What Is Cryptocurrency? How do Cryptocurrencies Work?

Cryptocurrency (crypto) is a digital or virtual currency that is made secure using cryptography. This is a kind of encryption that makes it nearly impossible to counterfeit or “double spend”, that is, to spend the same crypto coin for more than one transaction.

So, what is crypto?

Cryptocurrency can be used for transactions between individuals, it can be used for , and as a store of value, which means people can purchase crypto and hold it in a digital wallet.

Crypto runs on a blockchain, which is a type of digital ledger that records and verifies every transaction.

Cryptocurrencies, such as Bitcoin, are decentralised, which means that no government, person, or “central organisation” has control over it. And that is exactly why some people love the idea of cryptocurrencies.

History of cryptocurrencies

The first cryptocurrency can be traced back to 2009 when an anonymous person, or group of people, created Bitcoin. They used the pseudonym Satoshi Nakamoto to represent the creator.

So far, no one knows for sure who Satoshi Nakamoto is, but this has created a lot of interest and reams of news articles about just who the mysterious creator of this revolutionary breakthrough cryptocurrency. People have guessed Nakamoto to be anyone from to , through to , who was the first person to receive Bitcoin, sent by Satoshi Nakamoto. But is probably the most realistic candidate.

In any case, the creation of Bitcoin marked a significant milestone in the development of how “money” works, and many people are fascinated by the potential of how cryptocurrency could change the world for the better.

Bitcoin: The first cryptocurrency

Bitcoin, as the first cryptocurrency, became popular among tech enthusiasts and libertarians, who saw it as a way to bypass the traditional financial system. It was such a good idea that many other cryptocurrencies were created, including , , , and many others.

Each of these cryptocurrencies has their own unique features and use cases. But they all share the core principle of decentralisation and use blockchain technology to verify transactions.

What are altcoins?

or alternative cryptocurrencies, are any cryptocurrency other than Bitcoin. While Bitcoin is still the most well-known and widely used cryptocurrency, there are thousands of other cryptocurrencies that have emerged since its creation in 2009.

Altcoins can vary widely in terms of their features and use cases. Some altcoins are designed to improve upon the limitations of Bitcoin, such as faster transaction times or greater privacy features. Others are designed for specific use cases, such as gaming or social media platforms.

Cryptocurrency types: Types of crypto you need to know

There are over 12,000 cryptocurrencies currently available on the market. While most of these will die off and forever live in the crypto graveyard of broken dreams, some are really useful and are used by many people around the world.

Here are a few examples.

Bitcoin (BTC)

The first cryptocurrency, , is still the most popular and widely used cryptocurrency today.

It has the highest market capitalisation which means more people have bought it than any other cryptocurrency.

Ethereum (ETH)

The name of can be a little confusing, so this needs a bit of explaining. Ethereum is a network that anyone can use, but no one controls it (however developers do upgrade it occasionally). It lets people create and run different kinds of programs, such as games, social networks, or other cryptos, using smart contracts.

Ether is the cryptocurrency that powers the Ethereum network. It pays for things like the use of smart contracts and creating apps (called dApps) on the blockchain.

So, Ethereum is the network and Ether is the cryptocurrency. But confusingly, these two terms are used interchangeably when talking about the cryptocurrency. While the proper name for the crypto is Ether, most people just call it Ethereum, or “Eth”.

People can also own Ether just as an investment, and ETH is the cryptocurrency with the second-highest market capitalisation after Bitcoin. ETH enthusiasts often say a day will come when ETH will be more popular than Bitcoin, and they call this day “the flippening”. However, at the time of writing, this seems unlikely.

XRP

is a cryptocurrency, intended for quick and secure international transactions. It is used on the XRP Ledger (XRPL), but anyone can buy and hold XRP as an investment.

XRP has been part of a huge drama in the USA around regulation, so if you want a crypto rabbit hole to go down, this is a good one!

Tether

is a stablecoin. This is a cryptocurrency that tries to keep its value stable by being backed by another asset, such as a fiat currency, or something like gold.

One Tether is worth one US dollar, most of the time. However, the stablecoin has been known to against the US dollar sometimes. At the time of writing, Tether was the most popular stablecoin.

Solana

is a cryptocurrency and a blockchain platform with a goal of having high transaction speeds, while being decentralised. It charges lower fees than competing blockchains like Ethereum. The Solana network uses their native crypto (called SOL) to pay for things on the Solana network.

Dogecoin

was created as a huge joke in 2013. For this reason, it is known as a “memecoin”. But strangely, it became really popular and has evolved into a well-known cryptocurrency.

It is even sometimes mentioned by Elon Musk, and the price afterward.

The cryptocurrency has now found a use-case in tipping, donating, or sending money online. However, as a memecoin, Dogecoin price can be very volatile.

How does cryptocurrency work?

Cryptocurrencies work through a decentralised and distributed ledger called the blockchain.

Crypto and the blockchain

The blockchain records all transactions that occur on the network and is maintained by a network of nodes that validate and verify these transactions.

