Detailed Guide on Crypto: How Does Cryptocurrency Work?

For the last 5-6 years cryptocurrencies are becoming popular among different people across the world. Before this only less number of people were aware of the concept of crypto and blockchain technology. But now people from all countries are speaking about Bitcoin, Ethereum, and other cryptocurrencies.

Generally speaking, cryptocurrency is a decentralized form of money based on blockchain technology and secured by cryptography. Before understanding cryptocurrency you need to understand the three terminology linked with it – Blockchain, Decentralization, and Cryptography.

Three Main Terminology Linked With Cryptocurrency

Blockchain: In simple words, blockchain is a digital ledger whose access is distributed among authorized users. This ledger is used to record all transactions related to a range of assets, like money, a house, or even intellectual property.

The access to the ledger is shared between its users and any information shared is transparent, immediate, and “immutable”. Here immutable means anything recorded in the blockchain is there for good and cannot be modified or tempered even by the administrator. This adds extra security and transparency.

Decentralization: Decentralization in the case of cryptocurrency means there is no central authority responsible for supervising the rise and fall of a particular cryptocurrency. Whereas in the case of physical money issued by any country is centralized by the government or authorities like the Reserve Bank of India (RBI) in India. Decentralization has many benefits in the case of cryptocurrencies.

Cryptography: Security is the main fundamental part of a blockchain and this security is being provided by cryptography. Cryptography is a technique through which the cryptocurrency is secured on a Blockchain. Cryptography uses different encryption techniques to protect the data from unauthorized access. Every blockchain makes many claims like privacy and immutability through strong cryptography.

History of Cryptocurrency Technology

The roots of cryptocurrency technology are linked with the invention of the “blinding algorithm” in the 1980s. The main reason behind the invention of this algorithm was secure and immutable digital transactions. Now, this is the main fundamental of modern digital currency.

After that in 2008, a group of people now known as Satoshi Nakamoto created the concept of the world’s first cryptocurrency Bitcoin. Bitcoin was officially launched worldwide in 2009. But for use of Bitcoin as a payment method was started in 2012 by WordPress.

Currently, Blockchain technology is being used in every sector including Banking, Insurance, Businesses, etc. The use of cryptocurrency is growing every year with a rate of 12.8% since 2021. Today more and more businesses or institutions have started adopting cryptocurrencies as a payment system.

How Does Cryptocurrency Work?

Now you may think about how cryptocurrencies works. As we already said cryptocurrencies are not controlled by the government or any central regulatory authorities. Cryptocurrencies works outside the control of banks. There are many cryptocurrencies developed on different blockchain technologies available in market. Bitcoin is the major player among all cryptocurrencies.

1. Crypto Mining

Cryptocurrencies also called virtual currencies are generated through a process called ‘mining’. Unlike coal or other metal mining in cryptocurrency mining, miners are required to solve some mathematical puzzles with special hardware equipped computer systems where miners get rewards in the form of bitcoins.

2. Buying, Selling and Storing

Users or investors can buy or sell cryptocurrencies from different crypto exchanges, brokers and other individual sellers. There are many exchanges like Binance, Coinbase, Gemini etc. where everyone can buy, sell or store cryptocurrencies. Exchnages also provide wallets to store cryptocurrencies. Digital wallets can be of two types ‘hot’ or ‘cold’ wallets. Hard cryptocurrency wallets are which needs internet connection to transact, but these wallets are also vulnerable to thefts and frauds. On the other hand cold wallets are safer but they are harder to make transactions.

3. Transacting or Investing

Cryptocurrencies can be easily transferred from one digital wallet to another by paying some transaction fees. You can also use cryptocurrencies to buy goods or services or trade them to earn income.

Types of Cryptocurrencies

There are thousands of cryptocurrencies developed on different blockchain techniques available in the market. We can classify the cryptocurrencies in the following types:

1. Bitcoin

Bitcoin is the world’s first digital or virtual currency widely accepted across the world. At the starting of Bitcoin its value was very less and many people used them to buy Pizza or other items. But now it is most expensive cryptocurrency. Its all time high price is $68,000. But don’t worry you can also afford this currency because you need not to buy full Bitcoin, you can also buy a small fractions of Bitcoin.

2. Altcoins

Altcoin is a simple term used for any alternative cryptocurrency to Bitcoin. The most popular and second largest currency is Ethereum. Ethereum is the fastest growing Altcoin in the cryptocurrency market. Other Altcoins are Dogecoin, Shiba Inu, Solana, Polygon, Fantom, Shiba Inu etc.

3. Crypto Tokens

The concept of crypto tokens are totally different as crypto coins, some people may be confuse among both terms because they appear same. But there are many differences among tokens and coins. The major difference is coins can be mined but tokens cannot be mined. Coins are linked to the blockchains but tokens are not linked to blockchains.

Should You Invest In Cryptocurrency?

Many people thinks cryptocurrency investments are reasky whereas others thinks it is great thing to earn money. Although cryptocurrencies are highly volatile but smartly investing in right cryptocurrency could be rewarding for you. The simple approach for cryptocurrency investment can be buying assets at dip and selling at highs. You can also use cryptocurrency greed and fear index, when investors seems greedy then its time to sell your cryptos and when investors seems in fear then its good time to invest.

We are not encouraging you to invest in any cryptocurrency or this is not an investment advice. As crypto investments are highly volatile so be careful before investing in cryptocurrencies.