Cryptocurrencies: Understand how it works.

While Bitcoin is the most well-known digital currency – like two words often taken as synonymous – there are a variety of other types, with distinct characteristics. Discover the main cryptocurrencies available on the market.

Cryptocurrency:

Generically, a cryptocurrency is a type of money – like other currencies we live with on a daily basis – with the difference of being completely digital.

To explain that yes, Fernando Ulrich, author of the book Bitcoin: A currency in the digital age, makes a very simple analogy: “What e-mail did with information, Bitcoin will do with money”.

Something similar with virtual currencies in the future.
“With Bitcoin you can transfer funds from A to B anywhere in the world without ever having to trust a third party for this simple task,” explains Ulrich in the book.

According to the website Bitcoin.org, maintained by the community connected to Bitcoin, cryptocurrencies were first described in 1998 by Wei Dai, who suggested using cryptography to control the issuance and transactions carried out with a new type of money.

what use

Cryptocurrencies can be used for the same purposes as physical money itself.
The three main functions serve as a medium of exchange, facilitating commercial transactions;
reserve of value, for the preservation of purchasing power in the future;

What is mining?

To understand what mining is, you need to know that digital currencies – such as Bitcoin – represent a complex code that cannot be changed. Transactions made with them are protected by encryption.

As there is no central authority that monitors these transactions, they need to be registered and validated one by one by a group of people, who use their computers to record them on the so-called blockchain.

According to Ulrich, it is a public database containing the history of all operations carried out with each Bitcoin unit (other digital currencies based on the same technology).
Every new transaction – a transfer between two people, for example – is checked against the blockchain, to ensure that the same Bitcoins have not previously been used by someone else.

They offer the processing capacity of their computers to carry out these records and check the operations carried out with the coins – in exchange for this, they are remunerated with new units of them.
Bitcoins are created as the thousands of computers that make up this network manage to solve complex mathematical problems that verify the validity of transactions included in the blockchain.

In other words, mining represents the creation of new units of some types of digital currencies.
If more computers are used to increase processing power for mining, the mathematical problems that need to be solved become more difficult.

Price change

Usually the values ​​of virtual currencies vary with supply and demand. Coin value usually increases due to high demand from investors, which increases the purchase value, and prices tend to rise.

“There is only a limited number of bitcoins in circulation and new bitcoins are created at a predictable and decreasing rate, which means that demand must follow this level to keep its price stable”, explains the Bitcoin.org website. still small, few operations with cryptocurrencies are capable of causing a relevant impact on quotations.

Main cryptocurrencies

bitcoin

It was designed in 2008, in the midst of the global financial crisis that started in the American mortgage market, with the aim of replacing paper money, in addition to eliminating the need for banks to be present for financial intermediary operations. According to the Bitcoin.org website, the first Bitcoin specification and proof of concept were published in an article signed by Satoshi Nakamoto, the pseudonym of a programmer (or group of programmers) that has yet to be identified.

In the article, Nakamoto believes that there will be a maximum of 21 million bitcoins.

bitcoin cash

It was developed in an attempt to perfect the first currency, which has high fees and requires a long processing time for each operation.
The main difference is that Bitcoin Cash has a block size limit of 8 MB, which is much higher than the original Bitcoin’s 1 MB.

With this, transaction confirmations can happen faster and also with lower fees.
The operating rules are similar to the original asset, also with a limit of 21 million coins.

Ethereum

In 2016, however, a hacker found a flaw in the system and, from it, managed to steal the equivalent of $50 million in Ether.
Faced with doubts about what would become of the currency’s future, the community that maintained it opted to create a new network. The original Ether – the target of the theft – came to be called Ethereum Classic and the currency that began to circulate on the new network was named Ethereum.

The idea was that it would become an asset to reward developers for using the Ethereum platform in their projects.
It is a decentralized platform used to execute “smart contracts”, which are operated automatically when certain conditions are failed.

The blockchain is also the basis for validating Ethereum transactions to ensure security and prevent fraud.
As in the case of Bitcoin, the creation of new coins is also based on the mining process.

tether

Unlike Bitcoin and other digital currencies, Tether (USDT), launched in 2014 by a company of the same name, is a stablecoin, because it is backed by a physical currency.

