How Does Cryptocurrency Work?
Discover the basics of cryptocurrency and how you can buy, sell, and trade digital assets. Learn how blockchain technology ensures secure transactions and records your investments.
Cryptocurrency is a form of digital money that operates without the need for banks or financial institutions. It can be used for purchases or as an investment. Every transaction is verified and stored on a blockchain, a secure and unchangeable digital ledger that keeps track of assets and trading activities.
If you’re curious about cryptocurrency, this guide will help you understand how it works and what to consider before diving into crypto investment and trading.
What is Cryptocurrency?
Cryptocurrency, also known as crypto, is a digital payment system that removes the need for physical cash. It exists only in digital form and is primarily used for online transactions, though some businesses accept it for physical purchases. Unlike traditional currency, which is issued and regulated by governments, various companies create and distribute cryptocurrency.
One key feature of cryptocurrencies is their fungibility, meaning each unit holds the same value when bought, sold, or traded. This sets them apart from non-fungible tokens (NFTs), which have unique values based on the digital assets they represent. For instance, one crypto dollar will always equal another crypto dollar, whereas an NFT’s value varies depending on its attached asset.
Although cryptocurrencies operate without government oversight, they are still considered taxable assets. Any profit or loss from crypto trading must be reported to the Internal Revenue Service (IRS).
How Are Cryptocurrencies Created?
Cryptocurrency is created through a process called mining. Mining involves validating crypto transactions and adding them to the blockchain using specialized hardware and software. This process ensures the security and integrity of the digital ledger while also generating new cryptocurrency.
However, not all cryptocurrencies are created through mining. Some digital currencies, particularly those that cannot be spent like traditional money, are developed through a process known as a hard fork. A hard fork splits the blockchain into two separate chains—one following the original path and the other adopting new changes. Non-mined cryptocurrencies are often used as investments rather than for everyday transactions.
▶️ View Course: The Complete Cryptocurrency Course: More than 5 Courses in 1
Cryptocurrency vs. Traditional Currency
Traditional currency, such as paper bills and coins, is issued and regulated by governments. It can be used for everyday purchases and stored in banks, which provide security and insurance for deposited funds. Government backing ensures the stability and acceptance of traditional money.
In contrast, cryptocurrency operates independently of governments and financial institutions. It is stored in a digital wallet instead of a bank account. While banks insure traditional currency against loss or theft, cryptocurrency lacks such protections, meaning lost or stolen crypto assets cannot be recovered. This fundamental difference highlights the decentralized and volatile nature of digital money.
What Are the Advantages of Cryptocurrency?
Cryptocurrency offers several advantages over traditional currency. One of the main benefits is privacy. When making a purchase with cryptocurrency, you are not required to provide personal information, reducing the risk of identity theft and fraud. Additionally, cryptocurrency investments remain secure regardless of government changes or financial instability.
Another advantage is its global accessibility. Cryptocurrency eliminates the need for currency exchange rates, making transactions seamless across borders. However, it is important to note that not all countries recognize cryptocurrency as a legal payment method. Unlike traditional bank accounts that may impose withdrawal limits or restrictions, crypto wallets provide full control over funds without intermediary regulations.
▶️ View Course: Cryptocurrency Course: Learn to Make Money Online WORLDWIDE!
Types of Cryptocurrency
Cryptocurrency is available in the form of coins or tokens. The primary difference between them is that tokens exist on a blockchain and can represent assets, while coins can be virtual, digital, or even tangible. Coins function more like traditional money, with each digital coin having its own dedicated blockchain. In contrast, tokens are created on existing blockchains and can be used for transactions or to signify asset ownership.
The first cryptocurrency introduced was Bitcoin, which remains the most widely traded digital currency. Ethereum follows as the second most valuable cryptocurrency and is often used for more complex transactions and smart contracts. Other popular cryptocurrencies, known as altcoins, include Cardano, Solana, Dogecoin, and XRP.
How to Get Started with Cryptocurrencies
To start using cryptocurrency, you’ll need to choose either a broker or a crypto exchange. A crypto exchange is an online platform that allows users to trade cryptocurrencies directly, while brokers provide interfaces that connect with exchanges, making trading more user-friendly.
An exchange enables you to trade without an intermediary, meaning you must find buyers and sellers yourself. On the other hand, a broker facilitates these transactions for you. Here are the steps to begin trading cryptocurrencies:
1. Create and Fund Your Account
Once you’ve selected a broker or exchange, the next step is to open an account. Be prepared to provide identification, as some platforms require verification for security purposes. After verifying your identity, you can deposit funds into your account. Depending on the payment method, it may take a few days for the funds to be available for trading.
2. Buy Crypto
Once your account is set up and verified, you can make your first cryptocurrency purchase. There are many options available, and you can buy as much or as little as you want. To complete the purchase, enter the ticker symbol and the amount you wish to buy. Some of the most commonly traded cryptocurrencies and their symbols include:
Bitcoin (BTC)
Ethereum (ETH)
Dogecoin (DOGE)
Tether (USDT)
USD Coin (USDC)
Uniswap (UNI)
3. Select a Storage Method
Most cryptocurrencies are stored in a crypto wallet. If you purchase through a broker, your storage options may be limited. However, if you buy from an exchange, you can choose between a hot wallet, which is connected to the internet for easy access, or a cold wallet, which stores your crypto offline for added security.
Hot Wallets
A hot wallet is a crypto wallet that offers online storage accessible from a computer, phone, or tablet. Since it is connected to the internet, it is more vulnerable to cyber-attacks and hacking attempts.
Cold Wallets
A cold wallet does not connect to the internet, providing enhanced security. You can store cryptocurrency in an external device, such as a USB drive. When using a cold wallet, you will receive a keycode that must be kept in a safe place. Losing this keycode may result in permanent loss of access to your cryptocurrency.
🔷 View the list of Cryptocurrency Courses
