Cryptocurrencies are digital currencies. Like traditional currencies, people can use them to pay for goods, services, or gifts to each other. However, unlike traditional currencies, there is no digital money that one person can physically transfer to another. Instead, people transfer funds using apps on their mobile devices and computers.
The popularity of cryptocurrencies is already hard to overestimate and it is important to understand how they work.
What is blockchain?
Blockchain is a basic technologies that enable cryptocurrencies to function. Blockchain is essentially a digital ledger that performs an important function: first confirming and then constantly listing all transactions in digital currency. Computers connected to the blockchain, also called nodes, are responsible for this task and for adding new blocks to the chain. The new blocks include multiple transactions and detail which parties were involved.
How cryptocurrency works?
Cryptocurrency is a digital payment system. One part of the system is the actual currency. The second part, and perhaps even more important, is the blockchain network that supports such digital currency transactions.
Cryptocurrency transactions work in conjunction with a crypto wallet that contains a public and private key. These keys are strings of characters that identify a person’s account. Both parties exchange their wallet keys to first verify their identity and then initiate a transaction that is recorded on the blockchain.
This design ensures that all transactions remain secure. It also provides a universal approach to digital currencies, allowing them to work anywhere without restrictions.
How cryptocurrencies works?
- Digital ledgers based on blockchain technology validate the currency.
- Cryptowaller stores the currency.
- People can create a new currency by mining it by performing complex mathematical calculations.
- People can acquire cryptocurrency by buying it or by mining it.
- Various market forces affect the value of a currency.
How does crypto mining work?
When a new digital currency is created, it becomes publicly available through a process called Initial Coin Offering or ICO. This is when all available coins are sold to investors. However, those who want to work on the blockchain can create additional coins through a process known as mining.
Mining can be done by individuals or groups (called pools) who use computers to solve complex mathematical equations required by the blockchain to validate transactions. The mining process requires computing power and multiple miners to maintain and validate these equations. These calculations become more and more complex as fewer and fewer coins become available. This, in turn, increases the amount of time and energy required to mine coins.
The miners who complete these transactions are rewarded by the blockchain for their work: a small percentage of the digital currency on the blockchain. Rewards depend on the coin. As of 2022, bitcoin miners can earn 6.25 bitcoin tokens for their work, while ethereum miners get 2 ethereum tokens plus the fees contained in the block.
How to buy cryptocurrency?
People receive cryptocurrencies in two ways:
- Buy currency on the cryptocurrency exchange.
- Currency mining.
Regardless of the method, investors must store their currencies in a digital wallet. This device, called a crypto wallet, secures the keys needed to verify the cryptographic transactions of all users. There are two keys: the public key confirms the transaction, and the private key verifies the identity of the transaction.
Cryptocurrency wallets are available in cold and hot forms. A hot wallet connects to the internet and is easy to use, but requires protection to keep it safe. A cold wallet stays offline and is much easier to secure as it is inaccessible to anyone but the owner.
How is the market value of a cryptocurrency determined?
Some crypto coins are worth tens of thousands of dollars. Other coins are pennies or fractions thereof. Investors can buy whole coins or parts of them. Many factors determine the market rate of a coin:
- Requirement. Currencies rise in value if they are popular.
- Deficit. The fewer coins, the fewer opportunities and the higher the cost of each.
- Acceptance. Any currency will rise in value the more it takes on as payment for juvenile delinquents.
- Inflation. As traditional (also known as fiat) currencies experience inflation, cryptocurrencies can rise in value.
- Number of nodes. A currency with more nodes will be more active because there are more parties verifying transactions. Nodes are the number of digital wallets holding that currency.
