An Introduction to Cryptocurrencies

The process of cryptocurrency emission (so called ‘mining’) is also carried out online. The process of cryptocurrency mining requires specific software programs and computer equipment with a high processing power. The mining process involves solving various mathematical problems. If in cases a specific condition is met during the alternation process (a mathematical problem is solved, meaning the coin was successfully mined), the miner receives remuneration. The total number of possible solutions is decreased, while the complexity of the remaining ones is increased. For example, the total number of possible solutions for the most popular and expensive cryptocurrency Bitcoin is mathematically limited with 21 million variants. That means Bitcoin won’t be affected by inflation or significant depreciation. Currently there are around 12 million Bitcoins mined and further complication of the mining process can cause growth of the cryptocurrency exchange rate.

The majority of computing resources during the mining process are used to protect the network of cryptocurrency. Existence of each and every Bitcoin is confirmed with a blockchain - a distributed database that maintains a continuouslygrowing list of all cryptocurrency transactions.

The first and the most popular cryptocurrency today is Bitcoin. The history of Bitcoin began in 2008 when the description of this cryptocurrency “Bitcoin: A Peerto- Peer Electronic Cash System” appeared on the web. Satoshi Nakamoto was the author of that description. It’s still unknown if this name is a pseudonym of an individual or a group of developers. In the same year, many press releases were published and the bitcoin.org domain name was registered.

The Bitcoin network was launched in January 2009, while the first exchange service was offered one year later. That service allowed anyone to buy Bitcoins with dollars. The exchange rate was very unstable and you could get anything from 500 to 1500 coins for just one dollar. Various publications and articles increased the popularity of this new cryptocurrency and its price started to grow. In the second half of 2010 you could only get 15-20 Bitcoins for one dollar. Furthermore, MtGox Bitcoin Exchange was launched, allowing people to earn money on the difference between exchange rates.

In the year of 2011 the Bitcoin network was the focus for many hackers all over the world. Many e-wallets of common users were hacked. Furthermore, hackers managed to gain administrative access to MtGox and decreased the exchange rate of Bitcoin down to 1 cent by performing a large number of fake deals. The Bitcoin Exchange was closed for maintenance work and to increase the level of security.

After this the popularity level of Bitcoin continued to grow day by day. During 2013 the price of Bitcoin increased from 25-30 dollars per coin to more than 300 dollars per Bitcoin. Bitcoin users remained anonymous and that fact significantly affected the reputation of the company due to a high amount of illegal deals and prohibited product sales. At the same time this situation attracted more and more users to the system. In November 2013 the exchange of the cryptocurrency jumped drastically to the level of 1200 dollars per coin. However, already in December of the same year the exchange rate became more stable and returned to the level of 550-600 dollars per one coin.

The exchange rate of Bitcoin faced a lot of changes during 2014 and 2015: the initial growth of the currency at the beginning of 2014 (more than 800-900 dollars per Bitcoin), the level of 300 dollars per coin during the autumn season, the crisis in January 2015 when one coin was worth 200 dollars and further stabilization at the level of 350-380 dollars per coin at the beginning of 2016. New cryptocurrency was significantly affected by various events all over the world. Important news and global developments caused sharp changes of the Bitcoin rate. However, one thing remained unchanged – the process of emission was constantly carried out and the popularity level of Bitcoin maintained a steady growth.

Bitcoin showed stable growth in 2016 and the exchange rate reached the level of 600-700 dollars per coin. It’s quite hard to forecast further development of the market and experts are predicting very contrasting scenarios. However, one thing is obvious – digital currencies have successfully captured the minds of traders and investors.

In comparison with more traditional financial assets cryptocurrencies have a lot of differences, which can be as positive and negative.

The main advantages of cryptocurrencies are:

• There’s no inflation. Algorithms of the majority of cryptocurrencies allow the mining of a strictly limited number of coins. As mentioned previously, the total number of Bitcoins will never exceed 21 million. There are several cryptocurrencies which do not involve the mining process for their emission (non-minable currencies).
• The simplicity of cryptocurrency use. User’s data can’t be copied or used in any way if the currency offers an adequate security level. Such currencies are completely owned by the user.
• All transactions are anonymous. You can only find out the e-wallet number of the owner during a transaction. In order to make the transaction tracking more complex, all systems mix different transactions.
• There’s no payment control and no central bank. This decentralization makes it possible to keep all coins in the user’s e-wallet and in exchanges.
• The algorithm allows the users to not only trade on exchanges but also be involved in the cryptocurrency emission process, i.e. the mining process. However, mining the most popular cryptocurrencies is not available for the majority of users because it requires expensive equipment with high levels of computing power.

The main disadvantages of cryptocurrencies are mostly technical:

• There’s no way to protect e-wallets. You can lose all your money in your ewallet by losing your password or as a result of various technical problems when there’s no backup of the information.
• The user has to understand the general principles of computer security. It’s unsafe to keep coins as exchanges, as well as in e-wallets with low protection.
• National authorities have the right to ban cryptocurrencies. For example, the Ministry of Finance of Russian Federation offered a lot of restrictive measures for cryptocurrencies.
• There’s a huge number of low-quality cryptocurrencies. New creators of these currencies want to get their profit right here and right now, and they don’t plan to support or develop them. In the majority of situations these “new” cryptocurrencies are copied from Bitcoin and their authors, only making several cosmetic changes of the interface. Despite that such currencies are offered as “unique and innovative” solutions, their value is running on empty.

There are several other important factors in the cryptocurrency market which can’t be considered 100% positive or negative. Firstly, the high volatility of the exchange rate, i.e. the price of the currency, changes every day. Looking at Bitcoin you can notice incredible changes even during a month. Thus, many investors do not consider cryptocurrencies as a reliable and long-lasting asset because prices may grow or fall drastically in a couple of days (even hours). On the other hand, all traders understand that this situation is their best chance to earn a lot of money on the difference between exchange rates.

The cryptocurrencies market shows significant growth. There are several hundred various cryptocurrencies, and most of them somehow copy the algorithms of the Bitcoin network. New virtual systems appear every day. Such currencies have the lowest prices in the market and users can buy them in order to benefit from future growth. However, there’s no guarantee that new currencies are safe or will show any kind of growth in the near future.

You can find a lot of cryptocurrency exchanges. Before selecting an exchange for their needs, users have to consider the following:

• The volume of traded currencies. This is the most important, because it allows the evaluation of the level of popularity and stability of the exchange.
• The availability of required currencies (especially fiat currencies). Some exchanges prefer to work only with well-proven and popular cryptocurrencies. New currencies can’t be easily found in the majority of exchanges.
• The functionality and interface. Assuming completeness of information related to exchange rates of various currencies (maximum/minimum for the past periods, market capitalization, candlestick and volume charts, various financial indicators, etc). User-friendliness of the interface and simplicity of the order placing process is also very important. When interfaces are slow or the trader is required to perform multiple actions to place a single order, this results in loss of time and inability to react quickly.
• The transaction fees and wide range of payment methods (for deposits/withdrawals). The more payment providers are supported, the easier it is to find the most affordable and convenient one (because a deposit/withdrawal can cause significant fees and time delays).

Various information (including names and rates of cryptocurrencies and the overall level of capitalization), exchange rate charts, and other important data are available on the following website: http://coinmarketcap.com. This website can be used to select a cryptocurrency and open the list of exchanges where that currency can be traded. The website also offers links to cryptocurrency developer websites, where e-wallets can be downloaded.

Currently there are no exact criteria that allows the identification of the level of trust of an exchange. It’s not recommended to keep a significant amount of money in the exchange account!