What is cryptocurrency and how does it work?

The global economy is undergoing a seismic shift, with digital cryptocurrencies overcoming the limitations and inefficiency of government-issued fiat currencies. The cryptocurrency revolution is poised to bring full economic fairness to everyone, with full access to financial tools currently only available to investment bankers and their wealthy clients.

The new world of cryptocurrencies was born in the computer world, with algorithms and data structures complicated enough to baffle all but the most advanced software engineers. But today, cryptocurrencies are accessible to everyone.

What is Cryptocurrency?
What is Crypto? It depends on who you ask. Ask a software engineer to define cryptocurrency and you will hear about algorithms and data structures. Ask the same question (“what are cryptocurrencies?”) of bankers and government regulators, and they will describe a populist movement that requires a cautious response. And for millions of investors, the answer to “what is cryptocurrency?” is quite simply: an opportunity to secure their future and that of their family.

What is Cryptocurrency? It’s a technology, an investment opportunity, and a whole new way of looking at money. When people say “crypto,” the meaning depends on who they are and how they see it.

Any definition of cryptocurrency must include a bit of history, an overview of technology, and a study of market opportunities. This is what we offer you here: Cryptocurrencies for beginners, an overview of the current world of cryptocurrencies and the future it promises.

What does crypto mean? Let’s discover it together.

How does cryptocurrency work?
The “crypto” part of the word “cryptocurrency” refers to the encryption that is provided on all modern digital currencies. Cryptocurrencies like Bitcoin and Dogecoin have value because people pay to buy them. The cryptocurrency can then be exchanged for goods, services or government-issued currencies, such as the euro.

Most people acquire cryptocurrencies by buying coins and tokens online on exchanges or by selling something and accepting cryptocurrencies as payment. Some earn coins by using their computer to validate transactions on the blockchain. Completing these calculations is rewarded with newly minted coins in a process called “mining”.

When Satoshi Nakamoto created Bitcoin, the source code specified an arbitrary limit to the total number of Bitcoins that could be minted – approximately 21 million. At the start of 2021, there were only around 2.4 million bitcoins left to create and put into circulation.

what is cryptocurrency and how does it work?
Introductions to cryptocurrencies always include the word “blockchain”. A blockchain is a distributed database that tracks cryptocurrency transactions. Although blockchains and cryptocurrencies have been linked from the very beginning, they are different. The blockchain architecture can be used for many purposes other than virtual currency, and digital currencies do not need to be implemented on blockchains. However, current cryptocurrencies are based on blockchains because the blockchain architecture offers unique technical advantages. Every digital currency currently traded is a blockchain cryptocurrency.

Coins and tokens
We tend to use the terms “coin” and “token” interchangeably when referring to cryptocurrency units, but they are different.

A coin is the native currency of a blockchain. For example, Ether is the currency of the Ethereum blockchain. Cryptocurrencies include Bitcoin, Ripple, Ethereum, Dogecoin, NEO, and Litecoin.

Tokens are coins that are built on top of another blockchain. Dozens of tokens have been built on the Ethereum blockchain, for example, Enjin Coin, SAND, Radix, and Lotto.

An important difference between coins and tokens is that the gas – essentially the “tax” on crypto transactions – usually has to be paid using the blockchain’s native currency. So, if you use SAND, Radix or Lotto, the blockchain transaction fees will be paid in Ether. The conversion and payment may happen automatically in the background, or you may need to keep some Ether in your wallet, depending on the token you’re working with and the app you’re using.

Is Crypto Safe?

té gives the impression that crypto investors are regularly victims of scams and hacks.

Some of these losses occurred years ago on cryptocurrency exchanges that did not apply modern security measures to the money they held for customers.

Others are due to software bugs in particular applications, including DeFi applications.

what is cryptocurrency and how does it work?
Image source: QuoteInspector.com, License: CC BY-ND 4.0

Despite these losses that have attracted media attention, crypto technology is actually very safe. Blockchains provide immutable records of transactions, and as long as no one accesses your account, your crypto funds are safe.

The future of cryptocurrencies
Cryptocurrencies have the potential to be a populist alternative to the banking system’s monopoly on financial markets and investments. It could bring over a million unbanked people into the global economy, allowing everyone to benefit from their contributions.

Governments, banks, and investment firms are currently experimenting with responses to the growth of cryptocurrencies. Some view crypto as a threat, while others see it as a technology that can co-exist alongside mainstream financial tools. Some countries encourage the use of cryptocurrencies, while others discourage it. Regulations change frequently. As an investor, you need to factor these changes into your calculations.

Follow cryptocurrency news at Kriptomat, your online source for relevant information on the latest happenings in crypto news.

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