What is Cryptocurrency and how does it work? That’s what I’ll discuss in this article. It’s a basic article (why else would you be reading it, eh?) and hence I’ll keep things simple.
Keep reading if you’re very new to the crypto world.
We will see how all of it works and how you can get started with Cryptocurrencies in the next few seconds.
Let’s get started then.
Table of Contents
What is Cryptocurrency?
Cryptocurrency, in the simplest of words, is a digital currency. It’s created and stays on the internet. Bitcoin was the first Cryptocurrency but today over 9000 cryptocurrencies exist.
Its primary purpose is to facilitate payments. Although, depending on the exact Cryptocurrency, other benefits may entail such as investments, storage, anonymity and so on.
You can not use Cryptocurrencies without the internet (except in a few very rare situations).
There are thousands of Cryptocurrencies today, although it all started with Bitcoin back in 2009.
Today, Cryptocurrencies have entered the mainstream market with countries declaring them a legal tender (e.g. El Salvador) and world’s leading companies accepting them for payments (e.g. Tesla, AirBaltic, Adidas etc).
As you read more on this piece, the idea of Cryptocurrencies will become clearer to you.
How are Cryptocurrencies created/manufactured?
The first question you may be asking is, how do Cryptocurrencies even come to exist. How are they born/manufactured/created?
So, normal (fiat/physical) currencies we use are “printed” in a mint, aren’t they?
Similarly, Cryptocurrencies are printed (created) using computers. They’re generally created by solving super complex mathematical puzzles using specifically designed software and hardware.
Almost anyone can start mining Cryptocurrencies with the right software and computing power.
The exact amount of Cryptocurrency that we can mine in a given time-frame is dependent on the exact Cryptocurrency.
E.g. Bitcoin is limited to 21 million coins. This means, the maximum number of Bitcoins that can ever be created is set at 21 millions. While some other popular coins such as Dogecoin or Ripple do not have a maximum cap, or are unlimited.
Why do Cryptocurrencies exist?
Bitcoin, the first ever Cryptocurrency, has very specific reasons to exist. Since then, many Cryptocurrencies have come up with their own reasons that may or may not be the same as Bitcoin.
So, Bitcoin (or the first Crypto) was primarily created to facilitate the following:
- New financial system and payment mode: Just in the backdrop of the 2008 financial crisis, Satoshi Nakamoto (Bitcoin’s creator) figured we needed a better mode of payment and transactions rather than the normal money/currency we were using.
- Decentralization: Before Bitcoin (or Cryptocurrency), the only way you could pay someone that was accepted globally and on a large scale was through a bank. It could be any currency from any country but it was controlled by some bank or government. Bitcoin is decentralised. It’s not controlled by any one person or group and hence no one can independently destabilise the Cryptocurrency or in some cases control your funds without your permission, not even governments and banks.
- Transparency: Bitcoin (and most other Cryptocurrencies) are extremely transparent. This increases honesty and trust in the system. I’ve explained this transparency in the next section.
While most Cryptocurrencies have a similar goal alike Bitcoin, sometimes they may have additional, or entirely different goals.
- Investments: This actually is why most of the world uses Cryptocurrencies. Cryptocurrencies have had arguably the biggest ever returns on investments on the planet. Sometimes, companies and startups issue their own cryptocurrencies as proof of ownership, just like stocks.
- Trading: While cryptocurrencies aren’t “created” with this goal, it’s just another side of the “investment” coin, isn’t it? Some people buy and sell Cryptocurrencies in a shorter time-frame. This is what Cryptocurrency trading is and is basically like investing but with a quicker exit (and potential re-entry). Platforms like bitcoin-motion.software are a good place to start your Bitcoin trading journey.
- Other reasons: Dogecoin, one of the most popular coins on the planet today was actually created to “mock” Cryptocurrencies! UET was created with the goal to see if people will invest in a coin that “has no purpose or use case”.
How do Cryptocurrencies work?
First, a Cryptocurrency is “mined”. Once mined, the Cryptocurrency is added to a “Blockchain”. Imagine the Blockchain to be a ledger/notebook/record that’s public. Anyone can access this notebook and analyse the transactions.
This means, every coin sent from point A to B and then from B to X or any other point is recorded and displayed on this public Blockchain.
Do note that “transparent” doesn’t mean “without privacy”. Hence, while points or origins and destinations can be verified on the Blockchain, the exact parties involved in the transactions are generally hidden. In fact, coins like Monero exist primarily to make sure the involved parties can’t be traced.
Now, anyone who has any Cryptocurrency can send their Crypto to someone else to purchase an item or pay for a service (of course it also can simply be a gift).
You can also hold Cryptocurrencies in your wallets (explained next) for their future value.
Where are Cryptocurrencies stored?
Cryptocurrencies are stored in “wallets”. These are digital wallets and come in many different types. It’s basically like any other account you have online that has funds in it, e.g. PayPal.
- Online wallets: The simplest wallets are online wallets. These are basically “websites” that let you deposit your Cryptocurrency and hold it for you. These are the simplest but not the safest options.
- Software wallets: These are software you can download on your devices. These are more secure than online wallets.
- Hardware wallets: These are the most secure form of Crypto wallets. These generally look and function like a USB stick. You insert the stick to interact with your funds. Without the stick, the funds can’t be accessed. These are also called “cold storage” options because no one can “hack” your funds as they sit in the USB stick most of the time, away from the internet so there’s no connection or route for them to be hacked. (Do note there are still ways that may allow the funds to be hacked).
How can I get Cryptocurrencies?
There are several ways you can get Cryptocurrencies.
- Buy using fiat modes on exchanges: There are many exchanges that let you buy Cryptocurrencies using your credit/debit cards or other forms of payment.
- P2P: P2P stands for “person to person” exchange. You can find P2P on many established exchanges and then contact the other person. They’d transfer cryptocurrencies to you. The mode of payment is decided in advance. It’s better than directly buying off exchanges as more payment modes are supported and it’s generally more private. It’s less secure though.
- Earn some: Some sites offer Cryptocurrencies for completing surveys, streaming, playing games or doing a bunch of other activities.
Final words
I’m pretty sure you’ve got a decent idea what cryptocurrencies are and how they work, haven’t you?
Do note that I’ve avoided a lot of technicalities that revolve around Cryptocurrencies. That’s because I’ve compiled this as a basic, beginner-friendly piece.
All in all, once your basic concept of Cryptocurrencies gets clear, you can research more and get started with cryptocurrencies on your own.