When you send or receive cryptocurrency, the transaction is broadcasted to the network of nodes on the blockchain. These nodes verify the transaction and add it to the blockchain ledger, creating a permanent transaction record.

Why is crypto so popular?

Crypto is gaining more recognition every day. The popularity of crypto can be attributed to its potential to disrupt traditional financial systems, offer greater privacy and security, and provide new investment opportunities.

However, cryptocurrency prices can be volatile. Also the crypto environment, being so new, is sometimes unregulated, or regulations around it are uncertain. This can make some people sceptical about it.

How to buy and sell cryptocurrency?

Cryptocurrencies can be bought and sold on cryptocurrency exchanges.

Cryptocurrency and exchanges

Exchanges are online platforms that allow users to buy, sell, and trade cryptocurrencies for other cryptocurrencies or fiat currencies, such as US dollars or euro.

To buy cryptocurrency, you will typically need to create an account with a cryptocurrency exchange like provide identification information, and link a bank account or credit card to your account.

How to make money investing in crypto?

Investing in cryptocurrencies can be a potentially lucrative way to make money, but it can also be risky due to the volatility of the market. If you're looking to make money by investing in crypto, here are some tips to keep in mind.

Do your research

Before investing in any cryptocurrency, it's essential to do your research and understand the technology behind the coin, as well as the market trends and its historical performance.

Diversify your portfolio

It’s best to diversify your cryptocurrency portfolio to minimise your risk. You can do this by investing in several different cryptocurrencies across different market sectors and geographic regions.

Invest for the long-term

Cryptocurrency markets are seen as highly volatile, and prices can fluctuate often. It's important to invest for the long term and avoid making impulsive decisions based on short-term market movements.

Cryptocurrency prices

The price of each cryptocurrency varies widely and is determined by the supply and demand in the market. The price of a cryptocurrency is typically determined by the price of the most recent trade on a cryptocurrency exchange.

When a new cryptocurrency is launched, its price is often initially set by the creators or developers, who determine the initial supply and set the initial price.

The initial can vary widely depending on various factors, including the demand for the cryptocurrency and the overall market sentiment towards cryptocurrencies.

How are institutions planning to use cryptos?

Institutions are exploring a variety of use cases for cryptocurrencies.

Automatic sales tax payment

Some governments are exploring the use of cryptocurrencies to automate sales tax payments. For example, , in some areas, citizens can actually pay their tax using crypto.

And in Colorado in the U.S., citizens can in crypto. Several states in the USA are also moving towards allowing their citizens to pay their tax with crypto.

And of course, in El Salvador, where Bitcoin is legal tender, citizens can also pay their tax using crypto.

Tax collection

Cryptocurrency exchanges are used to improve tax collection. For example, the South Korean government has implemented a that requires cryptocurrency exchanges to report users' transactions to the government.

International payments

Cryptocurrencies can be used for international payments, bypassing the traditional banking system and the SWIFT network. In fact, companies are starting to using crypto.

Investment

Institutional investors are increasingly investing in cryptocurrencies as an asset class because they can provide diversification benefits and potentially higher returns than traditional assets.

Blockchain technology adoption

Many institutions are also exploring the use of (which underpins cryptocurrencies) for a variety of applications beyond just payments. These include supply chain management, asset tracking, and more.

Cryptocurrency: A secure network

Peer-to-peer (P2P) technology is closely related to cryptocurrencies, as many cryptocurrencies use P2P networks to facilitate transactions and secure the network.

In a P2P network, each node (or user) on the network can act as both a client and a server, meaning they can both consume and provide resources to other nodes on the network. In the context of cryptocurrencies, this means that each node on the network can validate and verify transactions, as well as store a copy of the blockchain ledger.

What are advantages of crypto?

The following are some advantages of cryptocurrency.

Decentralisation

Cryptocurrencies operate on a decentralised network, meaning no single entity or government controls the network. This makes cryptocurrencies immune to government interference or manipulation.

Anonymity

Cryptocurrencies can be used anonymously without revealing personal information or identity, which is particularly attractive to users concerned about privacy.

Accessibility

Cryptocurrencies can be used by anyone with just an internet connection, regardless of their location or financial status.

Speed

Cryptocurrency transactions are usually processed faster than traditional payment methods, especially for cross-border transactions.

Security

Cryptocurrencies are secured through advanced cryptography, which ensures that transactions are secure and cannot be altered or reversed.

Storage

Cryptocurrencies are stored in , which can be either software or hardware-based. Software wallets are typically free and easy to use, but they may be less secure than hardware wallets, which are physical devices that store your private keys offline.

Cryptocurrency: Summary

Crypto assets, while often misunderstood, are poised to revolutionize the financial landscape. Though they require significant computer power for their creation and management, they offer a tantalizing glimpse into a future where financial products are not solely the domain of traditional financial institutions. As our understanding of crypto deepens, we may find ourselves at the dawn of a new era of financial innovation.