Guide for beginners: what are cryptocurrencies, what are they used for and what are the differences between Blockchain and Bitcoin
Cryptocurrencies have always been the flame of a candle, which attracted a lot of “moths” who wanted to make money quickly. Many of them, following the analogy, burned their wings. Today, the crypto space is not a flame, but a raging flame of innovative technology that is changing the world. Accordingly, those wishing to take advantage of its opportunities have increased disproportionately, but the number of those who have failed has also increased.
The problem is that many newcomers do not know the most basic basics of the cryptocurrency space. The last rollback of Bitcoin showed that 85% of the “weak hands“ who started to ”dump” Bitcoins in fright are newcomers who have no idea what rules the crypto lives by.
Today, according to Coinmarketrate.com, the crypto market is recovering, the BTC is regaining its position, and newcomers regret their weakness. That’s why we decided to tell new players about the basic concepts of cryptocurrencies. And so, let’s start.
Where do cryptocurrencies come from
The Bitcoin cryptocurrency has been around since 2009. It was created shortly after the last major financial crisis in 2008. Who exactly created Bitcoin is still unclear. Satoshi Nakamoto is the pseudonym of the creator, in 2008 he published the Bitcoin White Paper, in which he spoke about his revolutionary idea of a new monetary system. Which group of people or which person is hiding behind this pseudonym is still unknown. Although several people claimed to belong to the name Satoshi Nakamoto, they could not provide any evidence. Meanwhile, there are more than 16,000 other cryptocurrencies besides Bitcoin.
What are Cryptocurrencies?
Although there are currently many different cryptocurrencies, one thing remains in common: they are based on blockchain technology. In general, there are three categories of cryptocurrencies.
Firstly, currencies and payment tokens – such as Bitcoin, which are intended for making payments.
Secondly, service tokens. They are used as financing for the project/network, guaranteeing buyers the opportunity to use their own products of this network.
Thirdly, securities tokens – which are structured similarly to securities (for example, stocks or bonds), with the exception of implementation on the blockchain.
What is the difference between Blockchain and Bitcoin
Blockchain can be described as the technology underlying the Bitcoin currency. For a better understanding, let’s look at the example of blockchain and VTS, and booking a room in a real estate company, let’s call it conditionally – “X”. Bitcoin here is the possibility of booking a room, where various booking options can be actively perceived on the screen. Thus, the presentation level – in this case, the screen – becomes visible to the viewer. But what happens behind this level of presentation is unclear.
Data processing and storage in the blockchain takes place in the background. As is the process that takes place behind booking a room. For Bitcoin, the blockchain is of great importance. However, a blockchain can exist without a BTC or other cryptocurrency. Blockchain can be imagined as a dynamic database – like Excel, in which every transaction ever made is recorded. This database is divided into several so-called blocks that are connected in a chain (hence the name blockchain). The number of transactions within one block is about 2000. A remarkable feature of the chain of these blocks is that the connection with the corresponding blocks is unchanged.
How does a regular database differ from a blockchain
There are three main features of the blockchain that explain how it differs from a regular database.
Firstly, the blockchain database is decentralized. This means that the database is not located on the same server or in the same company, but is distributed across many different computers. All these computers have the same copy of this database. This also explains why a hacker attack on the blockchain is almost impossible.
Secondly, every operation performed is completely transparent. All operations performed are stored in the database and can be viewed openly by all users for an unlimited period of time. Although the person making the transaction is anonymized, the transaction process as well as the corresponding amount are visible.
Thirdly, there is no central authority controlling transactions. The bank, for example, has the right to block or cancel transactions. This is not possible when using blockchain.
Is it possible that while the blockchain will remain, all other cryptocurrencies will disappear?
Sooner or later, about 99 percent of cryptocurrencies will die out. However, this should not affect currencies that dominate the cryptocurrency market, such as Bitcoin or Ethereum. It is simple to explain the disappearance of a significant part of cryptocurrencies. Imagine that you have a desire to start your own company. In order to get money for the company, a fundraiser is usually held. For example, the company’s shares are sold to investors so that the company can be built.
Fundraising in the blockchain industry was different. When most cryptocurrencies were created in 2017, the main reason was the ability to use cryptocurrencies instead of stocks. Instead of selling the company’s shares, useful tokens were created, which make up 90 percent of all tokens. It is worth emphasizing that, although blockchain provides many advantages, it should not be used for everything. First of all, blockchain is suitable for processes involving large amounts of money, and procedures in which security is necessary, as well as the protection of one’s own privacy.
How is Bitcoin better than regular money
Well, to begin with, we should be realistic. It is not necessary to share the assumptions that Bitcoin will one day replace ordinary money. It should be considered rather as an additional approach. Bitcoin is especially suitable for online payments. Nevertheless, here are three examples in which the BTC (compared to conventional money) can bring more advantages.
- This is inflation.
If we take Switzerland for example, then there are zero interest rates, sometimes even negative. The currency and the government are also stable. This is not the case in many countries in the world. In Venezuela, for example, inflation has increased so much that the value of the Venezuelan currency has halved within 30 minutes. In the case of BTC, inflation has been clearly predetermined since 2009. Every four years, the number of newly created coins is halved. This also limits the availability of new Bitcoins. The last BTC will be generated in 2140.
- This is the possibility of cross-border payment transactions.
If a person loses a bank card during their stay abroad, a money transfer from their home country is required to continue their stay. Money transfer usually takes 3-5 business days, interest must be paid at the exchange rate, and a high transaction fee can be expected.
When using Bitcoin, the transaction fee is a few cents, and the transfer takes about 10 minutes. Unfortunately, the Cue Ball is offered as a payment method only on a limited basis.
- This advantage mainly concerns people who do not have access to standard financial services.
In a country where most people live in conditions of low economic status, opening a local bank often does not make sense for large banks. These people can access the financial system through Bitcoin. A mobile phone and internet access are all that is needed.
How is the purchase of cryptocurrencies made
There are two ways to buy BTC (and other cryptocurrencies). Either directly on the exchange, or indirectly through a financial instrument. As with conventional exchanges, there are crypto exchanges on the crypto market. On these crypto exchanges, Bitcoins can be exchanged for fiat funds after creating an account. These cryptocurrencies can be left on the exchange or stored in a separate wallet.
How to store coins
Crypto can be stored both on crypto exchanges and in your own wallet. Wallets are digital wallets that can be compared to a regular bank account. In the Bitcoin blockchain, wallet owners have a public address similar to an email address. Any person who has the address of another person can send him a crypt. This public address is called the public key. A password is required to gain access to crypto assets in the wallet. This password is called the private key.
Although people with their own wallet have more power and control over their assets, it also increases their personal responsibility. Since, unlike traditional banks, there is no third party controlling the funds in the wallets, there is no way to recover the private key in case of its loss. The assets in the wallet can never be recovered without a password.
How secure is blockchain?
Blockchain is very secure. The Bitcoin blockchain, for example, has never been hacked due to its decentralized nature. Suppose 50,000 computers support a blockchain database. Theoretically, to crack it, you need to gain access to 25,001 computers.
There have already been hacker attacks in the blockchain industry. However, the blockchain itself has never been a victim.
Probably the most significant hacker attack on cryptocurrencies occurred in early 2014 at Mt.Gox, the largest crypto exchange in the world at that time. In this case, the private key of the exchange itself was hacked. Thus, human errors are the only reason why hacker attacks in the blockchain industry exist at all.