What is cryptocurrency and how does it work?

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Cryptocurrencies are the digital alternative to real money (Credits: Shutterstock / eamesBot)

Cryptocurrency exists as a completely digital alternative to traditional currency.

It can be used to buy goods or services or alternatively act as a form of investment.

Unlike real money, cryptocurrency is not issued by a government and is not subject to the same types of regulatory requirements.

Any group or individual can create a cryptocurrency, and in the same way anyone can buy it.

Instead of a bank account, crypto is about “wallets” – the name of software or hardware that can be used to buy, sell, trade or invest in these currencies online, just like traditional money.

Of course it’s a double-edged sword. On the one hand, cryptocurrency is completely democratizing, but it can also be used for fraud and criminal activity.

The most prominent cryptocurrency is Bitcoin, which was created anonymously in 2009, but there are thousands of others with new coins created all the time. These coins are divisible, so small quantities of them can be bought and traded at any time.

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The price of Bitcoin and other currencies is volatile – the price can change quickly – while there have also been high-profile attacks on centralized exchanges (websites where people buy and sell cryptocurrencies).

Person-to-person transactions

Cryptocurrency works without a bank or central authority (except sometimes the creator of the coin) controlling it. Therefore, it is usually exchanged from person to person when sold or traded.

Rarely is anyone working in between to skip the transaction, which is instead recorded on a publicly available database called blockchain. It is also completely anonymous, as the wallets do not have to be linked to names, addresses or other personally identifiable information. A user can hold multiple wallets.

To protect the system and increase their value, some cryptocurrencies are designed to be finite.

For example, only 21 million Bitcoins can be created and in circulation in the world.

If a traditional country needs more money, it can just print them – but it devalues ​​the currency and leads to inflation.

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This will not happen with Bitcoin. To create more, they must be “mined,” which involves using computer software to follow complicated mathematical formulas to produce them.

As of January 2022, about 18.9 million Bitcoins have been mined, leaving 2.1 million Bitcoins that have not yet been mined.

The computing power required to create and facilitate cryptocurrencies is extremely energy intensive and has significant environmental costs.

Some countries, especially El Salvador, have embraced Bitcoin and cryptocurrencies. Others, like China and Russia, are trying to control or ban its use.



Sam Volkering says …

Cryptocurrency expert Sam Volkering.

Sam has been working with cryptocurrencies for over a decade.

“Ultimately, people will not know anything about blockchain technology or even worry about it. In the same way, we do not care about Internet protocols.

“What you need to do is that if you are considering buying any cryptocurrency, do your due diligence on it. Understand what it is, why it exists, how it works, and what it is used for.

Sam Volkering writes about cryptocurrencies and other technology-based investment trends at Exponential Investor.

You can follow him on Twitter here.

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