- Cryptocurrency: what is it
- Pros and cons of cryptocurrencies
- How is cryptocurrency different from regular (fiat) money
- Where to buy cryptocurrency and is it legal
- Can I be imprisoned for buying and selling cryptocurrencies?
- How to make money on cryptocurrencies
Many investors have heard about cryptocurrencies, the ups and downs of the price of Bitcoin, the success stories of a few thousand dollars making people millionaires. But in reality, things are much more complicated. Before investing in cryptocurrency, you need to understand what it is, what are the main advantages and disadvantages of the asset, the differences from traditional money, as well as the main ways to earn money.
Cryptocurrency: what is it
Cryptocurrency is an electronic means of payment without a physical expression of form. The basic unit of measurement is “coins” or coins. They are used as traditional money, including storage, transfer to third parties, payment for goods or services.
Unlike an electronic wallet, a cryptocurrency is based on a complex cryptographic algorithm. The principle of operation of digital coins is based on an open data transfer protocol. All actions, including the issuance of new money and the processing of transactions, are performed collectively by network participants.
- transaction – the operation of transferring money between accounts;
- blockchain – a continuous chain of connected blocks where transaction data is recorded;
- block – a set of transaction data, as well as the number of the previous block;
- mining – the process of finding new blocks for which they give a reward, and adding them to the blockchain;
- node – an analogue of a server that constantly downloads information about the blockchain and allows you to exchange fragments with other network members;
- wallet – consists of a public key (wallet number) and a private key (access password).
How cryptocurrencies work:
- Decentralization – all actions are performed by network participants without the involvement of a single central issuer. Information about the funds is stored in all nodes, so in case of problems, access to data is preserved.
- Deflation – when issuing most cryptocurrencies, the final issue of coins is known, which guarantees the value of the asset and the absence of inflation.
- Security – the use of blockchain and special algorithms allows you to protect the network from hacker attacks. The more miners and nodes a cryptocurrency has, the more difficult it is to carry out an attack.
- Anonymity – each user receives a wallet number, which is in no way associated with his personality. But knowing the public key, you can see information about the amount of money in the account.
Reference: the value of a cryptocurrency is determined by the level of user trust. The more people use it, the higher the value and demand for new coins.
Pros and cons of cryptocurrencies
The popularity of cryptocurrencies is explained by distrust of the authorities and traditional money. People began to become disillusioned with monetary policy, so they resorted to using a decentralized payment system. The main advantages of cryptocurrencies:
- Reliability. Encryption algorithms, blockchain and computing power make it difficult to hack or falsify money data.
- Open source. This allows anyone who wants to explore the software, look for bugs, and suggest improvements to network performance.
- Limitation. The number of emitted coins is limited and known in advance. You can change the setting only with the consent of the majority of users on the network.
- cross-border payments. There is no longer a need to use banks or expensive intermediaries to transfer money to other countries.
- Control over funds. In the event of a bank failure, no one guarantees the safety of funds or the possibility of their return. The holder of the cryptocurrency is personally responsible for the digital money.
- Earning opportunity. The popularity and development of the new technology allows you to get a greater return on investment compared to traditional tools.
Despite a number of advantages, cryptocurrencies have significant disadvantages:
- Risk of losing all money. To access the money stored in the wallet, you must enter a private key. It cannot be restored or changed. In case of loss of login data, the funds will be frozen in the account.
- Attack 51%. The security of any cryptocurrency lies in the decentralization of computing power. In the event that one person or group of persons gains access to over 51% of the network resources, this will allow any changes to be made to the operation of the blockchain. However, the more computing power a cryptocurrency has, the more difficult it is to implement this plan.
- exchange rate volatility. The value of digital coins is affected by the level of user confidence and demand. The market also reacts unpredictably to changes in the policies of leading countries regarding cryptocurrencies.
- No guarantees. All risks fall on the shoulders of investors. In case of loss of money, theft of funds, lack of access to the wallet, nothing can be done.
How is cryptocurrency different from regular (fiat) money
Fiat money is used by people to pay for goods and services in everyday life. It can be funds on a bank card, banknotes or coins. In other words, fiat money is issued by the state, which sets its value and guarantees its value. Confidence in money is reinforced by the number of purchase and sale transactions and the payment of taxes in the state currency.
