What Is Cryptocurrency and How Does It Work?

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Last Updated on November 24, 2022 by Eddu Oz

What Is Cryptocurrency and How Does It Work?

Cryptocurrency is now driving decentralized, faster and anyonymos payments in the financial world.

Instead of banks, cash, and credit cards, people are now going paperless and relying on digital exchange platforms and mediums to buy and sell products using cryptocurrencies.

Besides, it is one of the most secure transactions, making it reliable and convenient.

With the growing popularity, many are striving to get their hands on cryptocurrencies and learn how it works.

However, knowing what cryptocurrency is and how it works is critical for users who want to invest in these digital currencies.

What Is Cryptocurrency and How Does It Work?

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What is cryptocurrency?

Cryptocurrency is a digitally generated currency unique due to the cryptography securing strategy, which secures it and makes it difficult to counterfeit or use other financial fraud practices.

Bitcoin, first created in 2009 by Satoshi Nakamoto, introduced the concept of cryptocurrency to the world. It is one of the fastest-growing currencies and is currently adopted as a means of trade and payment.

Moreover, you can get different types of cryptocurrencies in the market, such as Dogecoin, Litecoin, etc. Currently, the top leading and most-used cryptocurrencies are Bitcoin and Ethereum.

SEE ALSO: Developing Your Own Cryptocurrency – What You Need to Know

Types of cryptocurrencies

There are two main classifications of cryptocurrencies:

1. Coins

They are created as the currency of exchange. The types of coins available include Bitcoin, Litecoin, Dogecoin, Ethereum, Solana, Cardano, etc.

Moreover, these coins can only be sued for specific programs, i.e., you only use Bitcoins for Bitcoin programs and exchanges. You can also swap and trade them using various apps and websites such as Finixio AI, the leading platform for cryptocurrency exchange and other services.

Crypto coins can also be tied to the value of commodities such as the US dollar and gold, making them a part of the global financial trade.

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The connectivity is necessary to determine their value and the value of different commodities supposed to get paid for using the crypto coins.

What Is Cryptocurrency and How Does It Work?

2. Tokens

Tokens vary from coins because they are programmable assets usually built on the blockchain platform.

You can use them for contractual purposes and can be used outside the blockchain environment to acquire and establish asset ownership. Like the coins, you can send or receive them on different platforms.

Non-Fungible Tokens also referred to as NFTs, are one of the most common types of tokens available. You can get them in different forms, such as music, art, videos, game items, etc.

They are the latest cryptocurrency assets available in the market. They are not exchangeable since only one exists, but you can buy or sell them online.

How do they work?

1. Mining and acquiring the coins

Miners usually solve complex mathematical problems using computer power to generate coins in a process known as mining. If you plan to create the coins, you should have a higher hashing power to solve the problems faster or get them right to win or create a coin.

You can buy them from brokers through leading cryptocurrency trading platforms if you do not know how to mine or lack a device with the much power needed.

Once you own the cryptocurrencies, you should not anticipate a physical asset. You should enforce strict security measures to ensure they are safe from hackers.

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Most hackers can spy on your cryptocurrency transaction and target your cryptocurrency addresses and the keys to steal them from you. Alternatively, they can target the computer device you are using.

While buying or selling the coins, you should use the most reliable third-party platforms. Use a secure platform to avoid spying or someone stealing the coins while in a transaction.

You should also avoid storing them on cheap, unreliable exchange platforms due to security concerns. Some of these platforms are a target for hackers; in the process, you can lose your coins.

SEE ALSO: Best Cryptocurrency Insurance Policies in the US

2. Storing the coins

There are different ways to store them, including hot wallet storage and cold wallet storage. Hot storage enables you to store the coins and secure them using online software to boost the private security key protocols.

In contrast, cold wallet storage, also known as a hardware wallet, refers to storing them on an electronic device to store and safeguard private keys. With the hot wallet, you will incur some fees for the software and security protocols; the cold wallet is free.

How does it differ from other means of payment?

Unlike other forms of payment, such as gold and cash, cryptocurrencies are not in physical form; you cannot handle them physically, but they are available virtually.

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The transaction methods involving cryptocurrencies differ from how the banking system works. It works based on the distributed public ledger called a blockchain, which records transactions and activities conducted by cryptocurrency owners. The blockchain is like the bank; suppose the cryptocurrencies were like cash. 

The other key difference is the method of creation. Other transaction methods, such as gold, are mined and molded into bars, coins, and notes that are minted and created by treasury orders. Cryptocurrency gets created through the process referred to as mining.

Final Thoughts

You can either gain the cryptocurrency through mining or buying them from various trading platforms.

After the purchase, you need to securely store them in digital wallets, either cold or hot wallet storage. There are different types of cryptocurrencies in the market, and they have different values depending on their popularity, security, and convenience when used for transactions.

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