How Does Cryptocurrency Works? [Answered]

How Does Cryptocurrency Works

Cryptocurrency has been all the talk lately. From the general public to tech bloggers, everybody seems to know about it. So, what excertly is cryptocurrency, how does cryptocurrency works and why is it so popular?

In this article, we explained what cryptocurrency is and how cryptocurrency works; we also looked at other parts of a cryptocurrency, such as — Blockchain, Crypto mining, and wallets.

How does cryptocurrency works?

Cryptcurrency uses cryptography to secure its transactions and to control the creation of new units. More so, cryptocurrencies are decentralized, meaning they are not subject to government or financial institution control.

Here three main feature that makes cryptocurrency attractive:

  • Transactions are quick – usually processed within minutes.
  • Everyone participating in every given transaction is anonymous, meaning no personal information is shared.
  • Transaction in cryptocurrency blockchain are irreversible—no chargeback’s.
  • Lastly, the technology behind cryptocurrency is buildt upon the principle of decentralization, which means no central authority controls what happens with the blockchain.

Although, cryptocurrencies are good investment opportunity, they are not without risk. Because of market volatility, it is possible to lose your entire fund in a split second, so before you invest in any crypto project, be sure you know what you are doing.

As at the time of this writing, there are over 18,000 cryptocurrencies in existence today. While most people think of Bitcoin when they hear the term “cryptocurrency,” other popular examples include Ethereum (ETH), Ripple (XRP) and Litecoin (LTC) also exist.

Modern use case for cryptocurrencies include trading on decentralized exchanges or centralize exchanges, making electronic payments for the purchase of goods/services, and transferring funds without any need for third-party services. In other to grasp how cryptocurrency works, we look at the following:

What is Blockchain?

Blockchain is the underlying technology that powers cryptocurrencies. And it is a shared ledger where all transactions are recorded in perpetuity for anyone to view.

Each successful transaction in a blockchain is then encrypted in the block with a cryptographic code so it cannot be tampered with or added to whilst creating the next block.

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In a simple term, blockchain is a system of recording information in a way that makes it extremely hard or impossible to change, hack, or cheat the system.

In blockchain, transactions are duplicated and distributed across the entire network through the help of computer programs known as nodes each node validating transaction has a copy and any contrary copy of the same tranaction are usually rejected by the majority nodes.

For instance— Bitcoin nodes usese blockchain to differentiate legitimate transactions in bitcoin network; this process forestalls any attempts to re-spend coins that have already been spent elsewhere.

What is crypto mining?

When you hear people talk about cryptocurrency mining, they simply mean the competitive process that is used to verify transactions, thereby making new currency available to use. This happens all of the time on the blockchain.

A miner uses their computer [connected to the network via node] to run a series of mathematical tasks in order to generate new blocks which are recorded in the network as a new currency.

This process can be an avenue for users to earn more coins for providing services to the network. Coins like Bitcoin, requires tremendous amount of computational power to mining a single block.

What is a crypto wallet?

A crypto wallet is a software program or physical device that allows you to store your crypto and allow for exchanging, sending and receiving of crypto assets.

A crypto wallet is like a bank account but instead of your money being stored in a bank, it is stored in your wallet. These wallet works the same way as a traditional wallet, and with your private key, you can easily access your fund which is stored in the wallet.

Note—most crypto wallet allows you to hold multiple types of cryptocurrencies in the same wallet; this type of wallet is known as a multi-currency wallet. A good example of such wallet is trust wallet.

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What are the key features of cryptocurrency?

The main features of cryptocurrencies are:

No centralized authority

The first key feature of cryptocurrencies is that they are generally decentralized. This means that even though these cryptocurrencies maybe created by private individuals, they do not have central control over the coin or token, in most case the community of users decide how the project proceeds further.

Open-source

Cryptocurrencies are open source; this means that the source code of a particular cryptocurrency are public anyone who is intrsted to see the souce code can access it.

Peer-to-peer

Transactions within cryptocurrency network occur between two people or entities without an intermediary —such as banks or payment processor.

Anonymous

Cryptocurrency transactions are processed anonymously; therefore, users can transact freely without revealing their true identities.

Any transaction made in Bitcoin or other altcoins are recorded on the blockchain and the identities of the participating wallets are encrypted within each block of the chain. Hence, it is practically hard to trace the sender or receiver of a payment that was executed in the blockchain.

Security

Cryptocurrencies uses cryptography to secure transactions— When you initiate a transaction, the network encrypts the transaction so that it cannot be traced.

Also, the wallet where your transaction is coming from is encrypted, and only you have access to your wallet unless you compromised the security of your wallet.

Irreversible

A blockchain transaction is irreversible; this implies that once a transaction is initiated in the network it cannot be undone.

What are the benefits of using cryptocurrency?

There are several different benefits of using cryptocurrency, and they are quite attractive to people for different reasons.

Some people may decide to use cryptocurrencies because of the technology behind it, while others may be more interested in the investment opportunities or the financial freedom that cryptocurrencies can provide.

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Beside this few, there are other benefits which include:

  1. With cryptocurrency you acn send money anywhere in the world.
  2. Cryptocurrency provides you some of the best investment opportunity.
  3. The use of blockchain technology makes cryptocurrencies safer than the outdated financial system.
  4. Another benefit of using cryptocurrency is the availability of making more money with less stress.
  5. Cryptocurrency is convenient and easy to use.
  6. You don’t have to carry cash around with you when you use cryptocurrency.

What is the future of cryptocurrency?

Cryptocurrencies are flying high. Bitcoin and Ethereum skyrocketed by more than 1,000% in 2021 and continue to break records, with more projects and products being developed, the future is definitely bright.

How to get started with cryptocurrency?

There are many ways to get started with cryptocurrency, though the most accessible method for beginners is likely to be a centralized exchange.

These exchanges act as a third party, overseeing transactions so as to give customers confidence that they are getting what they pay for.

These exchanges —such as Binance, typically sell crypto at market rates, and you can pay with your credit cards after signing up, though you will need some level of identity verification in other to increase your withdrawal limit, the sign up process is simple and straight forward. If you are willing to start investing in bitcoin and other alternative coins, sign up here.

Bottom line

Cryptocurrency is sometimes referred to as digital currency, a decentralized currency, or virtual money. It is also known as crypto-currency.

I hope this article helped you get an understanding of how a cryptocurrency works. You may not be completely knowledgeable about them yet, but with time you will, especially when you keep reading more on this subject.

If  you are intrested in learning more about bitcoin and other cryptocurrencies, check out our other article ” cryptocurrency for beginners.

Useful Resource:

Guru99:Blockchain Tutorial

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