Cryptocurrency. Has the era of primitive accumulation come to an end?

This summer many have discovered the mysterious world of cryptocurrencies. Newcomers are shocked by the story of Norwegian student  Kristoffer Koch, a lucky man who bought 5000 bitcoins in 2009 for 27 dollars. Its rate at the announcement date was … 2519 dollars per one coin.

The first reaction of many people is to exchange at least a small sum as soon as possible and trade, trade and trade until financial nirvana is reached! But in the Internet, figuratively speaking, a year is like ten years anywhere else and the era of "primitive accumulation" of cryptocurrency capital when an outsider could easily become a multimillionaire, has passed long ago. Or it has not? Let us try to understand.

First of all, it is necessary to understand that cryptocurrencies are a unique phenomenon. Thousands of people study it throughout the world. But also they do not know what will really happen to bitcoin or any other virtual currency. Any forecasts can be wrong.

What you should know about bitcoin?

Actually, the cryptocurrency system is the peer-to-peer payment network working on a blockchain technology (blockchain means a chain of blocks). It differs from similar systems because of full decentralization and an open code. In other words, each transaction made in this system is processed by other participants. The creator of the system working under the name of Satoshi Nakamoto ("satoshi" means "wisdom" in Japanese, and a widespread surname of Nakamoto approximately means "being in a closed system") has no influence on it at all. An analogy is often drawn with usual money or a person who invented paper.

Safety of transactions and uniqueness of data is protected by the technology mechanism – each operation remains in the overall history. The authenticity of each transaction is protected by digital signature, which contains information on a unique private key of your wallet – and it is only one of about 20 checks of data validity. Other users of the network process all information, peers and you connect to them as soon as you open an account. Thus, all participants get information on a transaction.

But nothing more: information about a person or a user’s location is not published. Potentially it is possible to correlate a transaction with the IP address but it is so labor consuming that it’s almost impossible to implement it in practice. As a proof, there is a recent story with virus attacks to banks and government agencies – blackmailers demanded to transfer money to a bitcoin wallet, because it was absolutely safe for them.

This information is organized in blocks; each of them contains data on transactions, which took place within the last 10 minutes. Such blocks are formed in the course of "mining", that is production of bitcoin. A user by means of the computing equipment (it can be an array of video cards or specialized processors) "places" transaction data in blocks and tries to find a check sum suitable for this block in a bitcoin protocol by the direct-search method.

Such a process requires serious productivity but the business worth the effort – the system awards a participant with a number of coins for each found block. Blocks quantity is limited and it is known in advance that there cannot be more than 21 million bitcoins. The more participants of the network, the more difficult is the process of cryptocurrency production. The time of production of one block is fixed, it is 10 minutes. Also reward for new processed blocks arrives. At the same time no block can be replaced with another one – it will cause discrepancy and it will be rejected by the system.

Difficulties

Thus, the bitcoin and other cryptocurrencies aren't subject to inflation in principle because it is impossible to organize additional issue. To open an account in the system you should not enter any data. Besides, the system is reliably protected from external influence: the data is distributed on millions of computers.

Also there are disadvantages. For example, in case of loss of wallet data or a password, the funds in a wallet will disappear forever, it is impossible to restore information on coins ownership. Therefore it is necessary to make copies of such data. And the rate of cryptocurrencies is unstable as it is ensured only by use of the system. The bitcoin is valuable because it is useful and not vice versa. If interest in it falls, then the rate will go down as it happens when some negative news are announced.

The converse case is also true. The volatility according to the standards of traditional markets is incredibly high and 50% ups and downs is a normal thing.

Up to now what has been written here concerns only bitcoin cryptocurrency. But in practice there are several hundreds of them. And if some of them almost do not differ from bitcoin, others have much broader functionality. For example, Ethereum, one of the most popular cryptocurrencies, can be used for traditional transactions without any legal procedures, so-called "smart contracts".

One can mine cryptocurrencies with the help of the described mining procedure but it works not for all cryptocurrencies and not everyone would like to invest hundreds and thousands dollars in the hardware. Therefore it is easier to refer to a cryptocurrency exchange. The scheme is simple: a user transfers fiat money and receives a certain amount of bitcoins which he in turn can exchange for other cryptocurrencies. The most popular exchanges are Poloniex, LiveCoin, BTC-e. Some other bitcoin-based currencies, so-called forks, are traded only at certain exchanges, therefore you may need to transfer money from one exchange to another.

Subtleties of Trade

In general the rules of cryptocurrency exchanges are the same like those of a common stock or currency exchange but with a view to unpredictability of the rate. As it has been already mentioned, it can depend on political decisions of certain countries, technical problems, invested funds and so on. Therefore those who would like to earn on exchange rate fluctuations, have to study carefully fundamental principles of trading, trade operations at the exchange, watch the market and analyze it making the final choice on the basis of facts.

Within small article it is possible to give only some general advice. For example, you shouldn't buy cryptocurrency when the rate is going up or sell when it falls. Although, it is the first emotional reaction, skilled traders do the opposite way. It is better to buy coins, which rate has been even during the last few days and has rapid growth of capitalization.

The most difficult question is when to withdraw funds. Because the rate can grow up or start falling. It is impossible to give unambiguous answer – the mastership of exchange business is the ability to understand hints. That is why a cryptocurrency exchange is not a magic "field of miracles" but a platform for persistent trading work.

If you have no desire to get into details of trade but have some spare cash, it is possible just to buy bitcoins or other cryptocurrency, which you believe would potentially grow, and to forget about it (but only don't forget your wallet password!)

By the way, earlier mentioned Koch did like this. In several months you can wake up a millionaire … or find out that the rate of a currency you selected decreased in several times. In effect, such strategy reminds a casino game without any guarantees.

If your funds are stored at the exchange, you can set up automatic sale in case of certain fluctuations of the rate – for example, five times increase.

Go for it!