What is Cryptocurrency and Blockchain in Simple Terms

Cryptocurrency is a form of digital currency that exists exclusively on the internet. It does not have a physical form like paper banknotes or coins and is not subject to government control, making it unique and appealing to many users and investors. Unlike traditional currencies, which rely on banks as intermediaries in financial transactions, cryptocurrency allows transfers without intermediaries, using blockchain technology. The first cryptocurrency, Bitcoin, appeared in 2009, and since then, the number of digital currencies has significantly increased. In this article, we will explain what cryptocurrency and blockchain are, how they work, what factors influence cryptocurrency prices, and explore ways to acquire and use them.

What is Cryptocurrency?

Cryptocurrency is a form of digital money that uses cryptography to ensure transaction security and control the creation of new currency units. This means cryptocurrencies cannot be counterfeited or altered without using complex computational power, making them more secure compared to traditional currencies. One of the most significant features of cryptocurrency is its decentralization. Unlike regular currencies, which are controlled by government authorities, cryptocurrencies exist and are managed using blockchain technologies, eliminating the need for intermediaries such as banks. This also enhances privacy and reduces transaction fees.

What is Blockchain?

Blockchain is the underlying technology on which all cryptocurrencies are built. It is a distributed database consisting of a chain of blocks containing transaction information. These blocks are linked together and protected by cryptographic methods. Every time a transaction occurs, it is recorded in a new block, which is added to the blockchain. The entire process is maintained by network participants who verify transactions and ensure the system operates smoothly. One of the key aspects of blockchain technology is its decentralization. There is no central controlling authority, and all network participants have equal rights. For a transaction to be recorded in the blockchain, it must be confirmed by the majority of network participants. This makes the system more secure and resistant to manipulation.

How Does Cryptocurrency Work?

When you perform a cryptocurrency transaction, such as sending coins to another user, the system uses blockchain to verify the transaction. Thanks to the decentralized network, participants oversee all transactions and ensure their security. In the event of an attempt to alter transaction data, the system compares the new data with existing records and rejects such attempts. Miners are involved in creating new cryptocurrency units and maintaining the network. These are users who provide their computational power to verify transactions and add new blocks to the blockchain. In return, they receive cryptocurrency, making mining a profitable process.

Types of Cryptocurrency

Cryptocurrencies come in two main types: coins (with a subcategory of stablecoins) and tokens.

• Coin — a digital currency that operates on its own blockchain. An example is Bitcoin. Coins can be mined through mining and then used for transferring funds or exchanging for other currencies.
• Stablecoin — a cryptocurrency whose value is pegged to a stable asset, such as the US dollar or gold. This is necessary to reduce volatility and ensure price stability.
• Token — a digital unit created on an existing blockchain, such as the Ethereum platform. Tokens cannot be mined but can be purchased or earned through activity on the platform. Tokens are often used for accessing platform features or as an investment vehicle.

How to Acquire Cryptocurrency?

Cryptocurrency can be obtained in several ways.

• Mining — the process of creating new coins by solving complex mathematical problems using computational power. In the early days of cryptocurrency, it was possible to mine with regular computers, but now specialized devices — mining farms — are used.
• Staking — a process where users lock their coins in a blockchain to help maintain its operation. In return, they receive rewards.
• Purchase — cryptocurrency can be purchased through exchangers or cryptocurrency exchanges, which allow converting traditional money into digital currencies.

How to Use Cryptocurrency?

Cryptocurrency can be used for various purposes, including investment, purchasing goods and services, and speculative activities.

• Investment — cryptocurrencies attract investors due to their high returns. For example, Bitcoin’s price increased by 70% in 2023, making it attractive to long-term investors.
• Speculation — the high volatility of cryptocurrencies provides opportunities for traders to profit from price fluctuations.
• Payment for goods and services — while cryptocurrency is not yet widely used as a payment method, more companies are beginning to accept it. For example, Microsoft, Amazon, eBay, and others.

How to Store Cryptocurrency?

Cryptocurrency is stored in a digital wallet. This wallet can be online (hot wallet) or offline (cold wallet).

• Hot Wallet — an online wallet that provides quick access to cryptocurrencies but can be vulnerable to hacking.
• Cold Wallet — a device that stores cryptocurrency without being connected to the internet, making it more secure.

What Affects Cryptocurrency Prices?

• Supply and demand: The main factor determining the price.
• News and events: News about regulations, technological updates, or partnerships can affect prices.
• Market sentiment: The overall mood of investors and speculators.
• Economic factors: Inflation, interest rates, and other macroeconomic indicators.

Advantages of Cryptocurrency

• Decentralization: No control from the government or banks.
• Transparency: All transactions are recorded in a public ledger.
• Security: Cryptography ensures a high level of transaction protection.
• Fast and cheap transfers: Especially for international transfers.

Disadvantages of Cryptocurrency

• Complexity of use: It can be difficult for beginners to understand the technical aspects.
• Security risks: Loss of wallet access, exchange hacks, fraud.
• Volatility: Cryptocurrency prices can fluctuate sharply.
• Lack of regulation: The cryptocurrency market is poorly regulated, which creates additional risks for investors.
• Technical risks: Issues with blockchains or wallets can result in loss of funds.

Cryptocurrency Fraud

Unfortunately, as cryptocurrency has grown, the number of fraudulent schemes has also increased. These can include fake websites, virtual financial pyramids, and fraud in cryptocurrency projects that promise high returns but end up taking funds from investors.

Conclusion

Cryptocurrency is an innovative technology that has already changed the world of finance. It offers new opportunities for investments, payments, and transfers, and its use will continue to grow in the future. However, it is important to be aware of the risks and exercise caution when using cryptocurrencies. Before investing, it is crucial to thoroughly research the market and consult with a specialist.

Important to Remember:

• Invest only the funds you are willing to lose.
• Thoroughly research the projects you invest in.
• Use reliable wallets and exchanges.
• Be cautious not to fall victim to fraudsters.