How Do Cryptocurrencies Work?

By Mithun Girishan |

Published: February 09, 2021

How Do Cryptocurrencies Work?

Tags: , , ,

The new buzz word in the financial market is ‘cryptocurrency’ – or crypto. It’s taking the world by storm. 

You’ll probably hear people mentioning cryptos in everyday life, friends, family, or your hairdresser. But what exactly is a cryptocurrency? 

Cryptocurrency – the facts and the myths

A cryptocurrency is a medium of exchange that’s used to carry out a digital financial transaction. It’s a virtual currency that’s bought and sold online. Cryptocurrencies are independent of any control by a central authority – that’s why it’s a decentralized currency. 

Cryptocurrency uses cryptography for security. Cryptography is converting information into uncrackable mathematical codes, making it very difficult to create counterfeits.

Cryptocurrency golden bitcoin coin. Conceptual image for crypto currency, toned

A cryptocurrency is many things, but here are a few things it’s not: 

  • It isn’t legal tender in every country.
  • It isn’t a physical currency – it only exists digitally.
  • It isn’t a commodity like gold or silver, so it doesn’t abide by the demand and supply laws.
  • It has no intrinsic value, so you can’t trade it for another commodity.

How do cryptos work?

Cryptos don’t contain actual currencies, bills, or coins, they aren’t based on another asset like gold or silver, and they don’t go through financial institutions like banks. How do they work?

Cryptos use blockchain technology. A blockchain is a vast global ledger. Crypto is an entry that’s made in this global ledger. The blockchain records every bit of crypto transaction that happens in the world. Once registered, it can’t be deleted or modified, and everyone in the world can see the entry.

Cryptocurrencies can only exist on blockchains, not in anyone’s hand or account. There are two types of keys – public and private keys – that are available for users to access their cryptocurrencies. These keys are kept in online or offline wallets. The cryptocurrency belongs to the person who has the private keys to it.

There are still many who aren’t very confident about using cryptos. This is mainly due to the large number of scams that happen – around 2000 scams are reported. 

Just like in any other field, a surge in popularity resulted in fraudsters entering the market. They started offering unrealistic and wild promises that mainly attracted inexperienced investors who lacked crypto knowledge. If you exercise caution and due diligence, you’ll be able to spot a scam. Even crypto is not immune to scams, so you have to be as cautious as you are with any other investment.

Cryptocurrencies – disrupting existing conventions

Cryptocurrencies are used in almost 100 countries now, and the number is rising. It’s safe to say that pretty soon, the conventional method of doing business is going to get disrupted by this innovative concept.

Now that you understand cryptos, better take the critical next step – try them out. Buy a small number of cryptocurrencies to start with – to get the feel of it and experience the pros and cons. Welcome to the fantastic world of cryptocurrencies!