A guide to cryptocurrencies

What are cryptocurrencies?

A cryptocurrency is a digital asset that uses cryptographic encryption to guarantee its ownership and ensure the integrity of transactions, and control the creation of additional units, i.e. prevent someone from making copies as we would do, for example, with a photo. These coins do not exist in physical form: they are stored in a digital wallet.

How do cryptocurrencies work?

Cryptocurrencies have several characteristics that differentiate them from traditional systems: they are not regulated or controlled by any institution and do not require intermediaries in transactions. A decentralized database, blockchain or shared accounting record, is used to control these transactions.

Regarding regulation, cryptocurrencies are not considered a means of payment, are not backed by a central bank or other public authorities and are not covered by customer protection mechanisms such as the Deposit Guarantee Fund or the Investor Guarantee Fund.

Regarding the operation of these digital currencies, it is very important to remember that once the transaction with cryptocurrencies is made, that is, when the digital asset is bought or sold, it is not possible to cancel the operation because the blockchain is a registry that does not allow data to be deleted. To “reverse” a transaction it is necessary to execute the opposite one.

Since these coins are not available in physical form, you have to resort to a cryptocurrency digital wallet service, which is not regulated to store them.

How many types of digital wallets are there?

A digital purse or wallet is actually a software or application where it is possible to store, send and receive cryptocurrencies. The truth is that, unlike a physical money purse, what is actually stored in digital wallets are the keys that give us the ownership and rights over the cryptocurrencies, and allow us to operate with them. In other words, it is enough to know the keys to be able to transfer the cryptocurrencies, and the loss or theft of the keys can mean the loss of the cryptocurrencies, with no possibility of recovering them.

There are two types of wallets: hot and cold. The difference between the two is that the former are connected to the Internet, and the latter are not. Thus, within the hot wallets there are web wallets, mobile wallets and desktop wallets, the latter only if the computer is connected to the Internet. On the other hand, within the cold wallets there are hardware wallets and paper wallets, which is simply the printing of the private key on paper.

These escrow services are not regulated or supervised.

How is the value of a cryptocurrency determined?

The value of cryptocurrencies varies depending on supply, demand, and user engagement. This value is formed in the absence of effective mechanisms to prevent manipulation, such as those present in the regulated securities markets. In many cases, prices are also formed without public information to support them. We recommend you read this statement from the Bank of Spain and the National Securities Market Commission (CNMV) on the risks of buying cryptocurrencies.

Cryptocurrencies use blockchain

Cryptocurrencies work through the shared accounting registry or blockchain. This technology provides them with a high security system with the capacity to avoid, for example, that the same digital asset can be transferred twice or be counterfeited. Blockchain technology works like a large ledger where huge amounts of information can be recorded and stored. All of it is shared on the network and protected in such a way that all the data it holds cannot be altered or deleted.

What does it mean to mine cryptocurrencies?

This concept refers to the process necessary to validate the operations carried out using this type of digital assets. For example, if we take the practical case of a bitcoin currency: its mining would be based on the validation and recording of transactions in the blockchain registry.

In short, mining cryptocurrencies involves successfully solving the mathematical problems involved. Miners who have carried it out get cryptocurrencies in return.

How many types of cryptocurrencies are there?

To create cryptocurrencies, it is crucial to have knowledge of cryptography, or at least to know how to program in order to be able to clone code from another cryptocurrency and create it. Currently, there are thousands of cryptocurrencies, among which we find, for example, bitcoin or ether.

What is a bitcoin?

Bitcoin is the name given to the first cryptocurrency. It dates back to 2009 and was created by a person or group of people who called themselves Satoshi Nakamoto, who managed to create the bitcoin under the blockchain technology, which they themselves invented. Like the rest of cryptocurrencies, there is no regulation for it.

How can bitcoins be acquired?

We can get bitcoins by buying or exchanging the currency itself in specialized portals. It is important to bear in mind that bitcoins -or any other cryptocurrency- are complex instruments, which may not be suitable for people without sufficient knowledge, and whose price involves a high speculative component that may even mean the total loss of the money paid to buy the cryptocurrencies.

If you want more information about bitcoin, you can access this Openbank content. In addition, if you want to know all the curiosities about this currency, you can visit this information from Finance for Mortals.