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Tough 13 questions about cryptocurrencies

1. What are cryptocurrencies and what is their main difference from conventional currencies?

Cryptocurrency is a type of virtual money that is created directly on a computer network. The unit of cryptocurrency is coin (translated from English as “coin”). It is protected from forgery, as it is encrypted in a cryptographic way. Cryptocurrency is issued on a computer network and is in no way connected with either ordinary currency or any state currency system.

Cryptocurrency has no administrator; it is not supported by anything. The rate of cryptocurrencies cannot be regulated by a third party, it depends only on the balance of supply and demand in the market.

2. What is the difference between cryptocurrencies and bitcoins?

There is no difference, since Bitcoin is one of the types of cryptocurrencies, by far the most popular and expensive. Today, about 1,000 cryptocurrencies can be counted on the market. But their total number is very difficult to accurately name, because new ones appear constantly, and some of the existing ones do not find popularity and actually cease to exist.

Among the most famous besides Bitcoin, which appeared in early 2009, Ethereum, Ripple, Litecoin, Dash and Monero.

3. How do they arise?

Cryptocurrency arises during an action such as mining. Cryptocurrency mining cannot be blocked, transactions cannot be canceled, and all data is stored in a shared database. In this case, blocks are used that arise in the process of creating, for example, bitcoin. The whole process provides complete anonymity. Therefore, it is impossible to trace the chain of transactions.

4. What is mining?

Mining is a way of obtaining virtual cryptocurrency. Mining makes it possible for the blockchain infrastructure to work. In a distributed network, there are no central servers that would regulate them, all calculations for the operation of the network are made by the users themselves. There are several different methods of issuing cryptocurrencies.

The most popular today is called PoW – Proof of Work. Often, entire factory farms are built for mining, most of which are now located in China. Mining on the principle of PoW is profitable only in countries with cheap electricity. Some new cryptocurrencies use other, much more energy-efficient ways of emission. For example, PoI (Proof of Importance) or PoS (Proof of Stake).

Then the miner’s reward is determined not by his computing power, but by the activity of trading or simply the amount of currency on the balance.

5. Is this legal?

In some countries, bitcoin is legalized at the state level. The market leaders, in terms of creating a favorable environment for fintech and cryptocurrencies, are Japan, Switzerland, Singapore.

In Switzerland, cryptocurrency companies do not require any special permits or licenses, and the digital currencies themselves are treated as property rather than debt obligations. In Singapore, cryptocurrencies are considered assets rather than financial instruments, with transactions not regulated in virtual currencies. In Russia, there is no specific position on the definition of cryptocurrency and its regulation.

6. Why are all states afraid of cryptocurrencies?

Because many states do not know how to work with a new phenomenon of the XXI century. Also, many governments and central banks do not want to lose power and monopoly over the circulation and emission of money.

7. How are cryptocurrencies used in the banking business?

To date, no banking system works systematically with cryptocurrency. There are several states that have expressed their readiness to create a national cryptocurrency: Japan, Singapore, Russia, Estonia, Switzerland, Sweden. Cryptocurrencies can be used in the banking business to make ordinary and p2p payments. The digital currency will enable consumers to make instant payments in stores, while the cost of making such payments will be significantly lower than existing methods.

8. What are they provided with?

It is impossible to talk about the provision of cryptocurrency in the usual sense of the word. Unlike traditional money, the emission of which is controlled by state financial institutions, and which is backed by a gold and foreign exchange reserve, cryptocurrencies do not have a single center. That is, the technology underlying cryptocurrencies, the blockchain, is by definition a decentralized system. Probably, we can say that cryptocurrencies are provided with the power of a distributed computer network.

9. Is it possible to make money on this?

Of course, you can. We see that the rate of the most famous cryptocurrencies is growing continuously. If in May of this year, one bitcoin cost $ 2,5, today its rate is $<>,<>. Other cryptocurrencies are cheaper in absolute numbers but show even more confident growth. Given the fact that it is becoming increasingly difficult to mine cryptocurrency technically, and demand exceeds supply, it is possible that the value of cryptocurrencies, despite periodic drops, will increase further.

10. Why is the rate jumping so fast?

If the value of fiat money is influenced by various external factors – political events, state actions and stock speculation, then this does not affect the rate of cryptocurrencies. For example, after the 2016 referendum due to the UK’s exit from the European Union, the pound sterling rate fell to the values of 1985, and the election of US President Donald Trump had a negative impact on stock quotes around the world, but this did not affect the bitcoin rate in any way – it continued to grow.

Nevertheless, we have already witnessed several times how the bitcoin rate after a long growth fell quite significantly. The rate jumps because the volumes are not too large and an investor with several million dollars can easily shake the market order book.

11. What was the reason for the popularity of cryptocurrencies?

Both ideological and commercial-speculative components played a role here. According to the original idea, bitcoin and other cryptocurrencies are anarchic means of payment, independent of states and central banks. In fact, it is an attempt to realize Friedrich von Hayek’s dream of a system of competing private currencies. These ideas have not yet been fully realized due to the extreme volatility of cryptocurrencies, which makes it difficult to use them as means of payment. But the high volatility attracted many investors to the crypto market.

Its total capitalization is now about $ 150 billion. But the number of people entering this market is constantly growing, and with it the exchange rates are growing. This makes cryptocurrencies, especially the well-known ones – Bitcoin, Ethereum, Monero – very attractive to investors.

12. Is there a future for cryptocurrencies in Russia?

Nation-states have not yet decided how to treat the crypto market. On the one hand, this is an objective scientific and technological breakthrough, which is difficult to simply take and ban. On the other hand, according to its original idea, the crypto market contains a challenge to nation-states and can weaken their influence. This is a difficult situation for governments, and Russia is no exception. In 2017, the United States and China took tough measures to put the crypto market under control, or even ban some of its aspects (ICO ban in China).

On the other hand, Japan has passed a relatively liberal act on the legal status of cryptocurrencies. It is difficult to say which way Russia will go. The latest statement by Russian President Vladimir Putin caused a positive reaction among the participants of the cryptocurrency market.

13. Can I mine cryptocurrency myself?

If we are talking about buying, then there are no difficulties with this. It is enough to register on a cryptocurrency exchange (Most often this does not even require passport data in some countries such as Russia), enter ordinary money there, put an application for the purchase of cryptocurrency at an acceptable price, wait until it is executed, and withdraw the cryptocurrency to your wallet. If we are talking about mining, then its complexity depends on the specific currency that you want to mine. An example of a currency that can be mined on any computer is Monero (today it is the tenth currency by capitalization). Bitcoin is much more difficult to mine, usually special devices (ASICs) are used for this.

Most often, some people mine Ethereum, using “gaming” video cards. So far, this is legal and profitable in terms of electricity consumption. But if you want to receive significant amounts of at least a few tens of thousands of rubles, then you will have such difficulties as overheating of the room with mining computers and increased fire hazard from a large load on the electrical wiring. In such cases, it is necessary to carefully calculate the power consumption, carefully assess the capabilities of your power grid and, possibly, even rent a separate room.

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