For the past 6 months, the word “cryptocurrency” has become a very generic term. But cryptocurrency is not just a virtual currency it is a technology in itself. The more you understand this technology, the more benefits you will get. If you learn the basics of cryptocurrency you can invest in it very smartly.
So, let me explain everything to you in the simplest language so that you can clear your every doubt related to how does cryptocurrency work? If you are someone who doesn’t know what is cryptocurrency? How does cryptocurrency work? Which is the best Cryptocurrency? What is Blockchain? Should you invest in crypto or not? Then here are the basics of cryptocurrency.
What is Cryptocurrency?
Cryptocurrency is a virtual currency based on blockchain technology. Cryptocurrencies are secured by cryptography which makes them completely secure and it is almost impossible to counterfeit.
If you are not from the technical background then you might find these words completely new. So, first, let me define these terms one by one, and then we will combine them to know more about the actual scenario.
What is blockchain?
Blockchain is a technology that collects information, it is designed in such a way that it is almost impossible to hack.
Basically, a blockchain is a ledger of transactions, whenever someone commits a transaction, a new block is added to the ledger. Once a block has been added to the chain, no one can change or replace it, which means that once a transaction has been made you cannot get a refund.
We’ll understand this in more depth in the How does cryptocurrency work session.
What is cryptography?
The goal of using cryptography is to make the system more secure. Cryptography uses public-private keys, digital signatures, and hashing together to form the foundation of the blockchain. The role of cryptography in a blockchain is to securely interconnect the blocks.
Now I hope you have got the basic definitions of Blockchain and Cryptography. Now let’s get back to the cryptocurrency. These definitions will help you to understand crypto more closely in this write-up.
How does cryptocurrency work?
Let’s take a real-life example: If you want to buy something you will need a middle man, for example, If you want a cab to go somewhere, you need Uber, Ola, etc. If you want to buy a product online you need a centralized party such as Amazon, Flipkart, etc.
If you want to send money to someone sitting in New Zealand, it will take a few days for the money to reach the receiver as there are some centralized parties involved in doing this transaction, which are the banks of both of you. The staff sitting in the bank approves your transaction and this process takes a lot of time.
Another simple example is let suppose you are in a mall and you made some purchases and at the time of payment, your credit card suddenly stopped working because your bank’s server is not working properly. In such a situation, it is the bank’s fault but you will be in trouble.
So the cryptocurrency just removes the centralized parties from the middle and makes it a peer-to-peer transaction. So when you want to send bitcoin or any cryptocurrency you can send it instantly without waiting for days and depending on centralized parties like banks.
This is a real-life example of how does cryptocurrency works in our daily life, but let me explain how it works technically? What happens in the back-end when you make a transaction in cryptocurrency?
How Does It Actually Work?
Before I share the actual working of a cryptocurrency let me define the three more terms that we are going to use here.
- Public Key
- Private Key
Each user has a public key and a private key. A public key is a string that is used to receive the amount, for example, if I have to send you 0.001BTC then I will need your public key, it works as an account number.
A private key is a string that works like a password that identifies a user and then the user can get access to his/her account or wallet.
Although blockchain is completely decentralized, it does not require a centralized party to work. But it needs someone to approve the transaction. So millions of computers are connected to the blockchain to confirm the transactions. These computers are known as Nodes.
These three definitions will help you to understand how does cryptocurrency work?
Now let’s suppose I have to send you 0.001 BTC, I will ask you to share your public key with me, and I’ll enter your public key in my account, and when I send the BTC, It needs to be approved by the nodes. So when the nodes confirm the transaction, a new block is added to the blockchain and the node will be rewarded with some transaction fee, which is known as Proof Of Work.
The transaction will only take place when the majority of the nodes agree that the transaction is valid.
Advantages And Disadvantages Of Cryptocurrency
Anything made by man has some advantages and disadvantages. Similarly crypto also has some advantages and disadvantages also. So let’s discuss them:
- Cryptocurrency has the power to give you a high return.
- You can immediately make a transaction in any corner of the world.
- Most secured payment experience.
- Low transaction fee for international transactions.
- You can face large losses.
- Involves black market activities.
- You cannot get a refund in crypto.
History Of Cryptocurrency
So we have learned about What is cryptocurrency? What is Blockchain? How does cryptocurrency work? Now, it is time to discuss something about the history of cryptocurrency and who invented it.
The world’s first cryptocurrency was Bitcoin. It was invented in 2009 by an individual or group of people known as Satoshi Nakamoto. Bitcoin is the world’s first cryptocurrency and it is still one of the most popular currencies in the world. We will discuss more bitcoin in any other article.
There are thousands of cryptocurrencies available in the market and some of them are made on the same technology that is used in the bitcoin and some of them are made with new technology. The one thing that is common between all the cryptocurrencies is that all of them are based on the blockchain.
Most people use crypto for trading purposes, buy goods and services, and it is also used to store a value like we used to store gold.
How to find the best cryptocurrency to invest
You may have a question: Is crypto a good option as an investment? Well Yes, It can be a good option as an investment if you diversify your portfolio. Never invest all of your money in crypto. Just invest some amount in crypto, some in stocks, some in NFTs, etc.
If you diversify your portfolio smartly it won’t go down overall. And one more thing to note is that crypto is not a trading game it is a long-run game. If you choose wisely you will be profitable in long run. So let me tell you how to choose the best cryptocurrency to invest in.
As I have explained in this write-up that cryptocurrency is based on blockchain technology. Every cryptocurrency is based on a different type of technology. The use of their technology is different from the other.
So you have to understand the technology behind the crypto that you are going to invest in. For example, the use cases of bitcoin technology are as follows:
- Cross-border payments
- Real-time IoT operating systems
- Secure sharing of medical data
- NFT marketplaces
- Music royalties tracking
- Personal identity security
Similarly, each of the cryptos has its own applications, so all you have to do is just research about the technology behind the crypto and look at the history of that crypto and if you think it will be in profit in long run, Go for it.
Some Popular Cryptocurrencies
We can see that crypto is booming a lot for the past 6 months and daily new cryptocurrencies are introduced. Some of the popular cryptocurrencies are here.
- Ripple XRP
Platform From Where You Can Invest In Cryptocurrency
There are many online platforms available on the internet, you can use any popular one of them. But I personally recommended CoinSwitch, because it is very easy to use, it has no fee to join, and It is trusted. You can download the CoinSwitch App by clicking here. On signup, you will get Rs 50 worth of bitcoin.
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Using cryptocurrency can be the best decision for your financial life but only if you use it by understanding its fundamentals. There are many people who have different opinions about it. Never invest your all money in crypto, never invest all the money in any particular crypto. Try to diversify your portfolio. If you are reading till here, I hope you have learned the basics of cryptocurrency.
What is a cryptocurrency and how does it work?
Cryptocurrency is a virtual currency or a digital payment system based on blockchain technology. The cryptocurrency just removes the centralized parties from the middle and makes it a peer-to-peer transaction. So when you want to send bitcoin or any cryptocurrency you can send it instantly without waiting for days and depending on centralized parties like banks. To know more details read the complete write-up.
What is the cryptocurrency used for?
Cryptocurrency is a virtual currency or a digital payment system used to buy and sell goods and services.
How does crypto earn?
You can earn Cryptocurrency simply by investing in one or more Crypto Coins.