Since the cryptocurrency was created, however, experts have questioned the parity, as the company has not offered transparency about how it went about tracking it.
According to the company, 100% of them are secured, but not only by traditional currency, but also by cash equivalents and other assets or receivables from loans made by Tether to third parties.

The characteristic of Tether is that it is a stable coin that represents physical currencies in the digital world.
Thus, investors protect themselves from price variations of other assets and avoid the risk of incurring losses during these operations.

Tether is predominantly traded on Bitfinex, a major cryptocurrency exchange, which has shareholders and executives in common with Tether (the parent company of the coin).

There has already been, for example, an accusation by the New York Attorney General that Bitfinex would have used Tether reserves to cover a deficit of US$ 850 million in its accounts as of 2018.

Curling

Ripple (XRP) is a distributed payment protocol created in 2011, and the system’s currency is XRP.
A feature of the Ripple platform is supporting other tokens representing traditional currencies and even other goods on its network.

Conceived by developer Ryan Fugger, entrepreneur Chris Larsen and programmer Jed McCaleb, Ripple was created in 2012.
To some extent, Ripple’s operation resembles to some degree that of banks, by accepting various assets and facilitating the transaction of transactions.

Precisely for this reason, Ripple goes against the grain of the discourse on digital currencies in general, which ideally do not depend on the traditional financial system to carry out operations.

Litecoin

Litecoin (LTC) was created in 2011 by a former Google employee named Charlie Lee and has many features similar to Bitcoin.
The main difference is in the mining process, which seeks to reduce the time needed to confirm transactions made with the currency.

Due to faster transaction processing, Litecoin is considered a better alternative for completing day-to-day transactions.
Litecoin is designed to produce more units, with a limit of 84 million coins, versus Bitcoin’s 21 million.

Investing in cryptocurrencies: advantages and risks

Cryptocurrencies are recent assets with a very sophisticated operating logic.
Digital currencies have some advantages over physical currencies and other means of payment.

Volatility: This happens exactly because, little by little, cryptocurrencies are gaining visibility, which attracts many new users and ends up overvaluing the asset.

“These adjustments resemble traditional speculative bubbles: overly optimistic press coverage causes waves of new investors to pressure Bitcoin’s price higher.
Some analysts are skeptical of this behavior, while others believe that the maturation of the market and the system tends to reduce volatility over time.

Security: While Bitcoin.org stresses security as a positive aspect of digital currency, Ulrich points out that if users are not careful, they risk “deleting” or losing their Bitcoins.

Ulrich explains that digital currency wallets can be protected by encryption, but it is up to the user to activate it.
Likewise, digital currency exchanges need to protect themselves from hackers – news of thefts occasionally happens.

Degree of acceptance: there are few establishments that accept this form of payment, according to information on the Bitcoin.org website.

Transparent: All information about the supply of Bitcoin units is available on the blockchain for anyone.
Nobody, nor any organization, can control or manipulate the digital currency protocol because it is encrypted.

Freedom of Payment: Bitcoin allows a person to send or receive from anywhere in the world instantly.

Low fees: For commerce in general, there are services based on Bitcoins in which the processing of sales and transfer of values ​​are carried out daily and with lower costs than traditional methods, such as PayPal or credit card networks.

How to invest in cryptocurrencies

It is possible to buy shares of cryptocurrency funds, trade them directly in a specialized brokerage (also known as exchange), accepting digital currencies as payment in some business or even mining. Brazilian funds made indirect investments in cryptocurrencies abroad – buying derivatives or shares of other funds, for example.

These portfolios are distributed by brokerage houses and investment platforms and some applications require a relatively low amount (R$ 5,000 or even less).
Funds can be a good alternative for those who want to export themselves to the cryptocurrency market, but do not feel safe doing it alone, since the person who decides and monitors the applications is a specialized manager.

Another relatively simple way to invest in Bitcoins and other cryptocurrencies is through a specialized brokerage.
There are some houses in Brazil, called exchanges, that offer this type of service.
The first step is to open an account on the exchange, filling out a registration form with personal data.

Some exchanges embrace the adoption of extra protections, in addition to the usual passwords, such as tokens.
If this is the case with the Exchange you have chosen, you will need to activate it accordingly.