Cryptocurrency is money that exists only in a virtual form, but can be used in a real life. The main feature and difference from common currencies is that they are not regulated by banks and governmental institutions. A decentralized system is used for transaction fixation and the creation of new cryptocurrencies, so it attracts investors` attention. Daily payments in cryptocurrency are also rapidly gaining reputation. You don't trust virtual money and consider cryptocurrency a trend that sooner or later will go back to where it came from? We offer you an opportunity to understand, what cryptocurrency is, why we need it, and whether cryptocurrency is dangerous for the traditional financial system. 

What is cryptocurrency? 

Cryptocurrency is a digital asset based on blockchain technology that is a reliable ledger for all transactions accounting. Cryptography is used for issuing such currency units. This encryption method enables the control over cryptocurrency operations and guarantees transaction security. 

How did cryptocurrency appear? 

The first cryptocurrency was the well-known Bitcoin. Even before the cryptocurrency appeared, in October 2008, its creator (or group of creators), known as Satoshi Nakamoto, published a White paper called “A peer-to-peer electronic cash system”. Nakamoto described critically in a “white book” the concept of decentralized digital currency that uses blockchain technology to ensure reliability and operation security. 

The principal idea was to create a system that allows users to make money transfers directly among themselves, bypassing banks and other financial intermediaries. Blockchain was offered as an innovative technology that registers all the transactions in a public distributed ledger, ensuring their transparency and security.

During the 4 months after the book's release, Satoshi Nakamoto mined the first “genesis block” - that was the name of the block of 50 bitcoins. In fact, this moment started the era of  blockchain technology and the functioning of this network. By the way, the first cryptocurrency payment was made by Laszlo Hanyecz, who bought 2 pizzas for 10 000 bitcoins. 

From that time on, a lot of cryptocurrencies were issued, based on different technologies and having different characteristics, for instance, Ethereum, Ripple, Litecoin and many others. Such coins as Ethereum offer a platform for the creation and realization of decentralized applications (dapps). Other coins, such as Ripple, are instruments of international cryptocurrency operations. But the most famous and widely used is still Bitcoin.  

So, today, cryptocurrencies are an object of investment and use in different spheres of the economy, and they continue to attract attention as an innovative financial instrument.

Why do we need cryptocurrency? 

Cryptocurrency was developed as an alternative to traditional currencies and financial instruments.

Nowadays, cryptocurrency is used to: 

• Exchange.

Cryptocurrencies can be used for online operations and asset exchanges between individuals and legal entities. They enable quick, secure global transactions with low fees and don't need to involve financial intermediaries, such as banks. 

• Trading and investment.

Cryptocurrency is a form of investment, and many investors see the potential for long-term value growth. The prices fluctuate significantly, which opens good perspectives for trading, investments and profit-making. 

• International transactions.

Cryptocurrencies are used for international transactions in order to bypass bank systems and minimize the fees and delays connected with international bank transfers. 

• Innovations in the sphere of financial technologies.

Cryptocurrencies stimulate innovations in financial technologies (FinTech). They can become the basis for new financial products and services that will simplify financial operations (for instance, smart-contracts and decentralized applications). 

Remember that cryptocurrencies are also connected with risks, including price volatility and regulatory norms. People who are interested in cryptocurrency and how to use it should conduct additional research and be maximally aware of the data in this sphere. 

How is the cryptocurrency created? 

The process of creating cryptocurrency units, or coins, is called mining. Miners compete with each other for the right to create a new block in a blockchain (a distributed public ledger that is updated by the owners of the cryptocurrency). This process is a “Proof of work” and often involves solving complex mathematical problems using the computing power of a computer. The first miner who successfully solves the task will get the right to create a new block and add it to the blockchain.   

Thus, as an incentive, miners receive a reward in the form of new cryptocurrency units, for instance, new bitcoins, taking into account the fee for including the transactions in the block. Users can buy cryptocurrency from brokers and store it (sell, spend, or exchange) using a cryptographic wallet. 

Why do you need to own cryptocurrency

Cryptocurrency has some advantages that make it preferable for various spheres and users, opening new opportunities. Here are some of the main benefits of cryptocurrency: 

1. Decentralization and independence. 

Blockchain technology, on the basis of which this payment network functions, is a decentralized system. It means that there are no central organizations or institutions that control and regulate cryptocurrency. Simply put, this scheme doesn't have banks, so money transfers, loans, and other operations in cryptocurrency can be made without bureaucracy and intermediaries. For now, the government doesn't control cryptocurrency as well. It can be especially important in countries with unstable economies or restrictions on financial independence. 

