What Is Cryptocurrency? Crypto for Dummies

We are all familiar with all the common forms of money: banknotes, coins, and credit/debit cards. But now there is a new kid on the block, cryptocurrency. It is not the kind of money that you can hold in your hand or stick in a piggy bank, it is a digital currency that only exists electronically. It is made possible by the amazing blockchain technology. 

No bank or government controls cryptocurrency. It doesn’t have a regulatory body or a central issuing authority. This means that there’s no central authority deciding to make more units of a cryptocurrency or how many to produce, keeping track of the money, or investigating fraud. So, how does cryptocurrency work as money? 

How Cryptocurrency Works

If cryptocurrencies only exist digitally, then someone can easily make copies of counterfeit currencies and become rich, right? Wrong. Unlike a video file or an mp3, a digital currency such as Bitcoin isn’t a string of data that can be duplicated. A Bitcoin is actually an entry on a vast global ledger known as the blockchain. The blockchain is a decentralized public ledger that records all Bitcoin transactions. 

Crypto coins are created through the process of mining which involves using a computer’s power to solve complex mathematical problems. Once a miner solves a problem, they are rewarded with a certain number of coins. You can also acquire coins by buying them from brokers. Once you mine or buy a cryptocurrency, you have to store it in a crypto wallet. You can then proceed to use your coins to pay for goods or services, sell them using a cryptocurrency exchange, or simply store them for future use. 

Key Features of Cryptocurrencies

Transactions are Permanent

All cryptocurrency transactions are recorded on the network’s ledger in real-time creating a permanent, irreversible, and unchangeable record. 

They are Part of a Peer-to-Peer Network

​​Crypto networks depend on peer-to-peer networks that guarantee transactions and confirm that everything checks out. It is this decentralized nature of cryptocurrency networks that creates efficient transactions, enhances transparency, and prevents third-party (or regulatory) interference. 

They Use Encryption

C​​ryptocurrencies are secured through cryptography. Cryptography is the process of converting plain and clear data into a seemingly incomprehensible code. Only those with the decryption key can see the original data. Every cryptocurrency transaction is secured through cryptography to ensure that the transactions are secure, anonymous and never controlled by any central authority. 

Benefits of Cryptocurrency

Guaranteed Anonymity – Due to the use of cryptography, it is virtually impossible to find out who is behind a crypto wallet. 

Decentralization – This means that there is no central entity controlling cryptocurrencies. Unlike a bank where the management can freeze your money, crypto cannot be frozen unless you store it in a centralized exchange. Therefore, crypto allows you to manage your own transactions without the use of third parties. 

Limited Supply – Most cryptos have a low supply that is fixed. For instance, bitcoin has a capped supply of 21 million. It is quite different from fiat money that is usually inflationary. 

Low Fees & Fast Processing Speeds – Unlike other means of payments that are processed over lengthy wait times, cryptocurrency transactions are instant. This means you can pay for goods and services instantly or receive your money without delays. They also tend to boast lower fees, so you can kiss those hefty bank transfer and foreign exchange fees goodbye. 

In Short

Cryptocurrencies offer real solutions to the many problems that the current financial system suffers from. While they are used to purchase goods and services, crypto coins have also become a major investment opportunity for many, turning several people into crypto billionaires. 

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