Cryptocurrency Explained: What is cryptocurrency and how it works?
Imagine you are sitting with your friends or family, and someone comes up with the topic of cryptocurrency. Bitcoin reached its all-time high price in February 2021, and since then everyone is talking about it. However, most people do not know what cryptocurrency is and how they work.
Currencies have been an integral part of our lives, and as humans evolved the mode of payments evolved too. We started with the barter system and now we are living in an era of digital currency.
Cryptocurrencies have gained immense popularity since their inception – as of January 2021, there are more than 6700 cryptocurrencies in the market. And the number is constantly increasing.
In this article, we will discuss cryptocurrencies in detail, from its meaning to how it works, and why it is the future of currency. By the end of this article, it will be easier to answer the question, “what is cryptocurrency?” for yourself.
The crypto world is moving super-fast so there is no time to waste. Let’s get started!
Crypto Definition – What is cryptocurrency?
Crypto or cryptocurrency is decentralized digital money. It is based on blockchain technology and can be used to buy goods and services. Many people opt to invest in cryptocurrencies just the way they do in stocks or commodities or other assets. Although cryptocurrency is an exciting asset class, it can be risky as well. So, thorough research on how the system works is important.
Below is the list of five necessary elements that need to be in place to be called a cryptocurrency.
- Digital: Cryptocurrency is a virtual currency and only exists on computers. There are no physical notes or coins available in the market. Nor there is any crypto reserve in the banks.
- Pseudonymous: An individual is not required to give away personal information to purchase or use crypto. Both transactions and accounts are not connected with real-time identities. The digital currency is received on so-called addresses, that are randomly formed. The transaction flow can be analyzed but not necessarily connect with the real-world identity.
- Encrypted: There are special codes given to each user that help in protecting the information. It is called cryptography and the user information is hidden with it.
- Decentralized: Crypto does not have a central server or computer as it is distributed across thousands of computer networks.
- Global: Every country has its own fiat currencies. Transactions with fiat currencies are not easy. Whereas cryptocurrencies can be easily transferred around the world. In short, they are currencies without borders.
This is a great definition of cryptocurrency but there is more you all need to know. Next, we will discuss how it works and what are the top cryptocurrencies of 2021.
How does cryptocurrency work?
Just like fiat currencies, cryptocurrency is also a medium of exchange, but the only difference is it is digital, decentralized, and encrypted. Also, there is no central authority that manages, maintains, or controls the value and flow of cryptocurrency. Users are connected via the internet and are responsible for all crypto-related tasks.
In 2008, Satoshi Nakamoto introduced the first cryptocurrency – Bitcoin. He described it as “an electronic payment system based on cryptography proof of trust.”
Further, these cryptographic proofs are basically transactions that are verified and recorded on a program called Blockchain.
What is blockchain?
A blockchain is an open program and distributed ledger that records transactions in the form of codes. To easily understand, it’s like a checkbook that is distributed across numerous computers across the world. All the transactions are recorded in “blocks” that link on a “chain” of previous crypto transactions.
How many cryptocurrencies are there?
According to coinmarketcap.com, there are more than 6700 cryptocurrencies that are traded publicly. The total market cap of cryptocurrency is $1.4 trillion as of February 26, 2021. And the total value of Bitcoin was pegged at about $865.6 billion.
Best cryptocurrency to invest in 2021 by market capitalization
Data as of Feb 26, 2021. Source: CoinMarketCap.com
Learn more>>5 reasons why you should invest in Bitcoin
Is cryptocurrency legal?
In the United States, cryptocurrency is operating since 2013 and is used as a standard payment tool on many e-commerce platforms. Moreover, cryptocurrencies are legal, but the regulations vary by state. Many countries like China have banned the use of digital currency but sooner or later more countries will accept or legalized the use. However, we will discuss the legalities in another article. As of now, they are very much legal in the United Kingdom, Australia, Canada, Singapore, etc.
But, the main concern is to keep yourself protected by fraudsters who claim to sell fake digital currencies to vulnerable investors.
How does cryptocurrency trading work?
Buying and selling digital currencies have become a potential business for many trading firms. People can trade online through trusted crypto exchanges.
There is no shortcut to earn money therefore crypto trading should not be used to get rich. Moreover, people get scam every day by fraudsters who claim to provide a higher return on their investments overnight. Watch out for such scammers and only rely on trusted and reliable crypto exchanges for trading.
Should you invest in cryptocurrency?
The Crypto market is changing and unsteady now, but it is an exciting place for investors to explore. However, the key is to engage in safe and smart trading. Our goal here is to educate people about the new market trends and guide them through the process. We advise people on crypto trading and assist in recovering any money lost to scams or fraud.
If you are willing to diversify your investment portfolio then cryptocurrency can be your next target. In a piece of recent news reported by Bloomberg, JP Morgan strategists suggested investors allocate 1% of their portfolio to Bitcoin or other cryptocurrencies. Bitcoin can work as a hedge against fluctuations of other assets like stocks, bonds, and commodities.
It is indeed the future of the currency, but the final decision lies with you.
What is cryptocurrency: Conclusion
So far, in this article, you have learned what cryptocurrencies are and how they work. Digital currency has evolved the world of technology and it is only going to grow with time. Crypto can help you to take back control of your money and your personal information. Therefore, understanding cryptocurrency is understanding what technology can do for the world.
Some people are in favor of cryptocurrency and some are not. Which category do you belong to?