What is Cryptocurrency and How Does it Work?
With a market cap verging on $2 trillion and endless headlines ranging from hype to hysteria, there are plenty of reasons to be interested in cryptocurrency.
Now that institutional investors are funneling billions into Bitcoin and countries like El Salvador have legalized its use for legal tender, there’s no ignoring cryptocurrency any longer.
If you don’t understand crypto by now, it’s time to at least get the basics down. Whether you want to jump in as investor, mine your own cryptocurrency at home, or just be able to keep up with the news, we’re here to help.
Here is our overview of cryptocurrency that will give you the key terms and concepts you need to know.
Definition of Cryptocurrency
The simplest way to define cryptocurrency is a digital asset and medium of exchange. It is an umbrella term used to describe a wide range of coins and tokens, including Bitcoin, Litecoin, Ethereum, and others.
Cryptocurrency began as a way to exchange for goods and services without the use of traditional financial services, boasting advantages such as speed, security, anonymity, and widespread access thanks to decentralization.
In just a few short years, crypto went from a fringe tech trend to a legitimate store of value and method of exchange, with widespread support from thriving internet communities and mainstream institutions like banks and governments.
Blockchain Explained
The technology that powers cryptocurrency is called blockchain, which is a massive online ledger that records and verifies transactions.
Traditional databases are centralized, stored on a single server and controlled only by authorized administrators. Blockchain, on the other hand, is decentralized, meaning that no single person can manipulate or alter the ledger.
It’s important to distinguish blockchain from cryptocurrencies themselves. Blockchain is the underlying technology that allows coins and tokens to be traded quickly and securely, and many other applications are being developed based on these principles.
Mining Cryptocurrency
The creation of cryptocurrencies like Bitcoin happens through a process called mining, which is also the method by which the corresponding blockchain ledger is developed and maintained.
New coins enter circulation when miners solve complex cryptographic equations and receive “proof-of-work” verification. This is an incredible resource-heavy task that requires a lot of computing power and a bit of luck.
To earn new cryptocurrency, one must not only solve the equation correctly (a 64-digit number known as a hash), but they also must be the first to do so. This means you’re competing with millions of other “nodes” that are also contributing resources and testing their luck.
Successfully mining cryptocurrency can be done on a small scale, such as a simple mining rig setup in a home studio, or on an industrial level with thousands of hardware components operating concurrently in a data center or server farm.
Investors have the choice to make sizeable investments in hardware or outsource this computing power to a dedicate cloud service that maintains and operates machinery from afar. Approaches may differ, but everybody plays by the same rules in crypto mining.
Top Crypto Questions
With the basics of crypto out of the way, let’s address some common questions on the topic.
How Many Coins Are There?
While only a handful of cryptocurrencies make headlines every week, there are an estimated 5,000 unique assets in the world of crypto at large.
An important distinction to make here is between coins and tokens. Coins are native to a particular blockchain and are therefore considered more secure and valid, while tokens are built on an existing blockchain with minor differences in structure, application, and functionality.
For crypto newcomers, the smart move is to familiarize yourself with the top 10 market cap crypto assets at the moment and add them to a watchlist with alerts and notifications.
How Do I Buy and Store Crypto?
Cryptocurrency is more widely available than ever, but it wasn’t always so easy to obtain. A digital wallet or cold storage unit was initially required for the purchase of assets like Bitcoin.
Now, however, everyday investors can log on to an exchange like Coinbase or Binance and buy any of the thousands of cryptocurrencies with just a few clicks. The assets will be stored by the exchange and a unique key will be given for verification.
However, crypto gurus still recommend that these assets be held in wallets solely by the owners themselves as a measure of security and assurance.
With plenty of tutorials and options to store your own crypto by digital or physical means, this is a key step for anyone embarking on the journey.
Can I Make Money with Crypto?
This question is like asking whether someone can make money on the stock market. There are many ways to make – or lose – money with cryptocurrency, and every investor employs a unique strategy to maximize their gains and keep losses to a minimum.
The valuation of cryptocurrencies is the subject of much controversy, with a long list of factors at play.
Adoption by merchants, governments, and institutions appears to be the main driving force, while banning certain cryptocurrencies will obviously be a detriment to their value.
Furthermore, the popularity and implementation of blockchain seem to have a strong influence on price, even if nothing fundamentally changes about the technology itself.
Keep in mind that despite its skyrocketing popularity, cryptocurrencies are still very volatile and subject to things like regulatory crackdowns and infrastructure issues.
For all the crypto millionaires out there, many more have lost money in their search for fortune! Do your own research and invest wisely as you would anywhere else.
What Does the Future of Crypto Hold?
Cryptocurrency has come a long way in just one decade. What’s next?
More Uses for Blockchain
Crypto is just the first and most famous example of blockchain technology.
So far, blockchain has been tested in fields like logistics coordination, royalties tracking, personal identity security, supply chain monitoring, elections, and medical data transfer.
Advocates believe that when blockchain gains traction in other areas, this will bring further attention to crypto and positively impact its value.
ESG Crypto Mining
With global interest in crypto building by the day – and a limited amount of crypto to ultimately be mined – the sector is becoming increasingly competitive and every advantage counts.
That’s why more companies are looking to methods of renewable energy Bitcoin mining to reduce energy costs and generate more sustainable sources of power for their operations.
The concept is simple: the lower the energy costs, the more profitable a mining operation will be. This is driving innovation in the sector and sparking interest in sustainable energy initiatives.
Innovators are also looking for ways to maximize hash rates and boost revenue in the unique techno-lottery that is crypto mining. This can involve anything from improvements in processing power to lowering energy costs through renewable, off-grid sources.
There is even a Crypto Climate Accord that states ambitious goals for decarbonization and a greater focus on resources like hydrogen, wind, and solar to power mining and support transaction requirements.
Learn More and Stay Informed
It is an exciting time to get into cryptocurrency, even if you aren’t eager to invest right away.
With trends like ESG Bitcoin mining and increased adoption by governments and businesses, the fundamentals look strong.
Blockchain technology is going nowhere, and while the crypto industry might look very different years from now, there is strong reason to believe it will only be bigger and stronger than ever.
Sources:
What is Cryptocurrency? | NerdWallet