In this article, we take a look at what is cryptocurrency and how does it work.
Cryptocurrency is a digital or virtual currency designed to work as a medium of exchange. It uses cryptography to secure and verify transactions as well as to control the creation of new units of a particular cryptocurrency. Cryptocurrency is not issued by any central authority, rendering it theoretically immune to government interference or manipulation.
What is Cryptocurrency?
Cryptocurrency is a digital currency system operating on the blockchain. Thanks to advanced cryptography and the intrinsic properties of the blockchain, it is almost impossible to duplicate or counterfeit these digital assets.
To know what makes the blockchain such a revolutionary technology, read our guide on the blockchain.
When you send money to your friend’s bank account, the bank serves as a middleman to complete this transaction. It holds your money for you, and when you initiate a transaction, it deducts money from your account and deposits it in your friend’s account.
With cryptocurrencies, you can transfer value across a network without needing an intermediary, for example, a bank or a remittance company.
Cryptocurrency transactions are anonymous and secure, as they are processed using a peer-to-peer network. This means that no single entity controls the network, and no one can access your funds without your permission.
Cryptocurrency also has the potential to be more secure than traditional financial systems, as it is not subject to the same vulnerabilities. For example, a hacker cannot steal your funds unless they have access to your private keys.
How Does Cryptocurrency Work?
Cryptocurrency works by using a decentralized system known as the blockchain ledger. The cryptocurrency blockchain is an immutable public ledger that stores all the transactions that have ever occurred in a particular cryptocurrency.
Cryptocurrency transactions are completed using a process called cryptocurrency mining. This involves a group of computers running specialized software to solve complex mathematical equations. When these equations are solved, new blocks are added to the blockchain, and the miners are rewarded with a certain amount of crypto assets.
Each time a transaction is made, it is recorded on the blockchain and is instantly available for anyone to view. This makes cryptocurrency transactions transparent and secure, as all transactions are public and can be verified by anyone.
Cryptocurrency works using a system of digital wallets. A digital wallet is a piece of software that holds your private and public keys, which are used to initiate and complete transactions. Your wallet also stores your cryptocurrency balance.
What Makes Cryptocurrency Different from Traditional Money?
Cryptocurrencies are starting to be used as an alternative to traditional fiat currency like the US Dollar or Euro. This is because digital currencies are better than conventional money for various reasons. These are:
- Global, Cheap and Fast: Cryptocurrencies like Bitcoin and Ethereum transcend borders. You can send huge amounts of money worldwide for a small transaction fee. The recipient only needs a crypto wallet to receive that money and store cryptocurrency.
Statistically, sending Bitcoin is 60x more cost-effective and 48x faster than an international wire transfer.
- Irreversible: Unlike credit card payments, crypto payments cannot be reversed. This is done to ensure maximum security and transparency on the network.
For this reason, make sure to double-check the sender’s wallet address and the amount of the transaction.
- Privacy: When sending money to a bank account, you need 5-6 pieces of information. These include the title of the bank account, account number, phone number and email address of the recipient.
With cryptocurrencies, all that is required is a crypto wallet address. You are not required to share any private details of the sender or recipient, not even their name. Furthermore, if you wish to hide wallet addresses and the amount of your crypto transactions, you can use privacy cryptos like Monero or ZCash.
How Many Cryptocurrencies Are There?
Currently, there are over 8,000 different cryptocurrencies in circulation. The most popular digital currencies are Bitcoin, Ethereum, Ripple, Litecoin, and Bitcoin Cash. These five cryptocurrencies account for over 75% of the entire cryptocurrency market’s total capitalisation.
Many of these other cryptocurrencies are referred to as Altcoins, which are alternative coins to Bitcoin. Altcoins often offer different features to the original Bitcoin, such as faster transaction times, improved privacy, and even their own ecosystems.
Types of Cryptocurrencies
There are several different types of cryptocurrencies, each with its own unique features and uses. Some of the most popular cryptocurrencies and their features/uses are;
Bitcoin is a decentralized digital currency that is used as a store of value and a medium of exchange.
Ethereum is a blockchain-based platform that is used to create and execute smart contracts and decentralized applications.
Ripple is a currency exchange and remittance network that transfers money quickly and securely.
Litecoin is a crypto that is designed to be faster and more efficient than Bitcoin.
Bitcoin Cash is a hard fork of Bitcoin that is designed to have lower transaction fees and faster transaction times.
Other types of cryptocurrencies include privacy coins, stablecoins, and utility tokens.
Privacy coins are designed to protect users’ privacy by obscuring the ledger and transactions.
Stablecoins are designed to maintain a stable price and are backed by fiat currencies or other assets.
Utility tokens are used to access services or features on a particular platform.
How Does Cryptocurrency Derive Value?
As with all tradable assets, the value of a crypto is also decided by market demand and supply.
Today, cryptos are used for various purposes like cross-border transactions and smart contracts. For example, if people are unwilling to use the XRP crypto for cross-border transactions, there will be zero demand and, resultantly, zero value for $XRP.
If you want to invest in a cryptocurrency, look at how they derive demand and whether this demand will be sustainable in the future.
With the proliferation of cryptocurrencies, it is clear that they will be significant in the future. For you to make the most of this technological innovation, research solid cryptocurrency projects that offer a tangible value proposition and invest in them.
Where to buy Cryptocurrency?
Cryptocurrencies can be bought from various sources, both online and offline. One of the most popular crypto exchanges to buy cryptocurrencies is Binance. Binance is a leading cryptocurrency exchange that supports a wide range of coins, including Bitcoin, Ethereum, Ripple, and Litecoin. Coinbase is another popular exchange to buy cryptocurrencies, offering customers the ability to purchase and sell cryptocurrencies with fiat currencies using a debit card or bank account.
OKEx is another popular cryptocurrency exchange offering both spot and futures trading for a wide range of coins. Other sources to buy cryptocurrencies include decentralized, peer-to-peer, ATMs, and cryptocurrency exchanges.
FAQs
Can Crypto Be Converted into Cash?
Yes, you can convert your cryptocurrencies to cash if you need to. However, this will likely result in a lower value for the cryptocurrency sin there is greater demand for it on the market.
Is Crypto Real Money?
Cryptocurrency is not real money. It is a digital asset that uses cryptography to secure its transactions and to control the creation of new units. It is similar to traditional money, but there are some key differences. For example, you can’t spend cryptocurrency like you can spend fiat currency. You need a crypto wallet to store your cryptocurrencies.
How Do You Explain Cryptocurrency to a Beginner?
When you first learn about cryptocurrency, you can try to explain it in simple terms by using metaphors like digital gold. You can also try to explain the significance of blockchain technology and how it is used with cryptocurrencies.
