Is cryptocurrency a topic that keeps on showing up when you scroll Twitter?
Do questions like “what is a cryptocurrency and how does it work?” appear more often in your mind?
Whether you’re here to find out what it is and how it works or you’re searching for more information to make a decision, you’re in the right place. In this article, we will answer the questions “what is a cryptocurrency and how does it work?” as well as many others.
Stick around and you’ll see that cryptocurrency is not as complex as you might think.
Before We Get Started…
We understand that some of the common terms used in the context of cryptocurrencies can be confusing and unclear, especially if you’re just starting to learn all about them.
Don’t let the strange terms intimidate you! We’re here to make everything simple and clear.
For your convenience, we have assembled a useful collection of important terms that will be used in this article. The terms will be useful outside of this article too, as the terms provided are used when referring to cryptocurrency.
If you come across an unfamiliar term at some point in the article, feel free to scroll back up and check up to fully understand the context and information.
Cryptography – the process of hiding information to keep it safe. Certain sensitive information can be encrypted in order to protect it. A good example of this would be computer passwords or personal information when online shopping.
Fiat money – a currency that is issued, controlled and maintained as a national currency by governments. Fiat money isn’t supported by any tangible goods, such as gold, silver, and others. Current currencies such as the U.S. dollar, euro, and many others are considered to be fiat money.
Distributed ledger – a database that is accessible from different geographies, institutions, and sites. It can be accessed by multiple participants. Unlike a centralized ledger, a distributed ledger is better protected from cyber-attacks and financial fraud.
Mining – a process of gathering cryptocurrencies by solving cryptographic equations using a computer.
Peer to Peer (P2P) – distributed application architecture that uses a principle of a network and distributes tasks among equal partners with equal privileges.
Minting – the computer process of validating information, creating a new block, and recording that information into the blockchain. We will discuss blockchain later in the article.
What Is Cryptocurrency?
Cryptocurrency, or in short crypto, is a digital asset that can be used to obtain certain goods and/or services.
Unlike fiat money or any tangible money such as cash, cryptocurrencies are not something one can physically touch. That is because cryptocurrencies are being stored in a computerized database using cryptography to ensure safety and security. This also ensures easier ownership management and overall creation.
In addition, cryptocurrencies are not issued or handled by any centralized authority, such as a certain government or institution. Instead, cryptocurrencies work through a distributed ledger that serves as a financial transaction database.
Naturally, to get started, you will need to start with the official currency, or in other words, fiat money.
Probably the most popular and best-known cryptocurrency is Bitcoin, hence other cryptocurrencies and digital assets are often generalized and called alternative cryptocurrencies, in short, “altcoins” or “alt coins”.
Although Bitcoin and altcoins have their differences, the main reason why altcoins are generalized into one group and even called “alternative versions of bitcoin”, is that they were created after Bitcoin.
In other words, Bitcoin is the first known cryptocurrency that is so widely spread and appreciated.
As it often happens with popular ideas that become mainstream, people tend to look for similar alternatives that wouldn’t be as popular.
Although in smaller numbers, the same thing happened to Bitcoin and some people turned their eyes on altcoin markets. As people started buying more from the altcoin markets, a deserving name “alt season” made its place in the vocabulary.
The term essentially refers to specific timing when more people group up to buy altcoin.
What Is Blockchain?
Let’s face it – we can hardly talk about cryptocurrencies without talking about Blockchain, as the two are quite inseparable.
In addition, placing Blockchain among other useful terms at the beginning of the article is not good enough.
That is because we want to introduce a clear explanation with simple examples. Naturally, our goal is for you to be able to explain cryptocurrencies yourself.
How It Works
To truly understand Blockchain, let’s start by splitting up the two words it’s made of – block and chain.
Let’s start with the word “block”.
Blockchain consists of many separate blocks and each block is storing a limited amount of different information.
More specifically, each block has its own purpose and limits, therefore a different type of information is sorted into different categories and is hosted by blockchain blocks.
As it was hinted just now, the blocks have limited capacity to store information, so what happens when a block is filled?
This is where the word “chain” comes in.
When a certain block is filled, it joins the ranks of the fellow filled blocks, forming a chain of data that is synced together.
Finally, we have blocks in a chain that has claimed a fitting name – Blockchain.
Another thing worth mentioning is that as soon as a block is filled and joins the chain, it also joins the overall timeline by getting a time stamp. The timestamp is irreversible and can’t be modified in any way. You’ll find why it’s a great method in the next part of the article.
Why Is Everyone Talking About Blockchain?
Now you know how Blockchain works and why it’s even called Blockchain in the first place, but you might be wondering:
“What’s the point and what makes Blockchain special?”
The main significant benefits that come from Blockchain are its transparency, security, and decentralization.
Let’s dig a bit deeper.
Remember the blocks that gather information? As mentioned earlier they store a limited amount of information and each and every one of the blocks has their timestamp that can’t be modified in any way.
The blocks also make it possible to surveil all transactions as long as you have a personal node or by using blockchain explorers. With a personal node, you get a fast update of the chain of blocks whenever any kind of change happens.
All this essentially means that any kind of change will not go unnoticed, so you can surveil your own activities. Also, in the case of hacking, you can see where your crypto is and what’s been done with it.
You might have heard about Blockchain’s security before, but let’s point out what makes it so.
Simply put, the precise order and connection of the data blocks make it extremely difficult for an outsider to change a single detail.
In addition, to strengthen security, even more, Blockchain uses the art of cryptography. This means that each member of the network has a personal digital signature – node.