2. Security. 

Transactions on the blockchain involve a secure method of data encryption and are registered in a distributed public ledger. It makes the theft of digital assets or the forgery of transactions complicated and unlikely.  

3. Relatively low commissions. 

In most cases, cryptocurrency transfers have much lower fees compared with bank transfers or payment systems` services. It is especially noticeable with international transfers.

4. Velocity.

Many cryptocurrencies enable almost instant transactions, especially compared with traditional financial systems, which anyway take more time to process and confirm an operation. 

5. Transparency.

Blockchain technology provides transparency for all operations. All the transactions are registered in a distributed public ledger that you can monitor. Besides that, data on the blockchain can not be changed without the agreement of the majority of network users. 

6. Global access.

For cryptocurrencies, geographic borders don't exist, so they are available all over the world, even in places where there are problems with the existence of traditional financial organizations and payment systems.

7. Smart-contract use.

Some cryptocurrency platforms, such as Ethereum, support smart-contracts. It is an automated deal that can be performed without third parties when the certain conditions are met. Smart-contracts can be used in various spheres, including finances, real estate, and many others.  

8. Resistance to inflation.

Unlike traditional currencies, cryptocurrencies are characterized by a limited number of units. It means that it is not an object of inflation and is able to maintain its value. The use of cryptocurrencies as a means of value-saving depends on certain circumstances and the current situation on the market. But in general, digital currency can be an instrument for fighting against inflation, even if it is connected to risks and price volatility. 

Relations between banks and cryptocurrencies

You probably thought about the opinion of traditional payment systems concerning the cryptocurrency market, how seriously they take it and whether they consider it a competitor. For not, not all financial institutions recognize cryptocurrency as a viable and equally competitive asset. Therefore, it is difficult for users to deposit it in a bank account. Moreover, not all managers of financial institutions have enough knowledge to advise users. So, while users actively use cryptocurrencies, banks are distant from this type of asset. And they explain this by the fact that cryptocurrency: 

• has a really high risk; 

• has a dubious source of origin;

• is not regulated at the governmental level; 

• allows the purchase of prohibited goods.

Simply put, the cryptocurrency system can violate traditional principles of money turnover and destabilize the financial system. In connection with such negative consequences, the Basel Committee proposed to introduce a risk rate for cryptocurrencies of 1250%. This means that the bank has to create a reserve that exceeds 12.5 times the amount of its investment in cryptocurrency. 

So, it is seen that cryptocurrency can change the financial system. Cryptocurrencies can be a potential threat to traditional financial systems and bank institutions, forcing them to innovate and adapt new technologies. Perhaps that is why, according to Cornerstone Advisors, 8 out of 10 financial industry institutions are not yet going to invest in cryptocurrency. 

Cryptocurrency market perspectives 

The decision on the possibility of using cryptocurrency alongside traditional currency can be made only at the state level. Some countries have already recognized the cryptocurrency (for example, Japan), but the majority of them don't hurry to give, for instance, Bitcoin an official status. In China, it is completely banned, and in ex-USSR countries, the government can not decide. Time will tell what level cryptocurrencies will reach and whether a legal regulation will be developed.

As for Ukraine, one more step towards the legislation was taken at the beginning of the summer 2023. According to the article in Forbes, new changes to the Tax Code and the Law “On Virtual Assets” could be adopted next year. So, Ukraine could become the first country in Europe to implement European requirements for regulating operations involving virtual assets. 

How can you profit from cryptocurrency

With certain knowledge in the blockchain technology sphere, you can start up a pretty profitable business. You can make a profit on a cryptocurrency using several methods, such as: 

• Invest in digital assets and wait for sufficient price growth. You can trade via broker and multiply your investments not only while buying but also while realizing your virtual assets. 

• During the ICO (Initial Coin Offering), you can own the first coins of a new cryptocurrency at a low price, and when the price is higher, you can exchange them for real currency. 

• Trade on the exchange stock, creating speculative positions for the purchase and sale of the cryptocurrency assets. 

• Advise or teach people how to make money on cryptocurrency. Here, you can even not have your own cryptocurrency wallet, but you should critically understand the system. 

Forecasts for the cryptocurrency market 

It is difficult to predict what will happen with cryptocurrency in the next few years. The situation in the world is changing, the market is not stable, but virtual assets and blockchain technologies continue to develop and force changes in other spheres. Many experts are sure that cryptocurrency will definitely integrate into the traditional financial system and spread widely. So, now you understand why you should have cryptocurrency and know how to use it. Stay tuned to be aware of the latest news in the cryptocurrency world.