Cryptocurrency explained - what is this and how does it work?

Cryptocurrency explained - what is this and how does it work?

Thanks to the boom that caused it to skyrocket in such a short time frame, many people are hearing about cryptocurrency for the first time. If you’re one of those people then you’re likely confused but fascinated by the whole thing just like everyone else.

However, cryptocurrency is a lot to take in for a newbie. There are so many new terms to learn and processes to understand. While you don’t need to know everything about cryptocurrencies to benefit from them, it’s still a good idea and worth your time to learn.

So, in this article, we’ll be talking about cryptocurrency and how it can benefit your life. You’ll learn everything you need to know to decide whether you should start putting your hard earned cash into this interesting new asset. Let’s talk about how you can take advantage of digital currency.


What is cryptocurrency?

Cryptocurrency is a form of digital asset. While Bitcoin has been said to be digital cash, cryptocurrency now has many functions besides this. This includes tokens which can be a digital representation of many different assets or pegged currencies which mimic things like the US dollar or commodities like gold.

Some cryptocurrencies are part of intricate systems, and owning those tokens grants you certain rights or privileges. This could be the right to certain functions or the right to earn money for your holdings in the form of interest or stakes. The options are almost limitless.

While some currencies like Tether require a third party to manage them, many other cryptocurrencies, like Bitcoin are decentralized. This means that they can function without the intervention of a third party and they can’t be controlled by anyone.

As you can see, cryptocurrencies are extremely varied and each one is unique. They all have something special to offer and you need to do your research before jumping into any project.

However, the one thing that they have in common is that they all function using a digital accounting system. This immutable ledger is what makes a cryptocurrency secure and it’s important to understand exactly how they work.


How does cryptocurrency work?

All cryptocurrencies, regardless of their proposed purpose function using the blockchain. This is a digital accounting process, or a ledger, which records all of the activities for that currency. It’s how decentralized currencies manage themselves without the need of third parties.

For example, if you wanted to send some Bitcoin to a friend it would be recorded in the ledger that you sent it. Giving you proof of payment. Your transaction would then also have to go through that network’s security process.

In the case of Bitcoin, it’s run using proof of work. Other Bitcoin users running specific computer software must do “work” to confirm the transaction. The work in question is having their computer solve complicated equations. They are then paid a fee from the network for their trouble.

Going through the confirmation process is important. This prevents people from double spending or counterfeiting cryptocurrencies and it protects the network’s reputation.

Once that confirmation happens the transaction can’t be undone and you can’t remove any transactions from the ledger, ever. This is what gives people faith in cryptocurrency to maintain its value without a central authority.


Pros and cons of cryptocurrency

Cryptocurrency has many benefits. Since it can’t be controlled by a third party your “account” can’t ever be shut down. Your funds can’t be frozen or taken from you by the government or payment processors.

It’s also a very cost effective and speedy way to send money to someone, especially if they live across the globe. This is also a good option for people who live in countries with poor access to banking or those who are banned from using certain popular financial services. You can’t be banned from cryptocurrencies like Bitcoin.

However, there are some negatives to cryptocurrencies as well. For starters, transactions can’t be reversed. That means that you need to trust the person that you’re sending it to if they are meant to give you something in return. There’s no way to get a refund for a physical item which was not as described.

You also need to be more responsible with your personal information. If you lose your password or backup that wallet can never be recovered. Your funds are lost. Likewise, if someone tricks you into revealing delicate information they can steal from your wallet and you’ll never get those funds back.


Where cryptocurrency is used?

Cryptocurrency can be used anywhere and a number of online merchants accept it for goods. Even some pretty large retailers like Overstock will allow you to buy millions of goods for Bitcoin or other cryptocurrencies.

It can also be used as a way to send remittances to other countries where it might be too pricey or take too long to send them using other methods. This makes it so the other party doesn’t have to worry about converting your currency to their currency, and they can more quickly swap it to whatever currency they need in their home country.

Cryptocurrencies can also be useful for paying for something where you want your identity to remain hidden. A good example might be for someone who’s looking to purchase a domain name or VPN anonymously.

You can never really be sure that your identity won’t be revealed when using a credit card because you have to trust that that entity will not reveal your information. However, with Bitcoin, you can be sure because you never gave them your personal information in the first place.


Can cryptocurrency replace cash?

In the future it’s likely that digital currencies will replace cash. Many countries are already phasing cash out of existence. However, it’s unclear whether a decentralized cryptocurrency will be able to take its place or if governments will try to implement their own solutions.


Who controls cryptocurrencies?

Decentralized cryptocurrencies like Bitcoin are controlled by the community. No single entity has power over them, and everyone involved must come to a consensus before changes are made.

However, there are other currencies like Tether which are managed by a company. The rules here are much different and you should make sure to know the difference.


Can cryptocurrency be manipulated?

The price of cryptocurrencies can be manipulated. This is particularly true for currencies with very small market caps. However, you’d also be hard pressed to find a financial market anywhere that is not being manipulated to some degree.


Why is cryptocurrency going up and down?

Cryptocurrency is an asset that is heavily traded. The price goes up and down with demand. It’s just how supply and demand works. Smaller market cap coins and tokens are more likely to fluctuate wildly, but even bigger name cryptocurrencies can because they are not yet very established.


Can cryptocurrency be hacked

Some cryptocurrencies have been compromised from vulnerabilities in their codes. Some of these were due to bad smart contract coding which allowed for the theft of coins.

Others allowed for people to maliciously mine coins, another form of theft. Fortunately, cryptocurrencies can evolve and if vulnerabilities are found the codebase can be altered to address them.


Is cryptocurrency regulated?

In most countries cryptocurrency is regulated. While it’s nearly impossible to regulate the coins or tokens themselves, there is heavy regulation at entry and exit points. That means that if you buy or sell your cryptocurrency for a fiat currency like the US dollar you will most likely need to verify your identity to do so.

It’s important to know what your country’s stance is on cryptocurrency and to know that they will likely be expecting you to pay taxed on any profits that you’ve happened to make.


Cryptocurrency without blockchain

It’s not really possible to have a cryptocurrency without the blockchain. The blockchain runs the entire system of all cryptocurrencies, and without a ledger, they could not be trusted.


Cryptocurrency without mining

While all cryptocurrencies do need to “confirm” transactions, not all of them are “mined”. Proof of stake is more energy efficient and it does not require massive amounts of hardware to perform the same tasks.

However, there are many opponents of this, because there are some concerns as to its safety and further development may be needed before it can overtake mining.

There are also cryptocurrencies which are “issued” rather than mined. These can be airdropped or sold as a crowdsale. Some of these may have their own chains which are confirmed via POS or nodes and some may run on parent chains like Ethereum where their transactions are confirmed with the ones for the base currency.


Can cryptocurrency totally crash?

While anything is possible, it seems unlikely at this point. Some cryptocurrencies will survive, but they might not be the ones you expect.

Much like the dot com boom, not every company that was blossoming then is still around. Learning to pick which ones will stick around is the name of the game, but don’t expect cryptocurrency to vanish entirely anytime soon.