Understanding Cryptocurrencies

Until a certain time on December 17, everything was euphoria about bitcoin. That day it reached its maximum at more than US $20,000 per unit and in the year its quotation had multiplied more than 20 times. However, on February 6, its value fell to just over US $6,000, a decrease of almost 70% in 51 days. Suddenly, the bubble exploded, affecting the rest of the cryptocurrencies with a similar impact. The boom deflated and despite a temporary recovery, bitcoin is again at levels below $7,000. Investor confidence was damaged.

The steep ups and downs are distinctive of this new young market, revolutionary and disruptive to traditional asset models. Understanding how this technology works serves to discover that cryptocurrencies are more than a financial asset and that seeking to obtain a return from them is, at least for now, a very risky business. Its current usefulness passes on the other side.

And not only Bitcoins has had the leading role. Altcoins also have paved their way. There are new cryptocurrencies and crypto projects showing every day, serving specific purposes. In addition to this, business people tap on the cryptocurrency community to take it to the index market. They even have created custom index for cryptocurrencies. For instance, Trident index fund focuses on the top ten crypto assets with the highest market capitalization.

Blockchain and basic features

The key to understanding the operation of cryptocurrencies is to know that their code does not simply serve as a digital currency and that there, in its binary DNA, lies its innovative spirit. Its existence is possible thanks to the blockchain (chain of blocks), which was applied for the first time in 2009, just with bitcoin. Blockchain is a data structure, a shared registry that validates the user community. In this way, each exchange must be verified by the entire network to be accepted and in doing so it is added to the code forever.

In the case of cryptocurrencies, transactions are confirmed by the set of individual users -automatically- from their computers, and upon validation they are recorded in a block of information. The blocks are added to the chain. All the operations that have been carried out in the history of bitcoin are still there, in the code that is used today, transparent to the view of those who want to consult them.

The whole process is decentralized, oblivious to any type of control of entities such as banks and governments. The community is its own controller. Use as a digital currency is only one of the blockchain's capabilities because in itself it is only a safe, reliable and free form of external interference to register information in a dynamic code. They are also anonymous.

The anonymity of the blockchain and therefore of the cryptocurrencies means that a user does not need to reveal their identity at any time during the process. This, unlike the other means of electronic payments, allows payments to be made as discreet as if cash were used. The advantage over cash disbursements is that transactions are global, immediate and immune from restrictions. Many times, due to this condition, it is related to cryptocurrencies with shady deals. Like the cash.

Mining, use and payments

The new bitcoins are generated through the process of "mining". The mining is the process of verification of operations with bitcoin (or another type of cryptocurrency). When a person sells and another purchases, it requires computational resources to guarantee that transaction and register it in a new block of the chain. The "miners" are responsible for this work and charge a percentage as a reward, a commission that is usually very low. This process is carried out on a large scale by the "mining farms" (centers with a high processing capacity) or even by private miners with specially prepared equipment.

Without such a complication, cryptocurrencies can be purchased on sale-buying websites where, as if it were a foreign currency. The purchase or sale of bitcoins or fractions of these (or any other crypto) are made by credit card, bank deposit, PayPal, etc. When buying a code is generated that must be protected in an electronic purse. There are several types of portfolios and services that allow cryptocurrencies to be stored in offline hardware, in software, online and even in banks.

After acquiring bitcoins, ethereums, litcoins (and a very long list of cryptocurrencies) you can make a payment for a service or an online purchase in the growing list of companies that accept them (Microsoft is one of them). Its current usefulness is marked by this possibility, that of being used immediately as a digital currency, that is why those who defend its use dismiss the risk of volatility. The true value of cryptocurrencies is not in their quotation, but in being an instrument of fast, safe and anonymous change with low cost per transaction.

The cryptocurrencies understood as a financial asset and the speculation generated around them are an unintended consequence. The specialists hope that this condition and the volatility that they present today will disappear in the near future and may reach mass. The market is still very new.

Maybe, as happened with the dotcom bubble, the stumble serves to purge the market of curious and speculators. Far from being over, the cryptocurrency story seems to have just begun.