rewards in the form of tokens. It a crypt. The process is called mining. We will discuss it in more detail later.
The received coins are stored on crypto-exchanges or special electronic wallets. You can manage it like any classic currency if it has value and is traded on the exchanges. The principle is not particularly different. Beneficiary details, personal address, and also sometimes it is possible to independently set the size of the transfer commission. Of course, it may be tempting to indicate its minimum, but in this case, the transaction may be in the queue for processing for hours, or maybe days.
How does mining work?
There are two types of digital gold mining. In the first case, computer equipment or ASIC devices are used, which are designed specifically for the fastest processing of information.
To start mining cryptocurrency, you need several steps:
- using services to calculate which token is now more profitable to mine;
- register a wallet for the coins you have chosen, or take a personal address for it on any crypto exchange (the first option is preferable);
- configure software on devices and connect to any pool (combining computers and ASICs into a network for more efficient work)
- make sure that the “iron” worked inappropriate conditions and on time to service.
- a reward comes to the specified wallet with a certain frequency. It is important to monitor the profitability of the process because the complexity of the calculations increases and the devices bring less profit. The cryptocurrency rate is also important – if there is a decline in the price, you can not sell it, but wait for favorable conditions.
Another strategy that miners adhere to is to extract what brings the greatest profit and instantly convert it into a promising crypt.
The approach of using computers or ASICs is called PoW (Proof Of Work).
The second option PoS (Proof Of Stake) does not involve the use of additional processing power. The award is given to network members who store funds in wallets. They are validators confirming new transactions. The larger the amount is stored, the greater the weight of such a node and, accordingly, the reward. This is somewhat reminiscent of the function of a deposit in a bank with the only difference being that the asset can be used here at any time.
How does cryptocurrency wallet works?
For the user, the principle of using a crypto wallet differs little from any electronic one. There is an address to which funds are accepted. They are displayed on the balance sheet. But from the network, this is only a set of records tied to a specific wallet and not the real amount that a person owns.
There are several types:
This is not to say that some are worse or better, just each is optimized for
specific tasks. If you need a place to store crypto, then a paper or hardware
option is best. The advantages are that the wallet does not have constant access
to the Internet, which means there is no risk of hackers stealing funds.
The hardware looks like a flash drive and costs at least $50. Paperback is done independently. Visually looks like a QR, which is printed on a sheet.
When cryptocurrency is constantly working on receiving and transferring funds, the best option is a program installed on a PC, or with access in a browser.
The advantage is speed. At any time, to take the necessary action with the asset will take a couple of minutes. Some use crypto-exchanges for these purposes, where they partially store funds for trading and transactions. This method is riskier because both small and largest exchanges are constantly subjected to hacker attacks, during which customer deposits can be stolen.
Unfortunately, given the non-universality of cryptocurrencies, there is no wallet where you can store everything. But there are enough options that support most of the most popular coins. As a rule, there are enough of them for everyday use, and “exotic” options are stored in a separate project wallet or on cryptocurrency-exchanges if they have already been listed.
How does cryptocurrency-exchanges work?
One of the most pressing questions apart from “how to buy bitcoin” is “how to withdraw it.” Although the digital gold market is developing, it is not yet possible to cash out crypto cheaply – commissions can still reach 20% of the amount. Nevertheless, there are enough options to do this. The two most popular are the best change exchanger aggregator and the peer to peer platform called Localbitcoins.
The first is a list of trusted sites with which you can both buy tokens and turn them into fiat money. There is a clear feedback system by which you can filter out those that conduct transactions for a long time. And choose the one that offers the most profitable exchange rate at the moment.
The principle of operation is no different from those in which you can buy dollars or any other currency.
Localbitcoins is a great alternative that has become popular around the world. The main difference is that on the platform, participants themselves submit their applications for purchase or sale. Due to this, there is no intermediary. And everyone, like trading on the exchange, can make a deal at a favorable price to him.
Both options are suitable if the operation needs to be carried out with a popular crypt. Otherwise, you will have to look for exchanges where the desired coin is presented, convert it to a more common only then withdraw it.
How do cryptocurrency exchanges work?
Each exchange provides a platform for users where a specific list of tokens is provided for trading. In the crypto community, it is called listing. Within the framework of this list, it is possible to exchange some coins for others. As for the fiat, the withdrawal in dollars is available only on part of the sites.
This is primarily due to the legal regulation of the exchange, depending on where it is located. On many platforms, you can’t even make dollars. And to start trading, you must use exchangers.
The replenishment procedure is as follows:
- registration on the exchange
- getting the address of the necessary coin
- creating an application in the exchanger, where the address for receiving tokens is indicated previously issued
- start of trading when the transaction is completed and the balance on the exchange is updated.
The main benchmark on the cryptocurrency market, which is paired with most trading, is Bitcoin (BTC), but there are other options, including the dollar.
On those sites where, for various reasons, this is not possible, there is a “digital analog of the dollar” USDT. This is also a token, the cost of which is constantly kept at the fiat level. Most often used for profit-taking.
When choosing a suitable crypto exchange, one should take into account not only the availability of the necessary coin in the listing, but also the trading volume, and one should also pay attention to how seriously the platform owners approach protection issues. Unfortunately, customer accounts remain a tidbit for hackers who annually steal “digital gold” worth hundreds of millions of dollars.
To prevent this from happening, you need not only to choose a well-protected platform but also to take all necessary precautions on your part. A complex password, two-factor authorization, and diversification of funds.
For those who already had experience in exchange trading in other markets, and here there should not be any special difficulties. But still, the crypto market has its specifics, which should also be taken into account during trading so as not to lose all assets.
First of all, it is important to understand that the volatility here is much higher and some coins per day can both grow in price by 500% and instantly depreciate.
A competent systematic approach to trading will help to avoid the most negative scenarios.
In general, the cryptocurrency market is promising not only for traders but also as an investment tool. More and more projects appear that are based on the blockchain technology. And solutions have long moved from non-trivial to complex products that take entire directions to a new level.
A crypt is not another fashionable feature that everyone will forget about after a year. She has long confirmed her viability and prospects. The community growth dynamics are an excellent confirmation just like the number of institutional investors who become participants in the cryptocurrency market.
Therefore, the faster you understand the main advantages of cryptocurrency and blockchain, the easier it is to find the opportunity to use it for your good.