Bitcoin orangeA cryptocurrency is a type of digital currency. For its regulation and supply are used encryption techniques.

The main difference between cryptocurrencies and fiat money as we know them is the fact that this digital currency type is not regulated by a centralized authority like a bank or a government.

Cryptocurrencies are in the form of digital tokens, coins, and they have no physical dimension. As they are decentralized, the power of the Internet is used as a type of regulation, confirmation of transactions, and legitimacy. Each transaction for which cryptocurrencies have been used is recorded into a public ledger and verified by independent users on the same network so that the used coins are not used a second time by the same person.

Fiat Money:

Fiat money have no intrinsic value, these types of currency are established as money, as a legal payment method by government regulation and law. US dollars, British pounds, the Euro, the Japanese yen – these are fiat money.

What Is a Public Ledger?

The public ledger is the place where all cryptocurrency transactions are recorded for regulatory and monitoring purposes. This public ledger is called a blockchain. Each new record is another block to the chain. The information is stored across a network so that it cannot be accessed by unauthorized third parties and hackers, and to be altered.

The blocks are verified and validated by independent parties, mutually suspicious of one another, they serve as each others’ correctives. Once a transaction has been recorded, added to the chain, and verified, it cannot be altered anymore.

Explaining Supply – Cryptocurrency Mining

Unlike with fiat money, which are basically printed according to the governments’ and financial institutions’ will, cryptocurrencies have a limited supply that can be realized through a process called “mining”. The mining process goes through solving the so-called ‘hash’, a computational puzzle that becomes more and more complicated as more coins are being mined.

The people that participate in the mining processes are called as miners. Once they solve the hash, a new block is added to the chain and the transactions becomes public knowledge. In order for you to participate in cryptocurrency mining, you need to possess mining hardware and software, as well as a cryptocurrency wallet. The wallet is the place where your reward for solving the hash will be stored. The reword is usually a fraction of the mined quantity or a whole token.

Cryptocurrency Wallets:

If you have tokens in your possession you are going to be the only person that is going to have access to them thanks to your personal digital access key.

Can You Participate In Cryptocurrency Trading?

You can invest in, trade, and possess cryptocurrencies through methods other than mining them. The two ways are fundamentally different but both take place in the online trading field, as these are digital currencies.

  • Cryptocurrency Exchanges – these are the official places where you can buy and sell different cryptocurrencies under various conditions. For example, some exchanges allow the purchase of tokens using fiat money like Euro, Dollar, and Ruble. Others provide cryptocurrency pairs and exchange rates, you can also, for example, buy Bitcoins with altcoins like Ethereum, Litecoin, and others. When you trade on cryptocurrency exchanges you become the actual owner and holder of the coins, that are stored in your cryptocurrency wallet.
  • Contracts for Difference & Pairs – this type of trading requires the mediation of a third party, that is either a broker, or a robot. These two are financial derivatives used to invest in the change of value of a given currency or its exchange rate. There is no actual transfer of ownership when investing. When a trade is resolved, you generate a win or a loss, depending on your investment decision compared to the result, and you either lose a fraction of the invested funds or you gain a return on investment in the form of a profit. This profit is usually in fiat money as you use fiat money to invest.

Either way, if you decide to start cryptocurrency trading make sure you investigate the exchanges or brokers and robots you choose as your partners to ensure you have chosen a reliable and legitimate one.

Formation of Cryptocurrency Value

As it was mentioned above, the supply of cryptocurrencies is limited. They are also decentralized and governments, banks, and financial institutions cannot appoint a fixed value of a token, which is the case with the $10 bill for example. Because of that, the value of a token presented in fiat money is decided by the supply and demand of the given cryptocurrency.

The most popular currencies have a very big demand and for that reason, their value might spike, just like happened to Bitcoin in 2017. If the demand is low, the value of the tokens will decrease accordingly.

Because of these natural economic and market powers, and the lack of regulatory bodies like banks and governments to support a currency, the cryptocurrency industry is known for its volatility and value fluctuations. This presents a risk for people who trade cryptocurrencies but as we all know – the greater the risks, the greater the rewards.

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