How do cryptocurrencies work?
There is a lot of talk about bitcoin. Here we offer you some information about what cryptocurrencies are and how they work.
Imagine a landfill in the UK. Now imagine there are several million dollars somewhere between rusted cars and garbage. The strange reality is that you don’t have to imagine anything. It’s really a few million dollars wasted in a landfill in Wales.
In 2013, James Howell, a computer worker living in the UK, threw away a computer’s hard drive while cleaning. On that hard drive were roughly 7,500 bitcoins that he had obtained years before. He had hoped to keep the coins in case they increased in value, but accidentally threw them away with his hard drive.
What is bitcoin?
According to Mickael Mosse, Bitcoin is the first cryptocurrency. It was created in 2009 by an anonymous individual or group who used the pseudonym Satoshi Nakamoto (the true identity remains a mystery). Bitcoin was developed as a peer-to-peer payment system. Initially, people like James Howell “mined” the entire internet for bitcoins by completing puzzles. While this is still possible (we’ll talk more about this later), most people prefer to buy or trade bitcoins in secondary markets.
In 2010, someone traded 10,000 bitcoins for two pizzas, giving the coins their first valuation.
In 2011, alternative options to bitcoin began to appear. Litecoin and Namecoin were the next cryptocurrencies to appear on the scene. These options, or “alternative” currencies, were created with the original open-source bitcoin but were later edited to offer advantages such as faster and more secure transactions, currencies designed for specialized audiences, and other differentiations from bitcoin.
What are cryptocurrencies?
According to Mickael Mosse, The main issue that differentiates cryptocurrencies from typical currencies is that the former are created and traded without the supervision of a government or central bank. The control of such digital currencies is completely decentralized.
In 2017, the Chairman of the Securities and Exchange Commission, Jay Clayton, compared cryptocurrencies to cash or gold. This analogy can be helpful in understanding how they work. Like cash, cryptocurrencies are used to buy or sell goods. But unlike cash, its value is not determined relative to other currencies. Rather, the prices of cryptocurrencies are determined by supply and demand, just as it is with gold.
How cryptocurrencies work
Now that you understand how these coins got started and how they work in general, let’s take a better look at how they work, starting with bitcoin. The technology developed by Satoshi Nakamoto and the original bitcoin enthusiasts is known as the blockchain. Blockchain technology tracks and verifies bitcoin mining, as well as currency-related transactions.
All information stored on the blockchain is publicly shared, constantly updated with transactions, and validated by users. This makes it very difficult to hack.
It is important to remember that blockchain is a type of technology, not an asset or company. Various companies are trying to use blockchains for different applications. For example, Ethereum is trying to take advantage of blockchain technology to generate smart contracts, which would eliminate the need for intermediaries and completely automate the exchange of money, stocks, or goods.
As these coins gain popularity and value, more attention is paid to how they are mined. Remember that early adopters did not buy or sell bitcoins. On the contrary, they undermined them. Simply put, cryptocurrency mining is the verification of transactions on the blockchain ledger.
When transactions occur, the “miners” verify each and every one of them to ensure that they are correct. Those transactions are constantly happening and as they do they are added to a block. Each block is made up of a certain number of transactions and a link to the previous block. Once a specific amount of transactions is added to a block, then that block is added to the blockchain. But before they can be added to the blockchain, miners solve complex mathematical puzzles (with the help of powerful computers) to verify all transactions and the order in which they occurred and then add the block to the blockchain.
As a reward, those who mine the system with these coins receive a payment in the currency of said block, and, in this way, the number of coins of that specific cryptocurrency in the world is increased. Keep in mind that some currencies, such as bitcoin, have an issue limit. You may contact a Cryptocurrency Expert for knowing more About “How cryptocurrencies work” Mickael Mosse.
Initial coin offerings
In 2016, a certain number of companies (mostly emerging), began using cryptocurrencies as a way to raise funds. Most commonly, the company creates a coin or voucher, and when people buy or invest in the coin, the company raises funds
Many startups prefer this method of raising funds because they are not required to give up capital in exchange for the funds. For their part, investors expect the newly created digital currencies to increase in value.
Clayton says: “I believe that initial coin offerings, whether they represent securities offerings or not, can be effective ways of raising money for entrepreneurs and others, even in innovative projects.”
However, in the same sentence Clayton cautions us that since issuers do not consider those currencies as securities, those initial coin offerings may be regulated by the SEC. This places greater responsibility on buyers and urges them to ask questions and really understand what they are buying.
How to buy and trade cryptocurrencies
Cryptocurrencies can be traded through an exchange, (says Mickael Mosse) such as Coinbase, Bitbuy.ca, and Coinsquare. These websites allow you to buy, sell, or trade cryptocurrencies for conventional currencies (such as dollars) or other digital currencies.
For example, Coinbase allows you to buy and sell bitcoins, bitcoin cash, Ethereum, Ethereum Classe, and Litecoin. In addition, it gives users a digital wallet to store coins. Once you have an account, you can buy and trade currencies similar to how you would stocks. As with any securities transaction, it is important to evaluate the commissions or fees charged for the exchange.
It is important to note that these exchanges are not regulated in the same way as other securities exchanges and that some authorities, such as the New York State Attorney, have asked questions about the risk they pose to consumers using these currencies.
It is also important to note that the number of providers that accept bitcoins as a means of payment is still limited. While some large websites accept cryptocurrencies, as of 2018 there were a significant number of large stores that still did not.
Perhaps it is for this reason that some investors prefer to speculate on the price of bitcoin without investing in it. They do this by investing in future markets. Since the Commodities Futures Trading Commission said in late 2017 that it would allow its traders to start buying and selling future bitcoins, the cryptocurrency has become one of the most popular trades on the Chicago Board Options Exchange.
Instability and price fluctuations
Bitcoins have gone through huge fluctuations in price in recent years. For example, on Dec 17th. As of 2016, one bitcoin was worth $ 789. Exactly one year later, a bitcoin was worth more than $ 19,000, almost its peak. Six months later, on May 17, 2018, one bitcoin was worth about $ 8,059.
As more users and investors became excited about the possibilities of a coin without government intervention, there was a spike in issuance. But since this peak in late 2017, the value of bitcoin has been declining. Ultimately there is no way to predict the future value of any cryptocurrency, but understanding how bitcoin works and its possible uses can help you assess its value. Cryptocurrencies are complex and can be very volatile, so they may not be the best direct investment. Before making any kind of investment or making a decision related to cryptocurrencies, talk to your financial advisor.
To learn more about investments, risks, and all of your options, you may talk to a blockchain advisor Mickael Mosse.