Complex algorithms in simple words: what is cryptocurrency and whether it is profitable to buy it in 2018
What is cryptocurrency? This question in 2017 was asked by millions of people around the world. It was a year of unprecedented rise in the Bitcoins price and a great hype around it.
The idea that you can buy an asset for a few cents and in 5-6 years get $20.000 for it, turned out to be very attractive for many users. But to understand the nature of bitcoin (who has created it, how does it work, and how is it differ from fiat money?) seemed to be a difficult issue. We want to tell you in simple words what a cryptocurrency is.
Outdated system in the new world
The ХХ and XXI centuries have changed a lot in our lives. We have learned to overcome huge distances in a matter of hours and instantly transmit video, photo and sound to anywhere in the world. Many systems that were previously in the hands of the state (transport, communications, media and even space) became private, in other words, decentralized. And only the financial system remained unchanged. The form changed: instead of coins we have paper currency, electronic money and credit cards. But the content remained the same: the state issues money and controls their emission (quantity in circulation). Banks do not issue money, they only serve as intermediaries.
In the mid-2000s, there was a person who decided to change the existing system and create a non-state currency, which is managed not by the government, but directly by its holders. The developer took the pseudonym of Satoshi Nakamoto, and called his invention Bitcoin.
How it works
Bitcoin is based on the blockchain technology: a special way of recording information with cryptographic encryption. The way it works was described in detail by the Medium.
And the data is stored not in a single server center, it is rather distributed on a set of users' computers, similarly to torrent trackers. With the help of blockchain one can create ledgers of a wide variety of data (insurance, medical, data on the supply of products and their quality), and such data cannot be falsified.
To cut a long story short, the information in the blockchain cannot be rerecorded, because it is built into the chain of encrypted records.
But the first application of blockchain was the creation of a cryptocurrency. In this case, data on transfers (transactions) is recorded in blockchain: who, how much and to whom transferred money. Therefore, the system of each cryptocurrency is self-regulating and independent, and no one can control it.
What does bitcoin consist of?
Blockchain is a network in which bitcoin functions. It consists of a set of information blocks with encrypted data on transfers. This cipher (hash) is created by the network participants, who get a reword in cryptocurrency for their work. The more blocks are open, the more currency units are created. Therefore, bitcoin and all cryptocurrency exists only within its own blockchain with the records of its mining by a miner or transfer to other network members. There is no bitcoin outside the network: it cannot be downloaded or printed. Cryptocurrency is not a program or a numeric code; it is actually a ledger with information. This explains the complexity of the processes for its storage, purchase and sale.
Does the world need bitcoin?
More than eight years have passed since the creation of the ‘new global currency’, but we still cannot pay for a burger in McDonald's with bitcoins. Bitcoin still hasn’t become a new global currency as it was planned. Then why did it skyrocket in the price so dramatically?
The secret of its growth is in the interest that has been generated in the world by the blockchain and the possibility of instant, almost free transfers to any part of the world. In countries where banking services are not available to everyone, residents began using bitcoin, especially for transfers to their relatives from abroad. And blockchain is explored today by large companies (including Microsoft, IBM and the world's largest banks) in order to use it to accelerate and reduce the cost of many processes. Ironically, Bitcoin grows because it grows: investors have paid attention to this asset, it has become in demand and has grown in price.
Cryptocurrency is not a program or a numeric code; it is actually a ledger with information. This explains the complexity of the processes for its storage, purchase and sale.
However, in 2018, bitcoins are affected by many other factors as well: first of all, it is the development of new legislation, as well as the introduction of financial products (futures, options, etc. on Bitcoin). Analysts predict that in 2018 the volatility of digital currencies will be higher, which means the cryptocurrency investment in 2018 will be associated with even greater risks.