Today, cryptocurrencies are seen by many people as the most convenient era of exchange ever and have become a global phenomenon known by most people but understood by few. In 2018, you’ll have a hard time finding a software company, a major bank, accounting firm, or government that hasn’t researched cryptocurrencies or started a blockchain project. Beyond the noise in the press releases, often many people fail to understand the basic concepts, so let’s walk through the whole story.

Cryptocurrency is 100% virtual.  It is decentralized digital money that is based on blockchain technology and secured by cryptography. There is no paper, no silver, and no copper. It’s just the transfer of digital assets. The core concept is the same as that of the physical currency system. Assume them as just running spreadsheets of transactions, but instead of multiple banks keeping their separate records, with crypto, there is just one enormous spreadsheet of every transaction made using the currency that is called a ledger.

To better understand cryptocurrency, one needs to first understand three terminologies – blockchain, decentralization, and cryptography.

Talking about cryptocurrency blockchain, it is a distributed database shared among the nodes of a computer network. As a database, the blockchain aims to store the information electronically in digital format. Across a peer-to-peer network, cryptocurrency is a decentralized ledger of all records of transactions. Participants, using this technology, can confirm transactions without a need for a central clearing authority. Potential applications may include fund transfers, voting, settling trades, and many other issues.

Moving on to cryptography, it is the method of encryption techniques that secures data from unauthorized access. Most of the claims that blockchain makes, like immutability and privacy, are enabled through cryptography.

In short, cryptocurrency is a medium of digital and virtual currency exchange system that is encrypted and decentralized making it independent of banks to verify transactions. It enables anyone anywhere to send and receive payments in a peer-to-peer system. Instead of carrying money physically and exchanging it in the real world, the payments made through cryptocurrency exist purely as digital entries to an online database describing specific transactions and it is stored in digital wallets. Therefore, the transactions are recorded in a public ledger (blockchain) as you transfer cryptocurrency funds.

How Does Cryptocurrency Work?

Cryptocurrencies are not controlled by the central regulatory authorities or government. As a concept, cryptocurrency works outside of the banking system using different types of coins – Bitcoin being the major player. 

1. Mining

Cryptocurrencies are generated through a process called “mining” which is a complex process. Certain mathematical puzzles over specially equipped computer systems are required to be solved by miners. Mathematical puzzles are solved through computing systems that are equipped with specialized chips. Bitcoins are rewarded to the bitcoin miner who wins to solve the puzzle in the first place. The mining process further confirms transactions on the cryptocurrency’s network making them trustworthy to be rewarded with bitcoins in exchange. 

2. Storing, selling, and buying

Today, cryptocurrencies can be bought by users from central exchanges, brokers, and individual currency owners or they can even sell it to them. To buy or sell cryptocurrencies, platforms or exchanges like Coinbase is the most convenient one. Once you own cryptocurrencies they can be stored in digital wallets.

3. Transacting or investing

Cryptocurrencies can be easily transferred from one digital wallet to another, using only a smartphone, like bitcoin. Once you own them, you can: 

1. a) Use them to buy services or goods
2. b) Trade in them 
3. c) Exchange them for cash

Debit-card-type transactions are the easiest way to make purchases through Bitcoin. These debit cards can also be used to withdraw cash, just like at an ATM. Converting cryptocurrency to cash is also possible using peer-to-peer transactions or banking accounts.

Types of Cryptocurrencies

At present, there are tens of thousands of cryptocurrencies available with a figure of over 10,000 in 2022. Major cryptocurrencies include the following:

1.Bitcoin

Bitcoin is the world’s first decentralized form of cryptocurrency that is widely accepted. It was created by presumably pseudonymous developer Satoshi Nakamoto. There was a time when Bitcoin’s name was synonymous with cryptocurrency. As a result, it’s still so popular globally and has become very expensive. The cost of one Bitcoin was $68,000 in 2021. But here’s the best part, bitcoins are available for purchase in smaller fractions which means you don’t need to buy an entire coin.

2.Altcoin

An altcoin is a term used for an alternative digital currency to bitcoin. Ethereum is the most popular in this ecosystem and is also one of the fastest-growing cryptocurrencies in the market. Luckyblock, Shiba Inu, and Terra are some of the other altcoins available in the market today.

3.Crypto tokens

Many find the concept of crypto coins and tokens confusing. Coins and tokens appear to be the same. However, the two have many differences as, 

• Coins can be mined, but tokens cannot be mined. 
• Coins are linked to blockchains, whereas tokens are not. 
• In terms of utility, they vary in the type of service or product they allow users to purchase.

Why should you invest in cryptocurrency?

The future is digital. By 2030 the cryptocurrency market is estimated to reach $4.94 billion.  This is one of the reasons that work in favor of cryptocurrencies and you should be investing in it. The other important reasons are:

• They are secure and private: Cryptocurrencies that are based on blockchain technology ensure user anonymity. Through cryptography, we are also assured of high levels of security, which we discussed before. 
• They are decentralized, transparent, and immutable: The whole efficient system functions on shared ownership, where data is available to all permissioned members and is tamper-proof.
• They are a hedge against inflation: In times of inflation cryptocurrency makes for a great investment. For example, cryptocurrency is often compared with gold by investors. One of the reasons behind this is that they are in limited supply just like gold, as there is a cap on mining any type of cryptocurrency.