Blockchain is a database with transactions consisting of a sequentially built chain of digital blocks, each of which stores information about the previous and next blocks. It is a kind of digital notebook in which records are unchanged thanks to the hashing mechanism – a unique set of alphabetic and numeric symbols, where a change in one symbol leads to a change in other blocks. The main advantage of blockchain is its transparency, because everyone can read the information inside the blocks, but no one can change or destroy it.

How blockchain works

A blockchain is a distributed ledger system that is accessible to everyone on the network. For example, a blockchain-based digital currency can be created, moved and stored outside the purview of any government, financial institution or personal lawyer, but nevertheless every transaction is recorded on the blockchain and is public. It is a kind of Ariadne’s thread, breadcrumbs and navigator that leads anyone wishing to verify transaction information.

Blocks are added to the network through a mining procedure. For each new block, the miner receives a reward, which forms the financial basis of his activity. Once the first transaction is made, it must be verified by multiple participants in the network – this is the essence of decentralization of the blockchain without specific intermediaries. This means another advantage of blockchain over the classical financial system – unlike banks, blockchain operates around the clock and does not depend on the central bank of a particular country.

In 2014, it was reportedly possible to mine up to 1-2 bitcoins just on a regular computer at home, but to mine the same amount of bitcoins now, you have to tame complex math and find hundreds of video cards located in a single data center, also called mining farms. As miners want to earn more, they tend to buy as many specialized graphics cards as possible, which can be mined more efficiently than a conventional home, albeit powerful, computer. The shortage of chips used in graphics cards has influenced miners to buy up gaming graphics cards in 2021, which has raised the prices of Nvidia and AMD GPUs on the secondary market by two to three times.

The first algorithm for miners, including bitcoin, was called Proof-of-Work. It required a lot of computing power, which was provided by computers. That’s why now blockchains with Proof-of-Stake algorithm are appearing, where not machines, but validators – participants of the network responsible for its integrity and confirmation of all transactions taking place in the blockchain – rule the ball.

P-o-W requires a lot of electricity and expensive and rare specialized equipment. To become a P-o-S validator, one must have a certain number of coins of this network, pledge them, i.e. “create a stake” and put special software. By confirming transactions, validators are rewarded. The most prominent example of the P-o-W algorithm is the bitcoin network, and the alternative is the Ethereum network, which, although it started with the P-o-W algorithm, is in the process of transitioning to the P-o-S algorithm.

Types of blockchain

A blockchain can be a public network that anyone can connect to, or a private network that is typically used by organizations to avoid the loss of sensitive data.

After a while, the corporate sector has also taken notice of blockchain. The R3 consortium, which includes, for example, the American exchange Nasdaq and the Irish IT giant Accenture, created the Corda blockchain, which began to be used mainly in the financial sector. IBM’s Hyperledger blockchain has started to be used, for example, in the entertainment sector, reducing the counterfeiting and resale of event tickets, or in healthcare, to give access to patient data on the one hand and prevent its leakage on the other.

IBM clients find it much easier to work with a trusted vendor like IBM, which is why Hyperledger is quite popular with major corporations. Private blockchains are usually faster and cheaper, and all corporate data and transactions are held by a limited number of network participants. Admittedly, this leads to the fact that within a private network it is much easier to “collude and cheat” the system and much harder to communicate with another network. So when it comes to transparency and sustainability, everyone chooses the blockchain that serves their purposes.

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Research the market

The first step to creating a successful cryptocurrency investing strategy is to research the market itself. Familiarize yourself with the major cryptocurrencies, their history, technology, and key indicators. You should also study the relationships between different cryptocurrencies and factors that can affect their price, such as news, changes in government policy, etc.

Determine your goals and risk level

Before you start investing in cryptocurrencies, you need to determine your goals and risk level. Figure out how much you are willing to risk and what percentage of return you would like to realize. Keep in mind that cryptocurrencies are a high-risk asset, so you should not invest all of your money in them.

Develop your strategy

Based on market research and determining your goals and risk level, develop your strategy for investing in cryptocurrencies. Determine which cryptocurrencies you will buy, when to buy them and when to sell them. It is important to keep up with current market events and periodically review your strategy.

Use various tools and analytical data

To determine when to buy and sell cryptocurrencies, you need to use different tools and analytical data. For example, you can follow cryptocurrency price charts, analyze trading volumes and use technical and fundamental analysis.

When the choice of assets is made, you need to decide on the time of buying and selling. In this case, it is important not only to consider the current state of the market, but also to understand long-term trends. If you believe in the growth potential of a particular cryptocurrency for a long period of time, it may make sense to keep it in the portfolio, even if its price is currently falling.

It is also recommended that you diversify your portfolio by including several different cryptocurrencies to reduce risk. This will reduce the probability of losses if one of the coins starts to fall in price.

In general, a successful strategy for investing in cryptocurrencies requires careful market analysis, proper selection of assets and correct timing of buying and selling. In addition, it is important to follow the news and trends in the market in order to adjust your strategy in time.

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When people use the words Bitcoin and blockchain as synonyms it is not true. But people still do so, it’s a popular misconception.

Bitcoin is not just a coin, it is also a protocol that is based on blockchain technology. A protocol is a set of rules by which members of a network communicate with each other. For example, part of the Bitcoin protocol governs how private and public keys should be managed, how mining occurs, how transactions are confirmed, and so on. Ethereum, waves, neo, ripple and some other cryptocurrencies have a similar protocol to Bitcoin.

This protocol, like Bitcoin and Ethereum, includes the definition of a coin, which is usually named after the protocol. This coin is what makes using the protocol interesting for people. It is used to reward people who “mine” or mine to add blocks to the blockchain and, more importantly, to buy something from each other.

Tokens, on the other hand, are in the third layer of the architecture. They exist thanks to smart contracts, which in turn work thanks to protocols (the second layer). Ethereum is currently the most popular protocol for creating smart contracts and tokens. Bitcoin’s protocol, on the other hand, ultimately does not allow for the creation of tokens because it does not support the creation of smart contracts.

A safe alternative to traditional banks

To understand cryptocurrencies well, let’s first understand how blockchain and conventional client-server architecture works.

Client-server architecture

The basic concept of this architecture is that the client (user) makes an http request to the server, and if everything is fine, the server sends the client a web page as a response. The web page itself usually contains data from some centralized database.

The very fact that all information is stored centrally, on one (conventionally) server, which is controlled by a bank or company, is a huge problem. Even more, the fact that all information is stored on one server increases the chance that the server will be hacked. This, in turn, jeopardizes the privacy of your data.

Blockchain

Blockchain solves two big flaws that are inherent in traditional client-server architecture – privacy and data security. Blockchain is a distributed and immutable storage, in addition all transactions in it can be monitored.

Let’s take this definition apart piece by piece. Distributed means that information is stored on a network of computers. This eliminates the need to have centralized servers. You can think of this storage as a ledger that keeps a list of all the transactions that occur on the blockchain. This vault is immutable, once information is in it, it cannot be deleted or changed from there.

Transactions on the blockchain are pseudonymous, you can see other people’s transactions but you don’t know who exactly is behind them, you can’t change the data that is contained in the transaction. Some cryptocurrencies allow you to encrypt the data in a transaction or even require you to do so.

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