A personal node ensures that if a record is modified, the signature doesn’t just become invalid. The system goes the extra mile to notify the other members about a disturbance, allowing them to take action.
Decentralization in this case essentially means that Blockchain has turned away from centralized control and management.
Instead, Blockchain works in the distributed network principle. This means that every member of the distributed network gets the exact same privileges and copies of data in the form of a distributed ledger. In addition, all members get real-time data.
Simply put, one individual, institution, or organization cannot be corrupted by power and control. That’s because all members of the network are equal and therefore don’t have to rely on one entity.
Why Are Cryptocurrencies becoming more popular?
Cryptocurrencies, especially Bitcoin, have experienced significant growth in 2020 due to a global crisis that made us realize how fragile modern society is and how quickly it can change for better or worse.
While there are many different views on cryptocurrencies and different reasons why it’s the talk of the town – or rather the talk of the world – here are a few most popular reasons why cryptocurrencies are a thing.
#1. Cryptocurrencies are not controlled by governments and central banks. Many people appreciate it due to their personal beliefs and mistrust in their governments and banks that control and manage the money flow. In other words, many appreciate the freedom to control their own money and privacy.
#2. Some believe that it will become the new norm in the near future and who can blame them? It’s true that thanks to Blockchain cryptocurrencies are more progressive, better protected, and transparent. It’s understandable why many would prefer to build up their own currency rather than rely on a government or banks.
#3. Security and transparency are more important than ever. This probably applies to everyone across the globe, but especially to countries with weaker local currencies, as they hope for better opportunities. Sadly, many governments that are in control of weaker local currencies have either banned or restricted crypto to protect their own.
#4. Some are trying to make it into the train while they still can. Yes, there are people who don’t really care or know much about crypto. As it often works with massive hype, there are a lot of people who simply want to grab their share of the pie in case it does become the currency of the future.
What’s The Current State of Cryptocurrencies?
As hinted earlier, cryptocurrencies have experienced a dramatic jump in 2020 due to unforeseen circumstances and to this day they appear to be growing, though the growth does lack stability.
It might sound like common sense, but stability is something that is essential to any currency.
After all, the reason why we value fiat money some much for a long time is that everyone believes in its value, which gives it real value despite not being backed up by precious materials. Therefore, in comparison to cryptocurrencies, it’s more stable in reliable. At least for now.
This, however, does not mean that cryptocurrencies won’t establish themselves in the future as the better and improved currency that everyone will use worldwide.
At the present moment, CoinMarketCap has reported that there are 8,728 active cryptocurrencies.
You probably won’t be surprised to find out that so far the most popular cryptocurrency is Bitcoin with a total market value of $1,007,541,393,191.
The second crypto after Bitcoin is Ethereum, which you might have also heard of, as the media often likes comparing the two leaders. The total market value of Ethereum is currently $209,353,811,251.
Finally, the third most popular cryptocurrency is Binance Coin, which slightly resembles Bitcoin in regards to its name. The total market value of Binance Coin is currently $42,062,087,680.
Should You Be Concerned About Cryptocurrency’s Legality?
The short answer is – it depends on the country.
It’s perfectly legal in the US, but some countries have either completely banned them or restricted them.
For instance, Egypt, Morocco, Pakistan, and United Arab Emirates chose to apply an absolute ban on crypto, meaning that cryptocurrencies can’t be traded nor used there.
Some other countries like Russia didn’t ban cryptocurrency trading activities, however, purchasing goods and services using cryptocurrencies is illegal.
So why do some countries have regulations towards crypto?
There could be many different reasons, but some of the main ones are that many of these countries are likely seeking to protect their local currency rather than relying on crypto. It’s no surprise that money is a crucial asset for any country and some might feel that crypto threatens the order.
It’s also worth mentioning that since crypto can’t be controlled by governments and institutions, it’s possible to avoid economic sanctions that for various reasons are applied internationally to specific countries.
This essentially means that some of the countries that strongly support these economic sanctions chose to ban or restrict crypto to preserve the international order.
How Does One Buy Cryptocurrency?
Before you make a decision to buy cryptocurrency, the first thing you’ll need to do is check your country’s regulations. As mentioned before, you’re good to go if you live in the United States, but in case you don’t, a simple Google search will help you to find out.
If everything’s in order, you may proceed further and choose a suitable website where you can obtain crypto.
Keep in mind that different websites will accept different payment methods and the transaction fees can be higher in some. To be well-prepared, a little research won’t hurt, as websites with lower transaction fees will save you some money.
Finally, make sure that a website of your choice does offer the cryptocurrency that you’re after. It’s worth noting that different websites will likely have different cryptocurrencies, especially if they’re less known.
A good idea would be to look up different websites that offer the service and read the customer reviews. The reviews will give you a better and less one-sided image.
Typically, most people appreciate websites like Coinbase, Coinmama, Bitstamp, and CEX.io.
The Final Verdict – Should You Buy Cryptocurrencies?
We won’t give you financial advice, as we’re confident that you know what’s best for you.
However, something to keep in mind is that cryptocurrencies are unpredictable – you might get something out of it, but there’s just as big of a risk that you might lose money.
In addition, we understand that right now there’s a huge and intense hype surrounding cryptocurrencies, as many people truly believe and hope that cryptocurrencies are the future.
While they might be right, for now, crypto is not stable enough to really grow roots into societies and earn trust in order to replace or coexist with fiat money.
That being said, nothing is ever certain when you invest money in anything. No matter how many calculations one applies to predict the future and profit, the only certain thing is uncertainty.
We hope that the article was useful to you whether you’re thinking about buying crypto or simply wanted to familiarize yourself with the hype surrounding it!