Reference: fiat currencies are not backed by anything other than people’s trust. There are currently no standards that require the use of gold or other precious metals to back the value of money. The rate of fiat money depends on the state settings and the economic situation in the country. If necessary, the government can print an unlimited amount of money and put it into circulation. This increases the rate of inflation and reduces confidence in money.
Cryptocurrencies are issued by network members. The maximum number of coins is known in advance, which indicates a deflationary nature and an increase in the value of the asset in the future. The issue of new coins is handled by miners – they process transactions and mine new blocks, for which a reward is provided. Although the value of digital coins is not backed by anything, it directly depends on the level of demand. The more people are interested in cryptocurrencies and start using them, the higher the price. The market is self-regulating.
Reference: one of the key differences between fiat money and cryptocurrencies is the impossibility of canceling the operation. In case of an erroneous transaction to someone else’s bank account, a refund procedure is provided. With cryptocurrencies, this is not possible.
Where to buy cryptocurrency and is it legal
There are several ways to buy digital assets:
- Exchange sites or platforms are special resources that analyze reviews, reliability, solvency and reserves of sites. You can buy cryptocurrency with dollars, euros or rubles. It should be borne in mind that exchangers sell the most popular coins. If you need to buy promising assets or cryptocurrencies with a small capitalization, only exchanges are suitable.
- Direct purchase. On special forums, you can get acquainted with the holders of cryptocurrencies and directly make an exchange. Before the transaction, it is necessary to study the information about the person and make sure of his honesty. The main advantage is the absence of additional commissions.
- Cryptocurrency exchanges – designed for both trading and buying digital assets. After replenishing the account with fiat money, it will be possible to buy and withdraw cryptocurrencies.
Reference: the speed of transaction processing depends on the network load and the selected cryptocurrency. The transfer in the Bitcoin network will come within 30-60 minutes, Ethereum – 2-3 minutes, Litecoin – up to 20 minutes.
Russian legislation does not prohibit bitcoin, blockchain technology and other cryptocurrencies. The purchase of digital assets is allowed, but there is still no clear position of the state regarding the taxation of profits. New rules that will define the concept of cryptocurrency, provisions for declaring assets and paying taxes are being developed.
Can I be imprisoned for buying and selling cryptocurrencies?
It is planned to adopt a bill on the legalization of cryptocurrencies in Russia. It provides that individuals and “unqualified investors” can annually buy digital assets in the amount of up to 600 thousand rubles. Violation of the rules is punished according to the current legislation. Large investment amounts are available only to qualified investors.
Reference: it is impossible to track the amount of money received from mining, or the purchase amount when using foreign banks. The law is more related to the fight against money laundering.
The question of criminal liability arises in cases where the cryptocurrency is obtained in a fraudulent way or through illegal activities. There were no precedents of persecution for simple investment yet. But in the case of the withdrawal of money associated with digital assets, the bank may request documents confirming the legality of the origin of funds. If the income is from mining, you will need documents for the equipment, a cryptocurrency wallet number, and even an electricity bill. Such caution is associated with the law on combating the legalization of proceeds from crime.
How to make money on cryptocurrencies
The method of earning on cryptocurrencies depends on personal preferences and starting capital. Some investors use mining, others use long-term storage of assets, and some prefer active trading.
Main earning options:
- Mining – buying equipment and using it to mine new coins. The method will require cheap electricity, technical skills and a large investment. At the same time, the payback period depends on the rate of the chosen cryptocurrency.
- Cloud mining is the rental of computing power from a company that maintains equipment. The investor chooses only the number of hashes and the cryptocurrency for mining.
- Purchase on the exchange and storage – investments in popular and promising assets, like ordinary securities. Profit is provided by increasing the price of coins.
- Trading is the conclusion of profitable trading deals on the stock exchange by analyzing the current situation and predicting market movements.
- Arbitrage between exchanges – buying cryptocurrencies on one exchange and selling at a better rate on another. For small amounts, the method does not make sense.
- Investment funds are analogous to mutual funds in the world of cryptocurrencies that hold stable, moderate and risky digital assets in a portfolio.
Since cryptocurrencies are associated with risks, we recommend combining several methods. Diversification of strategies and the number of assets will help not only save funds, but also increase investment capital.