Cryptocurrency is a digital currency, most often based on blockchain technology. It is used as a medium of exchange within a peer-to-peer (P2P) digital economic system. The originality (authenticity) of the cryptocurrency is protected by cryptographic methods.
Cryptocurrencies do not have any physical expression, they exist only online, while they are the same means of payment as the usual money, and they can be used to pay for goods and services. In fact, a unit of cryptocurrency is a code that appears as a result of complex computer calculations. The process of obtaining cryptocurrencies is called mining. Specialized electronic wallets are used to store cryptocurrencies.
The history of the emergence of cryptocurrencies
The term “cryptocurrency” became widespread after the appearance in 2009 of the first digital currency — bitcoin, the author of which is a developer (or a group of developers) under the pseudonym Satoshi Nakamoto. The new electronic payment system was created to allow users to make direct digital financial transactions without intermediaries like banks or government agencies.
All cryptocurrencies that appeared after bitcoin are called altcoins. Altcoins, which exchange rate is provided by some financial asset (commodity value, fiat currency), are called stablecoins. The number of cryptocurrencies is growing daily and has already exceeded tens of thousands. However, throughout the existence of cryptocurrencies, bitcoin has remained the most popular digital currency with the highest market capitalization.
Cryptocurrencies are seen as a risky but highly profitable investment tool. There are several options for earning on cryptocurrencies, including staking, holding, trading, deposits, etc.
Unlike fiat (official) currencies, cryptocurrencies are decentralized since there is no centralized point of authority to control them.
Cryptocurrency network nodes are widely distributed around the world, and the management of cryptocurrency units and their release is based on pre-programmed algorithms and mathematical proofs. It is important to note that different cryptocurrencies work in their own way and have different degrees of decentralization.
It is also worth noting that all transactions with cryptocurrencies are independent and transparent for all participants included in the blockchain. At the same time, all operations are anonymous — you can only see the user’s wallet number, while the data about its owner remains unknown. Each cryptocurrency transaction is irreversible, as it automatically initiates changes in the entire blockchain.
Features of regulation of cryptocurrencies
Each country has its own legal rules for regulating cryptocurrencies. In some jurisdictions, this financial instrument is completely prohibited, while others, on the contrary, recognize them as legal tender.
For example, in the European Union (EU), cryptocurrencies are not officially prohibited but there are some legal restrictions, such as the need to identify users and comply with the anti-money laundering and terrorist financing standards and requirements. In general, most EU countries have a similar approach to regulating cryptocurrencies, however, each has its peculiarities and nuances.
In the Czech Republic, cryptocurrencies are also not prohibited or regulated by special legislation but rather subject to anti-money laundering and terrorist financing requirements, and the government of the country advocates strengthening control over transactions using cryptocurrencies and preventing their use for criminal purposes. In 2018, the Czech National Bank also proposed introducing mandatory user identification standards when trading on cryptocurrency exchanges and ICO exchanges.
Risks associated with cryptocurrencies
One of the key features of cryptocurrencies is price volatility. Cryptocurrency price volatility means rapid and unpredictable changes in the value of a particular cryptocurrency over a short time. This means that the value of a cryptocurrency can quickly rise or fall, sometimes even by double-digit percentages, in a few hours or days. This volatility is often associated with the speculative nature of cryptocurrency trading, as well as the lack of regulation and established market mechanisms in the industry.
Investing in cryptocurrencies is often viewed as a high-risk proposition with a high potential both for returns and losses. The lack of stable regulations and the decentralized nature of the industry makes it difficult to predict how the market will react to various events or news.
Therefore, investors should approach investing in cryptocurrencies cautiously and be prepared for potential risks. It is essential to conduct thorough research and screening of any investment opportunity before depositing funds to understand the technology behind a particular cryptocurrency, as well as its potential prospects and challenges. In addition, it is recommended to diversify your investment portfolio and avoid focusing risks on one investment to minimize the risk of losses.
