As cryptocurrency gains more popularity, more and more people are becoming curious as to how it works and what’s in there for them.
To be honest, cryptocurrency and all that surrounds it can be a difficult concept to understand at first, but as one digs for more information around the subject, getting a good understanding of it won’t take long.
This article will explain what cryptocurrency is and how it works. Also, I’ll be explaining everything from a beginner’s level.
Before we dive into how cryptocurrency works I’ll first explain important pieces that form the whole concept.
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What is cryptocurrency?
Simply put, cryptocurrencies are digital money that one can use in paying for goods and services. Cryptocurrency is not treated like our paper money because they are decentralized. This means it’s not regulated by anybody like the government or banks.
You might be asking how records are kept because of course, records of who paid who and how much the person received or how much balance is left must be kept to keep things in order. It must be relieving to know that the cryptocurrency is run by a public ledger called Blockchain which is where the transaction records are kept.
Many companies own their cryptocurrency which is called Token. Tokens are mostly used to buy products from the company that owns them. It’s not very advisable to invest in tokens unless you’re sufficiently informed of the future plans.
What is Blockchain?
Blockchain is a public ledger that stores all records concerning cryptocurrency transactions. No one person keeps the blockchain rather it’s stored in different computers across the world. Just so you know the records are encrypted to keep it safe. This technology of encrypting the Blockchain is called “Cryptography”.
Having explained those concepts, let’s now look at how cryptocurrency works.
How does cryptocurrency work?
We’ve established that cryptocurrencies are money only that they are digital. To send this digital currency you require a crypto wallet. For people to be involved in crypto transactions they both must own a crypto wallet (just like in conventional transactions through banks both parties must own a bank account).
Crypto wallets here are mobile apps or computer softwares. When a transaction is made between two people, the encryption takes place in the background to keep things safe and then sent to the crypto’s Blockchain which is then added to the record.
Cryptocurrencies are anonymously owned and only identified by unique keys. The amount of crypto owned by a user is associated with the key. No form of identification links a user to the key, anyone who gains access to the key is free to do whatever with the crypto.
With all that said, I’ve just explained how cryptocurrency works at a beginner’s level. I’ve also explained what Blockchain is. Now, let’s get down to details of how the technology behind Blockchain works.
How does Blockchain work?
Defining from a different angle, Blockchain is a “block” of transaction records stored sequentially. Take note of the word “sequentially”, as you’d suspect, the first record to arrive Blockchain is stored first then subsequent records follow sequentially. That’s it.
It is likely that you’ve come across the phrase “Bitcoin mining”; that’s in specific term. Let’s look at a broader term “crypto mining”.
Let’s look at what crypto mining means, if crypto can be mined and how it is actually mined if possible.
What is crypto mining?
This refers to the process put in to earn new coins, it could be Bitcoin, Ethereum, or any Altcoin, the process of getting more of these coins is described as mining.
Can cryptocurrency be mined?
Yes! Cryptocurrencies are mined by crypto miners when a record of a transaction is added to a Blockchain.
Let’s dive into the actual process of mining crypto.
How is crypto mined?
When a crypto transaction takes place, a copy of the transaction is sent to computers storing the crypto’s Blockchain. Miners who leverage the power of sophisticated computers try to solve cryptographic puzzles which involve decrypting the puzzles. When it’s decrypted successfully they can then add a block of the ledger to the Blockchain and are then rewarded with the coins.
A lot goes into the process which we deem not fit to bore a beginner with.
Enough said on the underground concepts of how cryptocurrency works, let’s get down to the part with the potential to put some bucks in your pocket.
How to buy Cryptocurrency
As mentioned before, cryptocurrencies are stored in wallets and these wallets are software own by different companies or you can call them more appropriately “Exchangers”. An example of these exchanges is Coinbase or Binance.
To actually get some crypto’s in your possession you need to exchange money for it.
Using a Coinbase wallet, you can buy Bitcoin or any other cryptocurrency by using your bank credit card. You first fund your wallet with Dollar or any other currency you wish to use and buy crypto of your choice.
You can also buy from a peer who wishes to sell it. All you have to do is share your address while he sends the crypto to it. You can do a whole lot more on the Coinbase app like storing your coin, sell it or exchange one crypto for the other with a peer.
What you should know about investing in crypto
Investing in crypto isn’t rocket science but as every investment comes with benefits insight, it also comes with its own risk. Remember I said cryptocurrencies are not regulated, the graph is very unstable. No reasonable future guarantees only predictions to follow.
Crypto investment involves buying and storing the coin until the market appreciates and you’re able to sell at a higher price compared to when you buy.
Also, be cleared, crypto investment is a long-term investment that might take years to actually make a substantial profit.
How much do you need to start Bitcoin investment?
The minimum is what the exchanger allows. For example, with just $2 Coinbase allows you to buy your first cryptocurrency. This means with just $2 your journey into crypto investment has begun.
This is it, guys! This is how cryptocurrency works for beginners. Just remember that investing or trading cryptocurrencies like Bitcoin is a very risky venture and at the same time very rewarding because of the volatility. Ensure you carry out due diligence before embarking on it and always invest what you can afford to lose.
If you have any further questions or contributions, kindly drop them on the comment box below.