What Is Cryptocurrency And How Does It Work? – A Perfect Guide

Cryptocurrencies have been out there for entirely too long. Still, it’s only recently that a large number of the population has come to know about this term after all the digitalization. And my friend are you aware of What Is Cryptocurrency And How Does It Work?

What Is Cryptocurrency And How Does It Work

However, there is still some mystification and misunderstanding among the general population related to cryptos. This article on what is cryptocurrency and how does it work? It aims to give detailed information on cryptocurrency. Please read the full article to know about cryptos and their benefits.

What Is Cryptocurrency And How Does It Work?

Cryptocurrency is also called Crypto or Crypto-currency; it is a type of currency that exists digitally or virtually and operates on cryptography for secure transactions. However, cryptocurrencies don’t have any regulating authority; instead, it uses a decentralized system to register transactions and allocate new units.

So, we can say that it is a digital payment system that does not depend on any bank to authenticate transactions. Principally, it is a peer-to-peer system that entitles anyone and anywhere to send and receive payments digitally.

Despite carrying physical money around the world and exchanging it, cryptocurrency payments are purely digital and have entries to an online database describing the specific transactions. When you transfer any crypto, its transactions get recorded in a public ledger, and the cryptocurrency is stored in your digital wallets.

Are you also curious about how cryptocurrency got its name? Well, it is something that everyone wants to know. Cryptocurrency got its name because it employs encryptions to validate transactions. Thus, an advanced type of coding is implicated for storing and transmitting cryptocurrency data between your digital wallets and your public ledger.

The introductory cryptocurrency in the world was Bitcoin (What Is Bitcoin), which was discovered in 2009 and is still the best-known cryptocurrency today. Much of the engrossment in cryptocurrency is to trade it for profits and with venturers at times for driving the prices sky-high. Further, if you are interested, check out this How To Buy Bitcoin In India?

How Do Cryptocurrencies Work?

There are thousands of cryptocurrencies today and all with their unique traits. But, they all work in similar ways. It’s pretty difficult to avoid some lingos while discussing cryptos, but the whole concept is easy to understand.

Cryptocurrency uses blockchain technology. Now, what is it?

A blockchain is a digital record for all types of transactions regarding cryptos. The copies of the blockchain are stored and managed by computers worldwide. Blockchains are often collated into general ledgers; it is part of a traditional double-entry auditing system. Each transaction is escorted to debit and credit in separate sections of the record book.In short, it works like a regular ledger- very simple, right! So, if you have two digital coins and you send one coin to your friend, on the blockchain, it will show, “I’m sending one coin, and now you have one coin.”

In this way, each group of transactions is stored in a blockchain and is chained to the current ledger. And when a block is added, it can not be reversed or changed, which is why people often call blockchains immutable.

Moreover, some cryptos have blockchains. Bitcoin and Ethereum are the best cases in point of cryptos with their blockchains. And you will also find some cryptos built on top of already existing blockchain instead of starting from zero.

So, now you must have understood what cryptocurrency is like. To make it clear, cryptocurrency is different from fiat currencies, like US Dollar and Indian rupees, because they are not distributed or backed by the government.

Since blockchains are decentralized, it makes cryptocurrencies more secure. No company, person, or government controls a crypto blockchain. It works on a decentralized network of computers all over the world.

Now, who decides which transaction to be added to each block?

Crypto uses two mechanisms to create a trust system and affirms which transactions are valid and should be added to the blockchain. These mechanisms are-

  • Proof of Work

This leans on people all over the world. They are considered “miners” competing to be the first to solve the complex cryptographic puzzles, which adds the following block to the blockchain. The winners are paid when the other members of the same network confirm that the mentioned Amount of computing power was used to generate the solution.

  • Proof of Stake

This is a recent and less energy-intensive mechanism compared to the proof-of-work mechanism. In proof-of-stake, miners stake some of their currency to make sure they validate only valid transactions.

How Many Cryptocurrencies Are There And There Worth?

There are above 16,000 different cryptocurrencies that are traded publicly. And cryptocurrencies are prone to increase. Till January 3, 2022, the total value of crypto-currency was $2.2 trillion. And some of the largest trading cryptocurrencies are- Bitcoin, Ethereum, Tether, Binance Coin, Solana, Cardano, USD Coin, XRP, Terra, Polkadot.

People are investing in cryptocurrencies for several reasons. Some of the popular ones are-

  • People see cryptos like Bitcoin as the “future currency” and are racing to buy them now before they become more valuable.
  • Some also like the fact that cryptocurrency eliminates the central banks from managing the money supply since, over time, the banks tend to minimize the value of money through inflation.
  • Others also like the technology behind cryptocurrencies- blockchain, because it is a decentralized recording system and is more secure than conventional payment systems.
  • And some are in support of crypto because they are going up in value and have no interest in the currencies as accepted as a method to move money.

Are Cryptocurrencies Good For Investment?

The value of cryptocurrencies is indeed going up; however, many investors see them as mere speculation and not actual investments. Because, like the real currency, cryptocurrency can not generate cash flow, so for you to achieve profit, someone will have to pay extra for the money than you did.

And so, it’s often called “the greater fool” theory of investment. For those Who see cryptocurrency as the future, It should be noted that a currency needs stability, so all the merchants and consumers can determine a fair price of the goods.

The price volatility can create a puzzle. If bitcoins are more valuable in the future, people will not spend and circulate them today, thus making them less realistic as a currency. So, why spend on bitcoin when it could be five times the value next year.

So, for questions like should I buy cryptocurrency? The answer will be Crypto is speculative and a volatile buy. So stocks of established companies are less risky than investing in cryptocurrencies.

In the end, you should always protect yourself from frauds who see Crypto as an opportunity to sting investors. As always, buyers beware.

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