Introduction to Cryptocurrency

What is Cryptocurrency and How Does It Work?

Hey there, you’ve probably heard about cryptocurrency before. If you haven’t, you might know names like Bitcoin, Ethereum, Solana, or Dogecoin. Yep, those are cryptocurrencies. A lot of people buy them as investments, hoping their value will go up. Some also use them as a form of money to buy and sell things.

You might have seen how the price of cryptocurrency started really low, and then shot up. Some people made a lot of money, but others lost money too. That’s why some people are still unsure, or even afraid of cryptocurrencies.

So, you might be wondering, what exactly is cryptocurrency? How does it work? And what do terms like blockchain and mining mean? This article will break down everything you need to know about cryptocurrency and how it works.

What Is a Cryptocurrency?

The word cryptocurrency comes from the words “crypto” and “currency.” “Crypto” means hidden or secret, referring to cryptography — a way to hide information to keep it safe. “Currency” just means money. So, cryptocurrency is digital money that is secured by cryptography and exchanged through a computer network.

Because it’s digital, crypto currency has no physical form. You might have seen pictures of Bitcoin and thought this is what cryptocurrency looks like, but it’s not. Cryptocurrency has no physical form, as it’s all online. You can send it, receive it, and use it to buy things — just like regular money.

Now, you might ask, what’s the difference between cryptocurrency and the money in my digital wallet — like US dollars or Euros in my mobile banking app? Well, traditional currencies like the US dollar and Euro are controlled by central banks. To send those currencies, you need a bank or payment service. But with cryptocurrency, you can send money directly to your friend without needing a middleman like a bank.

Why Doesn’t Cryptocurrency Need a Bank?

But wait — why doesn’t cryptocurrency need a bank? Here’s a bit of history. Cryptocurrency’s modern story began with Bitcoin, which was created in 2009 by an anonymous person known as Satoshi Nakamoto. He seems Japanese, and you will see this Japanese guy’s face that most people assume is him because his name and background seem true — but actually, nobody knows who he is.

Unlike traditional currencies like the US dollar and Euro — that are printed and controlled by central banks or governments — cryptocurrency was created to be free from control. Some people didn’t like the idea of governments controlling money, so they made cryptocurrency as a way for people to exchange money directly with each other without needing a bank or any central authority.

Is Cryptocurrency Money or Investment?

So, is cryptocurrency actually money and not an investment like stock? Well, yes. Cryptocurrency was actually made to be used as money, like the US dollar, for buying, selling, sending, and receiving money.

Over time, however, cryptocurrency became more like an investment. In some countries, like El Salvador, people still use cryptocurrency to buy things in everyday life. But most people use it to try to grow their money. For example, you might buy Bitcoin when it’s worth $10,000 and sell it when it’s worth $60,000 to make a profit.

Most people don’t want to use cryptocurrency as currency due to its volatility — like buying a coffee for 0.001 Bitcoin today, but tomorrow you might need to pay 0.002 Bitcoin for the same coffee — because of its fast price changes, making it unpredictable.

This made most people still prefer to use traditional currency as money and cryptocurrency as an investment. Cryptocurrency started with Bitcoin, but now there are many other coins — coins like Ethereum, Tether, and even meme coins. So, that’s a simple definition and a bit of history about cryptocurrency. Let’s move on to the next section.

 How Does Cryptocurrency Work?

Cryptocurrency works using a technology called blockchain.

So, what is a blockchain? Imagine Bob has a notebook where every transaction is written down. Once a transaction is written, it’s locked in and can’t be erased or changed. Now, not only Bob has the notebook, but everyone in this blockchain network has a copy — so no one can cheat or mess with it.

If Bob hacks and changes the notebook, it will be obvious, as it’s different from others’ notebooks, and that notebook will be invalid. Each page in the notebook is a block in blockchain. And when one block is full, a new one is added to the chain. That’s why it’s called blockchain — which is a chain of blocks.

Blockchain in Cryptocurrency Transactions

So, how does cryptocurrency use blockchain technology? When a new transaction is made, the transaction details are sent to a network of computers around the world that are using the blockchain. These computers then check if the transaction is valid by solving a very hard puzzle or equation. Once they solve the puzzle and confirm that the transaction is correct, the information is added to several blocks.

These blocks are linked together, making the data permanent and unchangeable. Once that’s done, the transaction is successful.

In regular transactions — like sending US dollars or Euros — a bank validates and processes the transaction. But with cryptocurrency, it’s these computers around the world that validate it by solving hard puzzles and equations.

Who Are Crypto Miners?

Now, you might wonder, who are these computers solving the puzzles? Well, people who solve puzzles and validate the transactions are called miners. Why do they do that? When they solve the puzzles or equations, the cryptocurrency system rewards them with new coins.

This is called mining and is based on a system called Proof of Work. That’s why you may have heard about Bitcoin miners using powerful computers — because they want to solve as many puzzles as they can. The more puzzles they solve, the more cryptocurrency they earn.

Not all cryptocurrencies are mined this way. Some — like Ethereum — now use a different method called Proof of Stake, which we will explain in another article.