Cryptocurrency is a new, modern currency that operates largely on the internet and without any central authority determining its value. Central banks usually set the value of the regular currency. This is not the case with cryptocurrency. In addition to its decentralization (no interference from banks), it is not a physical currency and is entirely digital.
Cryptocurrency has become popular since 2009 when Bitcoin was invented. Bitcoin is now the world’s biggest and most valuable cryptocurrency. Since cryptocurrency does not operate like regular currency, what rules it? How does cryptocurrency work? Who sets its value? This article explains how cryptocurrency does work.
Cryptocurrency and The Blockchain
Unlike regular currency which is controlled or supervised by the government or some other central body, cryptocurrency is based on a technology called the blockchain. The blockchain is simply an online ledger made up of connected data sets or blocks.
The blockchain holds the transaction records of cryptocurrency. Every new transaction is added to a block which is then added to the chain. This blockchain is publicly accessible and despite containing every transaction history, does not contain users’ personal information. Thus, making it very secure.
Also, the blockchain lives on multiple computers in a network and each computer has to verify the data before it is added to the blockchain. The blockchain is made secure, especially from unauthorized sources by encryption with a method known as cryptography.
New cryptocurrency is made with a process called mining. Miners have to solve complex mathematical puzzles using very powerful computers. Each puzzle is unique and the network validates the transaction once the puzzle is solved.
Anyone who solves a puzzle gets the right to add to the blockchain and gets Bitcoins as well. It was once possible to solve these puzzles at home and mine bitcoin from a PC. However, the difficulty level of these equations has increased and can now only be done with special equipment that can provide the computing power needed.
There are a plethora of platforms or exchanges where users can buy or sell cryptocurrency. Some common ones include Coinbase, Binance, and Kraken. Cryptocurrency is usually stored in a digital wallet which is kind of like a bank account for crypto. There are 2 types of crypto wallets: Hot and Cold.
A Hot wallet is always connected to the internet and provides easy access to making transactions. However, its constant connection to the internet makes it more exposed to cyber criminals. A cold wallet, however, is not connected to the internet and is stored offline. This makes it more secure, but harder to transact with.
Cryptocurrency has come a long way from its introduction to the world. While it is still not an accepted payment method in every part of the world, its reach has grown considerably. Many retail stores online now accept crypto as payment. Big brands and even governments have shown interest in integrating it into their current systems. Investors continue to pour in money which shows how much potential it holds.
Despite the fluctuations in crypto prices, many people are getting into it as a means to make money. There are, however, a lot of risks involved when it comes to trading with cryptocurrency. There are also plenty of advantages and is worth pursuing after making the necessary research. If you are looking to go into cryptocurrency, it is important to know how it works, as has been the aim of this article.