What is Cryptocurrency and How Does It Work?

The first cryptocurrency is Bitcoin, created by an anonymous developer (or a group of developers) known as Satoshi Nakamoto in 2009. The goal was to develop a global digital currency that has a decentralized nature and doesn’t rely on any traditional banking system. Later on, it gained huge popularity. Today the cryptocurrency market is diverse and has experienced significant growth in recent years. There are 420 million cryptocurrency owners worldwide, according to statistics by the Triple-A. The same study reveals that this is about 4.2% of the population around the world.

Let’s start a cryptocurrency journey to explore "What is crypto and how does it work?" What is a crypto wallet?", "How to buy crypto and what crypto to buy" to understand whether it’s a good investment for you.

What is crypto?

Crypto or cryptocurrency refers to a digital currency that has no regulating authorities, like central banks. Cryptography is used for issuing, verifying, and securing your transactions. The main characteristic feature of cryptocurrency is decentralization which means enhanced security and no risk of government manipulation or interference.

In simple terms, cryptocurrency assets are based on decentralized networks leveraging blockchain technology - a distributed ledger maintained by a network of computers worldwide. It’s a peer-to-peer digital asset system where all the transactions are recorded on a blockchain, providing transparency and security due to unchangeable public ledgers.

How does crypto work?

The process of initiating cryptocurrency transactions looks like this: in a peer-to-peer network, a user utilizes a digital wallet software to send crypto to another digital wallet using a public cryptocurrency address.

In such networks computers or peers have the capability of sharing any information without the presence of a 3rd computer that acts as a server. Then, this transaction is encrypted and recorded on the blockchain. In other words, blockchain acts as a digital ledger that records various transactions concerning different assets, guaranteeing transparency and security, as these records are unchangeable and shared between its users.

Cryptocurrency versus traditional finance: pros and cons

When comparing traditional finance with cryptocurrency, it’s important to understand the difference between centralization and decentralization in this context. Centralized money means regular money controlled by governments and banks. This is typical of traditional finance, whereas cryptocracy is decentralized, that is to say, there is no authority or intermediary responsible for controlling cryptocurrency in the crypto market. With cryptocurrency, you can enjoy a bunch of benefits, such as:

Privacy

One of the advantages of cryptocurrency is enhanced privacy. Unlike traditional finance, you may skip providing personal data, which means protection from various fraudulent actions. In this case, your investments and funds will be secure.  

Security

Traditional financial systems are becoming more vulnerable and are often hacked. Identity thefts happen quite frequently in different parts of the world. Cryptocurrency offers enhanced security, as sophisticated cryptographic techniques and decentralized technologies are leveraged to provide transparency and security. It can minimize single-point failures, making this system resistant to any hacking or fraudulent activities.

Transaction fee and speed

Unlike traditional finance, where you have to pay high transaction fees, especially when making cross-border transfers, cryptocurrency transactions require minimal costs. Moreover, it’s also time-consuming to transfer money using traditional financial systems because of banking hours and other factors, while cryptocurrency transactions are made instantly.

Accessibility

The crypto market is highly accessible, as users should only have a computer or smartphone connected to the Internet to be able to access the crypto world. In most cases, no verification is needed to open your digital cryptocurrency wallet, whereas traditional financial institutions require a lot of personal data and carry out an in-depth verification process.    

 Disadvantages

Despite various advantages, cryptocurrency has drawbacks as well, like:

• Frequent price swings are typical of cryptocurrencies and investors may experience losses because of the volatility.  
• There is a risk of scams with cryptocurrency, as recently it has become an attractive market for scammers. Choose a trustworthy crypto platform to invest your funds.

What is crypto mining?

The process of cryptocurrency creation is known as crypto mining. It’s the validation process of crypto transactions and miners utilize special software and hardware for adding crypto transactions to the blockchain. To verify these transactions, miners solve complex mathematical problems and get compensation in the form of the coin that they are mining.

What is a crypto wallet?

Crypto wallets serve as a user interface, enabling users to send and receive the digital assets that they store on the blockchain. Your public and private keys are stored in crypto wallets. You need these keys to purchase crypto and provide your digital signature to authorize your transactions.

A public key is open to everyone, other users need it to send you crypto, while the private key is used to prove the ownership of the public key and it should never be disclosed to anyone.

You can choose from several types of wallets: hot wallets and cold wallets. A hot wallet is connected to the Internet (such as web-based wallets), and a cold wallet is an offline option, for example, a hardware wallet.

How to buy crypto?

To get started and buy crypto, you need to take the following steps:

Step 1: Selecting a crypto exchange or a broker.

Buyers and sellers trade cryptocurrencies in the digital platform, known as crypto exchange. Such exchanges usually require minimal fees. In general, brokers utilize interfaces that interact with exchanges.

Step 2: Opening an account and funding it.

Some platforms may require a certain form of identification, while others have no such requirements. After the verification process, you can fund your account.

Step 3: Buying crypto

After setting up your account, you can make your first cryptocurrency purchase. The options are diverse, among popular ones are Bitcoin (BTC), Ethereum (ETH), Dogecoin (DOGE), and a lot more.

Step 4: Choosing a storage method

In most cases, a crypto wallet is necessary to store your cryptocurrency. However, if purchasing from a broker, you may lack the opportunity to choose how to store your cryptocurrency.

What crypto to buy?

Cryptocurrencies can be available either as coins or tokens. What’s the difference? A token is an asset that exists on the blockchain, whereas a coin may be digital, tangible, or virtual. Furthermore, coins have their blockchain, while tokens are created on an existing one. Tokens can be used as currencies and may be a representation of an asset.

The choice of cryptocurrencies is diverse, like Bitcoin, Ethereum, Solana, XRP, etc. The recent Forbes Advisor survey stated that Bitcoin is the most well-known cryptocurrency in the world, as 90% of the survey respondents were aware of it, the second most popular option was Ethereum (50%), the third one - Dodgecoin (45%) and the fourth one- Binance Coin (36%).

To wrap up, investing in crypto can be a great option for those who prioritize secure, transparent, accessible, and instant transactions without any intermediaries, high transaction costs, and detailed identity verification procedures.