Currency

How Does Cryptocurrency Work?

Unless you live under the rock, you must have heard about Bitcoin and other cryptocurrencies. However, not everyone truly knows what they are. Cryptocurrencies are digital currencies you can use to buy goods and services but work only online. There are lots of them, and this type of currency works in a completely different way compared to your traditional currency.

If you are new to the cryptocurrency world and perhaps wish to invest in it, this post has put together important things you need to know about cryptocurrency. You will know what they are and how they work. So if you are ready to learn some pretty amazing stuff, keep reading.

What Is Cryptocurrency?

A cryptocurrency is a form of currency that exists only on computers. So they are often referred to as digital currencies. It can be transferred between peers without the need for any middleman like a bank, and it can be used as a payment that can be exchanged online for goods and services. Many companies have issued their own currencies, often called tokens, and these can be traded specifically for the goods and services offered by the company. Think of them as you would casino chips or arcade tokens.

Transactions made in crypto are recorded on a digital public ledger called blockchain, and the transaction ledger and data are encrypted using cryptography. That is why the currency is called cryptocurrency, and that’s what gives it its security too.

Cryptocurrencies are decentralized, meaning they are not controlled by any central government like our traditional currencies but are instead controlled by users and computer algorithms. Bitcoin is the first and most popular cryptocurrency, but there are many more with their unique, specific names. However, any other cryptocurrency aside from Bitcoin is generally referred to as an altcoin (alternative coin).

How Does Cryptocurrency Work?

Cryptocurrency transactions are made between peers using software called “cryptocurrency wallets.” These wallets are also where cryptocurrencies are safely stored. The person making the transaction will have to transfer balances from his account or wallet to another. To transfer funds, knowledge of a password (a private key) associated with the account is needed.

Transactions made between peers are encrypted and then broadcast to the cryptocurrency’s network and queued to be added to the public ledger. The process of adding and recording these transactions to the public ledger is called mining. When the transaction is added to the public ledger, all users of a given cryptocurrency have access to the ledger if they choose to access it.

However, the person who sent the transaction is encrypted. Meaning while the amount involved in the transaction will be made public, the person who made the transaction will be made anonymous. Many transactions are added to the ledger at once. These “blocks” of transactions are added sequentially by miners. That is where the ledger and the technology got its name, “block chain”. It is a “chain” or “block” of transactions.

What Is Cryptocurrency Mining?

Like we earlier said, transactions are recorded and added to the public ledger by some people. These people are called miners, and they use certain software and hardware aimed at confirming transactions to the digital ledger to carry out the operation, which is known as cryptocurrency mining. The miners are then rewarded for their hard work with coins.

How Many Cryptocurrencies Are There? What Are They Worth?

Presently, there are more than 10,000 different cryptocurrencies that are traded publicly, according to CoinMarketCap.com. But every time, new cryptocurrencies are being added to the market. As of May 27, 2021, the total value of all cryptocurrencies was more than $1.7 trillion – down from April high of $2.2 trillion.

However, the total value of Bitcoin, which is the most popular cryptocurrency at the moment, was pegged at about $735 billion – down from April high of $1.2 trillion.

Why Are Cryptocurrencies So Popular?

There are different reasons cryptocurrencies appeal to their supporters. For some, it is because of the security it offers, while some people like it because it removes middlemen from transactions and helps them enjoy low-fee transactions. Nevertheless, below are some reasons cryptocurrency has become so popular.

  • Some supporters see cryptos such as Bitcoin as the currency of the future, and see it increase in value in the years to come. For that reason, they are always racing to buy it.
  • Some people see it as a golden way to store wealth because they are regularly going up in value.
  • Many people stick with cryptocurrencies because they remove central banks from managing the supply of money. So they are immune to any form of inflation.
  • Some simply like the technology behind cryptocurrencies. Blockchain technology provides a highly decentralized system of processing and recording transactions compared to the traditional payment systems, which also makes them more secure.
  • Some people are attracted to the quick transaction nature of the system. Compared to international money transfers that could take days to be completed, cryptocurrency can be moved across the globe in a matter of minutes.

Best Cryptocurrency by Market Capitalization

Based on market capitalization as tracked by CoinMarketCap, a cryptocurrency data and analytics provider, here are the top 10 largest trading cryptocurrencies.

  • Bitcoin with a market cap of $735.3 billion
  • Ethereum with a market cap of $324.2 billion
  • Tether with a market cap of $61 billion
  • Binance Coin with a market cap of $57.5 billion
  • Cardano with a market cap of $54.6 billion
  • XRP with a market cap of $46.5 billion
  • Dogecoin with a market cap of $44 billion
  • Polkadot with a market cap of $22.1 billion
  • USD Coin with a market cap of $21.9 billion
  • Internet Computer with a market cap of $16.7 billion

How Do I Buy Cryptocurrency?

To buy cryptocurrencies, you will need to have a wallet. That is a digital app that also acts as a safe for storing your cryptos. Getting a wallet is not difficult, and there are a couple of them to choose from.

After getting your wallet, you will need to create an account on an exchange where you can transfer real money to buy cryptocurrencies such as Bitcoin, Ethereum, Cardano, XRP, and many more.

Some popular exchanges you can use include Coinbase and Binance.US. Coinbase allows you to create both a wallet and buy and sell your cryptos on the platform. Also, there is a growing number of online brokers that can make the process of buying cryptocurrencies easy for you. Some of them are AnyCoin Direct, eToro, Robinhood, etc.

But of all of them, AnyCoin Direct comes highly recommended. They offer swift transactions and allows you to use a wide range of payment methods to buy your cryptos. The platform is intuitive and straightforward. You can buy your Bitcoin or other cryptocurrencies there quickly and safely.

Are Cryptocurrencies Legal?

Yes, cryptocurrencies are legal in most parts of the world. If you stay in the U.S, there is no question that they are legal. But in some places like China, cryptocurrency has been banned. So whether cryptos are legal or not depends on each individual country. However, when buying or trading with cryptocurrencies, always be take preventive measures so you don’t fall victim to fraudsters.

What Are The Risks Of Investing In Cryptocurrency?

#1: Cryptos are unregulated by any government

Because crypto and its marketplaces are private and unregulated, the chances of abuse are also high. For instance, in 2014, Tokyo-based Bitcoin exchange platform MT. Gox was hacked, causing the platform to lose more than 700,000 BTC.

#2: It doesn’t exist physically

Cryptocurrencies are not tangible assets like gold or other commodities. Unlike a stock or bond, it doesn’t represent a piece of a company. It is not printed or minted like other currencies too. Apart from their trading value, cryptos have no fundamental value, which also makes them highly speculative.

#3: It is highly volatile

Every time, the price of cryptos changes. Sometimes, it can plunge or climb by hundreds of dollars in hours. For instance, in 2013, BTC plunged from $1,000 to $300 per unit. And in November 2020, BTC crashed to $3,000, then climbed again to a new all-time high of $23,770 in December.

A post by Kidal D. (5015 Posts)

Kidal D. is author at LeraBlog. The author's views are entirely their own and may not reflect the views and opinions of LeraBlog staff.

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