First of all, you learn basic concepts, categories, and rules of a subject when you acquiring new knowledge. The same way is right for cryptocurrencies. Before learning the dynamics of the movement of pairs, it is necessary to understand the basic concepts. What are cryptocurrencies, what are they for, etc? This knowledge of fundamental things will help you better understand the trends of their further movement, and predict the course after the chosen period.
Yes, cryptocurrencies have been entered our life more than ten years ago, but still, not everyone understands what they are for.
What are cryptocurrencies?
Cryptocurrencies are a special type of financial asset. Today, not all central banks recognize them as a financial tool, but the reality says that they are. They do not exist physically (in metal coins or paper banknotes), all operations are performed by entering special data in the register. Tokens (units of cryptocurrencies) are protected using crypto technologies.
There is a wide list of cryptocurrencies, several tens of thousands. The most famous of these is Bitcoin.
The first cryptocurrency appeared in 2008. It was Bitcoin. The creator is known as Satoshi Nakamoto. But who is it – nobody knows for sure. The Bitcoin concept that formed the basis of all digital assets:
- maximum security;
- confidentiality of participants;
- lack of a single control center.
Any cryptocurrency resembles a network created from individual and independent blocks of transactions. Each block includes information about the previous operation. Thus, data on previous transactions can be obtained, but it is impossible to get personal information about the owners of tokens.
The process of creating new blocks is called mining. The miner needs to generate a crypto signature for each new block. The process of generating new blocks is not endless.
It was easy to mine the first blocks of cryptocurrencies. But it got more complicated after new members are added. At the first stage, it was enough the work of one miner with a powerful computer. But today, only joint efforts and special equipment are required for a successful generation.
The use of cryptocurrencies for transactions and payments
With the development of the Internet, the emergence of economic relations in the virtual space, the question arose about a convenient means of calculation. The web market knows no boundaries but the traditional financial assets are significantly limited by national legislation.
Transferring money from a bank in one country to another can take several days or even weeks. Also, a good percentage is charged for this. This limitation stopped the development of the virtual market. In the 2010s, the need of creating a single financial asset that could be used to pay in the virtual space was really important. The financial institutes wanted to get some tool that did not know the restrictions associated with national legislation. The emergence of cryptocurrencies was the answer to the market demand.
Using of cryptocurrencies as investment instruments
Most investors who buy virtual currencies consider them as an alternative way to store their valuables. They believe that virtual financial instruments protect their assets from depreciation better than traditional investment methods.
If we talk about the most popular cryptocurrency, bitcoin, then its characteristics are similar to gold. The number of its blocks is limited. The speed of their mining is also predicted. It will not be possible to create new tokens here, as is the case with paper money. In other words, the cryptocurrency is not affected by inflation, which can be caused by unplanned emission.
If we compare cryptocurrency with gold or paper money, then it is much more convenient to store and transfer it than real assets.
The absence of a common center and regulator is a big plus. It is impossible to disrupt the performance of the system by a single management decision.
Confidentiality is also an advantage. It is possible to understand the block movement pattern, but it is not possible to know the private information about their owners.
Disadvantages and risks of using cryptocurrencies
Despite the advantages, cryptocurrency also has certain risks. Unfortunately, not all cryptocurrencies are created to make life easier for people. Some projects are created solely for a fraudulent purpose. Today, virtual money has not yet become a full-fledged way of mutual settlement. And some research proof it.
The Foundation for Interwallet Operability surveyed e-money owners a few years ago. The study showed that 73% of cryptocurrency holders have never used it to pay for services. The reason is uncertainty about the success of the transaction. Of those who paid, 75% felt insecure during transactions. How often are transactions made? The same study showed that 30% of owners make mutual settlements with digital tokens once a month, and 43% paid with cryptocurrency once a year.
Users are stopped by incomprehensible, high payments for the transaction, uncertainty with terms of transfers, errors with address formats.
A survey by the UK Financial Conduct Authority showed that digital money is acquired primarily for speculative purposes. As you can see, there are certain technical aspects that still need to be upgraded. Until cryptocurrencies cease to be a means of speculation and do not become a full-fledged payment asset, it is too early to talk about their full-fledged development in the long term.
Well, if you still consider cryptocurrencies as an investment tool, we recommend that you first know more about the risks. Due to the fact that this market is young enough, and just in its stage of formation, it looks more like the wild west, in comparison with the established stock market.
If you are faced with the idea of understanding this market and using it to diversify your capital, FOBS offers its own product, API management, which will help the investor not to lose their funds and systematically profit from this risky and highly volatile market.