what is Cryptocurrency is and how does it work

what is Cryptocurrency is and how does it work

written by John Murphy | November 11, 2022

Cryptocurrency, sometimes called crypto or crypto-currency, is a form of currency that exists virtually in a digital format. So to know about what is Cryptocurrency is and how does it work. Actually it uses cryptography to process, secure and record transactions. 

The word crypto comes from the reason that it uses encryption to verify transactions. The purpose of encryption is to offer the peer-to-peer movement of currency and provide safety and security.

It is a digital payment system that independently works without the involvement of banks. Additionally, it does not have a central controlling authority. So, you can send and receive currency anytime, anywhere.

Since Cryptocurrency lacks physical existence, its transaction details are recorded online in a public ledger. At the same time, it is stored virtually in e-wallets. 

To better understand what Cryptocurrency is and how does it work, we need to know three terminologies – blockchain, decentralization and cryptography. 

  • Blockchain

In cryptocurrency economics, blockchain is a digital ledger that records transactions. Blockchain access is allowed only to authorized users. Furthermore, blockchains document various transactions, including money, assets, and intellectual property.

Additionally, access to a blockchain is shared between users. For this reason, all transactions are immediate, transparent, and immutable (irreversible or unaltered – not even an administrator can change it).

  • Decentralization

The second most important concept to understand what is Cryptocurrency, is lying in its decentralized nature. The fiat money that we use every day is centralized. Centralization means it has a controlling authority—all rules, regulations, and control lie with a single body.

Contrarily, decentralization concerning Cryptocurrency means there is no controlling or supervising authority. However, each Cryptocurrency has its own set of rules regarding trade.

Decentralization transfers power to individual holders who own digital assets. It works as a democracy since sharing ownership , avoiding mismanagement and miscommunication. Furthermore, blockchains are fully secured.

  • Cryptography

Cryptography is related to the security feature of Cryptocurrency. It is the method that protects data from unauthorized access. There are multiple advanced techniques used to offer protection, like encryption.

Blockchain claims of immutability and privacy depend on cryptography. Cryptography is the construction and analysis of protocols to prevent unwanted exposure of third parties. Owing to complex mathematical concepts and data science provides secure communication channels.

History of Cryptocurrency

Many consider Cryptocurrency a modern time concept. However, its roots are traceable back to the 1980s. A blinding algorithm was invented, which is all about immutable and secure digital transactions. The concept remains relevant with the inception of Cryptocurrency.

2008 was the year when a group of people known as Satoshi Nakamoto drafted guiding principles of Cryptocurrency. However, 2009 was the year when the first Cryptocurrency came to the surface, Bitcoin.

It took some time, but in 2012 it made its first transaction. However, it has been growing at an annual growth rate of 12.8% since 2021. The cryptocurrency value is about to reach $4.94 billion by 2030.

How does Cryptocurrency work? 

Since there is no centralized authority, cryptocurrency developers set their own rules. It is an evolving idea as new currencies become the crypto ecosystem each day. There are a handful of cryptocurrencies currently available in the market.

Let us now explore how does Cryptocurrency work?

  • Mining

Cryptocurrencies are the product of a process that is mining. It is a complex process. Evidently, miners need to solve complicated mathematical puzzles through special computers to get cryptocurrencies. 

The process is so complex that, on average, it takes around thirty days to get one bitcoin. That is quite some time. However, miners have become experts over time and have started solving puzzles in a low period.

So, mining is the process of creating Cryptocurrency.

  • Trading 

Buying and selling cryptocurrencies is easy today; you can trade them through crypto exchanges. Multiple brokers in the market offer cryptos in exchange for fiat money or other Cryptocurrencies.

Since new crypto projects enter the frame each day, you can even buy Cryptocurrency directly from owners of the currencies. So, trading cryptocurrency is a relatively easy task now. However, the high volatility makes it difficult to predict the forecast performance of cryptocurrencies.

  • Storing

Storing Cryptocurrency is a crucial step in the crypto trade. Many exchanges offer storage facilities and charge a fee. Holders can quickly put their digital currency and assets in online wallets. Two main types of digital wallets are – hot and cold wallets.

  • Hot Wallet: A digital wallet always connected to the internet is called a hot wallet. Most crypto exchanges provide hot wallet services. However, it is less safe than one may request. The continuous internet connection makes it vulnerable to hacking threats.
  • Cold Wallet: A digital wallet that does not have all-time connectivity to the internet is called a cold wallet. They are more secure and safe. However, it takes more time to make a transaction.
  • Investing or Transacting

You have several choices for investing in digital currencies. It is easy to complete in minutes from your cell phone. You have the liberty to transfer them from one wallet to another. Once you own a cryptocurrency, the choice is all yours to:

  • Trade them
  • Exchange them for cash
  • Use them to buy services or goods

A few famous cryptocurrencies like Bitcoin are providing holders with ATM cards. So you can easily withdraw currency whenever you want it.

Frequently Asked Questions

What are famous cryptocurrencies?

More than ten thousand different cryptocurrencies are available for trade in the market. To quote a few names:

  • Bitcoin
  • Ethereum
  • Litecoin
  • Ripple

What are the types of cryptocurrencies?

There are two main types of cryptocurrencies – Bitcoin and Altcoin. Bitcoin is the world’s first Cryptocurrency and possibly the most known. There are many other alternate cryptocurrencies such as Altcoins; examples include Ethereum, Luckyblock, Terra, and Shiba Inu.

What is Cryptocurrency?

Cryptocurrency is a currency that exists digitally, makes secure transactions using cryptography, and stored in wallets.

What can I buy with Cryptocurrency?

You can buy almost anything with your digital currency, like – luxury goods, cars, gadgets, and insurance. The list goes on as each day, new companies accept cryptocurrencies for trade purposes.

How does Cryptocurrency make money?

You can make money with Cryptocurrency through trade. For example, selling cryptocurrencies at a rate higher than the purchase price will earn you money.

Parting Thoughts

We are still determining what the future holds for Cryptocurrency. The highly volatile industry keeps everyone guessing. However, one thing is for sure: it has attracted enough investment to stay around for years to come.

Cryptocurrency – a digital equivalent of fiat money has its pros and cons. Although governments are restrained from acknowledging the crypto ecosystem, it seems not far away that it will get its desired place in global economics.

Trading cryptocurrency is easy, but developing it is a tough ask. 

We leave this place waiting for feedback from your side, do let us know about your experience with cryptocurrencies. Adios!