Those who follow the market even from afar have probably been surprised by the ups and downs of digital currencies in the news. The most famous is Bitcoin , but many others are already relevant – as well as the sympathy of investors. But what is cryptocurrency ? How do these assets work and how to trade them?
InfoMoney has prepared this guide, thinking of those who want to take their first steps in the world of digital currencies and want to know where to start. This is a new asset class in the market, and that’s why it raises a lot of doubts for those who are still learning.
What are cryptocurrencies?
In general, a cryptocurrency is a type of money just like other currencies we live with on a daily basis, with the difference that it is completely digital. In addition, it is not issued by any government
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But is it possible? To explain that it is, Fernando Ulrich, author of Bitcoin: Currency in the Digital Age, makes a very simple analogy: “What email did to information, Bitcoin will do to money. Before the Internet, people depended on the post office to send a message to anyone who was elsewhere. Physical delivery required an intermediary, which is unimaginable for someone with access to email and other messaging services.
Something similar will happen with virtual currencies in the future. “With Bitcoin, you can transfer funds from point A to point B anywhere in the world without even entrusting this simple task to a third party,” Ulrich explains in the book.
Although bitcoin is the best-known digital currency, the concept of cryptocurrency predates it. According to Bitcoin.org, a website maintained by the bitcoin community, cryptocurrencies were first described in 1998 by Wei Dai, who proposed using cryptography to control the issuance and transactions made with the new type of money. This would eliminate the need for central authority, as with conventional currencies.
What it’s worth.
Cryptocurrencies can be used for the same purposes as physical money. The three main functions are to serve as a medium of exchange that facilitates commercial transactions; as a store of value to preserve future purchasing power; and as a unit of account when products are priced and settled economically. According to Ulrich, currencies such as bitcoin have yet to acquire the status of a unit of account because of the high volatility of their prices at present.
What is mining?
To understand what mining is, you need to know that digital currencies such as Bitcoin are a complex code which cannot be changed. Transactions made with them are protected by encryption. Since there is no central authority tracking these transactions, they must be logged and verified one by one by a group of people who use their computers to record them in what is called a blockchain.
Blockchain is a huge book of transactions. According to Ulrich, it is a publicly accessible database containing the history of all transactions made with each bitcoin unit (other digital currencies are based on the same technology). Each new transaction – for example, a transfer between two people – is checked against the blockchain to make sure that the same bitcoins have not previously been used by someone else.
Those who write transactions to the blockchain are what are known as miners . They offer the processing power of their computers to perform these records and verify the transactions made with the currencies – in exchange they are rewarded with new units of them. Bitcoins are created as the thousands of computers that make up this network solve complex mathematical problems that verify the validity of the transactions included in the blockchain.
In other words, mining is the creation of new units of certain types of digital currencies. If more computers are used to increase the computing power of mining, the mathematical problems that need to be solved become more complex. This happens just to limit the mining process.
“Bitcoin is designed to replicate the mining of gold or other precious metals on Earth: only a limited and predetermined number of bitcoins can be mined,” Ulrich explains in his book. (Read more in the Bitcoin section of this guide)
How the price change works
Essentially, the price of digital currencies changes according to the good old law of supply and demand. In times when cryptocurrencies attract more attention, investors tend to have more demand, which increases the volume of purchases and, therefore, prices tend to rise.
“There are only a limited number of bits in circulation.In other words, mining is the creation of new units of certain types of digital currencies. If more computers are used to increase the computing power of mining, the mathematical problems that need to be solved become more complex. This happens just to limit the mining process.
“Bitcoin is designed to replicate the mining of gold or other precious metals on Earth: only a limited and predetermined number of bitcoins can be mined,” Ulrich explains in his book.
