What is cryptocurrency and how does it work?

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In the last several years, a new form of currency has become prominent among investors, vendors and consumers. This currency is crypto and can be confusing to understand without learning some key definitions and details first. Researching this currency online will quickly land you into discussions of validity, classification and peripheral technology like blockchains and NFTs, which further muddy the subject.

Estimated reading time: 3 minutes

Cryptocurrency basics

The basic fact you need to know about cryptocurrency, also called crypto or cryptocurrency, is that it is a decentralized and digital currency. This means that it is not issued by a government, bank or individual source and is not generally backed by paper currency, gold or silver. Because crypto is invested in and traded by users, it can sometimes be classified as an asset instead of a monetary system. However, this classification does not change the fact that it can be exchanged for goods and services like any other currency. More companies are accepting popular forms of cryptocurrency, allowing you to exchange it for Euros or US dollars, purchase goods and services with it, and you can even find a crypto fundraising platform for your cause.

Blockchain security

Cryptocurrencies run on blockchains, a distributed ledger technology with encryption protocols added to each node in the distribution network. Blockchain security is so high that many companies use the same technology for data sharing and storage. Whenever an information packet is moved on the chain, it gains a new security block. This block is a cryptographic hash of the last block, timestamp, and transaction data. Removing a piece of information from the chain will cause it to unravel, making each block more secure than it would be on its own.

Mining cryptocurrency

Mining is more difficult for established currencies, like Bitcoin, because as the money grows, it becomes more complicated and requires more processing power. When you mine crypto, you are setting your computer up to verify transactions as they move down the chain and being rewarded with currency for this time and effort. This method is how new money is released and is theoretically possible for a person to accomplish.

Benefits of crypto

One of the most significant benefits of cryptocurrency is that it is anonymous. This anonymity means that you can be better assured that your assets, crypto wallet, and online purchases made with crypto cannot be hacked back to you or your physical location. 

Potential pitfalls

One of the most referenced pitfalls with crypto is that it is the primary funding source for NFTs or Non Fungible Tokens. These tokens are usually rights to original digital copies of intellectual property works such as art and music. The market for NFTs has been unstable recently, and if the server housing your tokens is hacked, the anonymity of crypto can make it difficult to prove that you are the rightful owner of the property.

Another potential pitfall is that the anonymity of crypto means losing your login information for your crypto wallet will lock you out forever. There is no recovery method for most of these exchanges, so setting your computer up to mine crypto and forgetting your password is primarily a wasted effort, costing you a lot of money.

Once seemingly a fad, cryptocurrency has become more prominent recently, with some of the more significant types accepted by vendors of all shapes and sizes. It can be confusing to research this monetary system because it is sometimes considered a form of currency and other times considered an investment or asset. Once you know how the system works, however, you will see that it can be exchanged for tangible goods and services and held as an investment or used to purchase NFTs.

Do you think you understand cryptocurrency a bit better now? Let us know on social media by using the buttons below.

Last Updated on November 30, 2022.

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