What Is Cryptocurrency? How Does It Work?

What Is Cryptocurrency? How Does It Work?

In recent years, the world has witnessed a remarkable rise in the digital currency known as crypto. As the name suggests, it is a form of currency that exists only in the digital world with no physical counterpart like banknotes or coins. 

Cryptocurrency is decentralized, meaning it is not controlled by any government or financial institution. Instead, transactions are validated through a blockchain network of computers. 

With over 5,000 cryptocurrencies in circulation and a market capitalization of over $2 trillion, people are increasingly curious about this emerging technology.

Crypto has spiked the mainstream and is enticing more investors than earlier. It is also emerging as a global payment method.

Companies like PayPal, Tesla, and Square are continuously working with cryptocurrency. In this article, we will try to explain what is cryptocurrency and how it works.

In this post, we will take a deep dive into what cryptocurrency is and how it works.

What Is Cryptocurrency?

Cryptocurrencies are decentralized digital currencies that can be used to buy and sell goods, and services and trade them to earn profit. These digital currencies have the potential to grow and store value.

There are thousands of cryptocurrencies operating worldwide. Bitcoin is the original and most popular cryptocurrency, which started back in 2009.

Ethereum, Bitcoin Cash, XRP, and DogeCoin are some other popular cryptocurrencies.

Purpose Of Cryptocurrencies

All these mentioned and remaining currencies are invented for different purposes. Some of them are used as replacements for FIAT currencies and cash.

At the same time, the rest of them are used for private and direct transactions.

These all currencies are digitally owned, stored, sold, and purchased through online exchanges. There is nothing like physical coins that exist in digital currencies.

Crypto as Currency

Cryptocurrency is utilized for trading and as a currency. However, it is not too frequent as a payment method by retailers and businesses. Its objective as currency is lessened due to a lack of worldwide adoption and volatility.

How To Invest In Cryptocurrency?

Crypto also serves as a sort of investment similar to bonds, stocks, and precious metals. Investors purchase coins and then wait for their price to surge—later cash out at a suitable time to get some profit.

Crypto coins can be bought or sold for cash, but they don’t possess any physical use or value.

There are many trading robots like Bitcoin Ira and Bitcoin Revolution for safe crypto trading and minimizing loss.

Crypto is an unregulated and volatile market where nothing is certain. Regulators are still finding ideas to classify crypto for trading, payments, taxation, and anti-fraud.

How To Store Cryptocurrencies?

Cryptocurrencies can be stored in both online and offline wallets. Some crypto exchanges like Coinbase have online and in-app wallets. One can also store crypto offline in hardware devices.

The principal tenant of cryptocurrencies is decentralization, and these currencies have nothing to do with central banks or the government. Instead, they are valued and maintained by their users.

What Is Cryptocurrency Mining?

Crypto mining is the process of creating new coins. It is basically the validation of transactions on the concerned blockchain ledger.

Mining basically refers to the creation of new crypto coins which is accomplished by solving complex puzzles.

Relation Between Blockchain And Cryptocurrency

A decentralized ledger is used to record all the cryptocurrency transactions, which is called the blockchain.

Blockchain is a public database of transactions that is accessible to all other crypto holders. Every crypto sale or purchase is noted on the blockchain.

The digital validation process of transactions is used to verify actions and prevent any fraud.

The data of individual transactions and the people involved are kept secure through cryptography.

At the same time, anyone can join and participate in the blockchain.

Popular Crypto Terms

Blockchain

A blockchain is a kind of database that stores cryptocurrency transaction data in the form of blocks.

The new blocks are formed as extensions to the previous ones, which develop a blockchain.

Thus, the entire data of cryptocurrencies is stored in these database blocks.

Decentralized

Decentralized indicates to investors and others that currency is neither owned by any financial institution nor by any central bank.

Bitcoin

Bitcoin is the first, most valued, and most popular cryptocurrency.

Altcoin

Any digital currency which is not Bitcoin is called Altcoin. For example, Ethereum, Bitcoin, and Dogecoin are some of the popular altcoins.

They all have different features and are made for various purposes.

Crypto Exchange 

An online exchange where you can buy or sell cryptocurrencies.

Crypto Wallets

Online or offline wallets are used to store cryptocurrencies.

Tangle

Tangle is the mechanism to process and store crypto network IOTA.

DLT(Digital Ledger Technology)

Digital ledger technology is a decentralized digital record. The record is saved in multiple locations on the database.

A blockchain is a form of DLT, but this technology has more potential than just crypto trading support.

Advantages Of Cryptocurrency

Crypto has several advantages. Some of them are as below.

• The first advantage of cryptocurrency is the accessible funds’ transfer without any third-party involvement. Public and private keys secure these transactions.
• Unlike wire transfers, banks, and other financial institutions, funds transfer fees are minimal in cryptocurrency transactions. 
• Cryptocurrency allows you to pay for online or physical purchases by scanning the QR code or using a crypto card like BitBay. These transactions are performed through the crypto wallet of the person paying. However, they take some time to validate with blockchain to check whether it is genuine or fraudulent.
• Cryptocurrencies are not affected by the government or financial institutions’ contracts, which provide stability during inflation.

Disadvantages Of Cryptocurrency

Digital currencies also have some drawbacks.

• Cryptocurrencies are unregulated, so they are sometimes used for money laundering and tax evasion. Tracing Dash, Monero, and ZCash crypto coins is nearly impossible. That is why these are the best choice for bad actors for any illegal or malicious practices.
• The entire ecosystem of cryptocurrencies, including exchanges and wallets, is not entirely safe from hackers and theft. 
• Crypto is the most volatile investment market. There is no particular time for cryptocurrencies to rise and fall. There is no clear idea about their demand and supply.
• Frauds, high exchange rates, and high fees on exchange platforms are other risks associated with cryptocurrencies.
• If your funds are stolen or lost, it is nearly impossible to retrieve them, and no one will take responsibility.

Is Cryptocurrency Safe?

Cryptocurrency is secure due to cryptographic work, distributed ledger technology, and the encryption process.

But it is not as safe as the USD because any authority will not back it. It does not have any insurance from networks or financial institutions.

That means if your currency network fails, no one, even the government, will not recover the loss.

Putting all the assets as a crypto investment is not a wise decision.

Future Of Cryptocurrency

The value of cryptocurrencies has risen in recent years. But there are still questions about the sustainable growth of digital currencies.

Global economic giants and investment players have increased the crypto validation.

However, the future of crypto is still unclear because of intense price swings. Therefore, it is also called speculative investment.

The addition of NFTs and other blockchain players has attracted more people to crypto. As a result, several crypto assets are under production to be launched.

Conclusion

There are thousands of cryptocurrencies that are traded publicly. Despite all the myths, concerns, and controversies, cryptocurrencies are gaining popularity.

More people are talking about cryptocurrency and investment as compared to the situation five years back. However, jumping into crypto just because it is trending is not a good way to go.

Frequently Asked Questions