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Cryptocurrency: What it is and How it works

A cryptocurrency is an encrypted data string that denotes a unit of currency. A peer-to-peer network called Blockchain, which also serves as a secure ledger of a transaction, for example, buying, selling, and transferring, monitors and organizes it.


Unlike physical money, cryptocurrency is decentralised, which means governments or other financial institutions do not issue them. Cryptocurrencies are created and secured through cryptographic algorithms that are maintained and confirmed in a process called mining, where a network of computers or specialized hardware, such as application-specific integrated circuits (ASICs), processes and validates the deal. The process incentivises the minors who run the network with the cryptocurrency, such as Bitcoin, Ether, Litecoin, Monero, etc. are popular cryptocurrencies.


Cryptocurrency received its name because it uses encryption to verify transactions. This means advanced coding, storing, and transmitting data between wallets and to the public ledger. The aim is to provide security and safety.


The first cryptocurrency was Bitcoin, founded in 2009 and remains the best-known cryptocurrency today. Much of the interest in cryptocurrencies is to trade for a profit with the speculators driving prices skyward.


How It Works


Cryptocurrencies run on a distributed public ledger called blockchain, a record of all negotiations updated and held by currency holders. They create units of cryptocurrencies through mining, which involves using computer power to solve complicated mathematical problems that generate coins. Users can also buy the currencies from brokers, then store and spend them using cryptographic wallets.


If you own a cryptocurrency, you own nothing tangible. What you own is a key that allows you to move a record or a unit of measure from one person to another without a trusted third party.


Although Bitcoin has been around since 2009, cryptocurrencies and the application of blockchain technologies are still emerging in financial terms, and we expect more users in the future. Transactions, including bonds, stocks, and other financial assets, could be traded using this technology.


Cryptocurrency examples


There are thousands of cryptocurrencies. Some of the best known are:


1. Bitcoin


Founded in 2009, Bitcoin was the first cryptocurrency, and still is the most commonly traded one. The currency was developed by Satoshi Nakamoto and is believed to be a pseudonym for an individual or group of people whose precise identity remains unknown.


2. Ethereum


Developed in 2015, Ethereum is a blockchain platform with its cryptocurrency called ether (ETH) or Ethereum. It is the most popular cryptocurrency after Bitcoin.


3. Litecoin


This cryptocurrency is more similar to Bitcoin, but has moved to develop innovations, including faster payments and processes to allow more settlements.


4. Ripple


It is a distributed ledger system that was founded in 2012. Ripple can track different transactions, not just cryptocurrencies. The company behind it has worked with various banks and financial institutions.


Non-bitcoin cryptocurrencies are known as ‘altcoins’ to distinguish them from the original.


How to buy Cryptocurrency  


One may wonder how to buy cryptocurrency. There are three steps involved:


1) Choosing a Platform


The first step is deciding which platform to use. You can choose between a traditional broker or a dedicated cryptocurrency exchange.


·       Traditional Broker


These are online brokers who offer ways to buy and sell cryptocurrency, as well as other financial assets, like stalks, bonds, and (EFTs). These mediums offer lower trading costs but fewer crypto features.


·       Cryptocurrency exchanges


There are many exchanges to choose from. Each offers different cryptocurrencies, wallet storage, interest-bearing account options, and more. Many exchanges charge asset-based fees. While choosing among platforms, one must enquire what are all the cryptocurrencies available and what fees they charge, their safety properties, storage and withdrawal options, and any educational resources.


2) Funding your account


Once you have chosen your forum, the next step is funding your account so that you can trade. Most crypto exchanges allow users to purchase crypto using fiat, i.e. (government-issued) currencies such as US dollars, British pounds, or the Euro using a debit or credit card. The important thing to consider while buying is the fees, which include potential deposit and withdrawal fees plus trading fees.


3) Placing an Order


You can place an order via your broker or exchanges web or your mobile platform. There are other ways to invest in crypto through PayPal and the cash app. There are the following investment vehicles.


·       Bitcoin trust


·       Bitcoin mutual funds


·       Blockchain stocks or ETF


How to Store Cryptocurrency


Once you have purchased, you need to store it safely to protect it from hackers or theft. There are different wallet providers. The terms ‘hot wallet’ and ‘cold wallet’ are used.


Hot Wallet Storage


It refers to crypto storage that uses online software to protect the private keys to your assets.


Cold Wallet Storage


Unlike hot wallets, cold wallets (known as hardware wallets) rely on offline electronic devices to securely store your private keys.


Although cryptocurrency is gaining popularity in recent times, still hackers have access to doing malpractices. So stringent protection properties must be provided and every government should make it safe and accountable to the users without much restriction and the users’ privacy must be safeguarded without much taxation. 


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