30 November 2023

What is cryptocurrency and how does it work?

Describe cryptocurrencies.
A digital payment method called cryptocurrency doesn’t rely on banks to validate transactions. Peer-to-peer technology makes it possible for anyone, anywhere, to send and receive money. Digital entries to an online database detailing individual transactions are the only thing that cryptocurrency payments are made using, as opposed to actual money that is carried and exchanged in the real world. A public ledger keeps track of all cryptocurrency transactions that take place when money is transferred. Crypto wallets are used to store cryptocurrency.

The fact that cryptocurrency uses encryption to confirm transactions is how it got its name. This indicates that the storage and transmission of cryptocurrency data between wallets and to public ledgers require sophisticated coding. Encryption is used to make things safe and secure.

How are cryptocurrencies operated?
Cryptocurrencies have the block chain as their basis which is a decentralized data base of all the transactions with its updates done by the different holders of those currencies.

The units of cryptocurrency are generated through a process referred to as mining involving use of computer power in solving difficult mathematical puzzles. Users can use cryptographic wallets to both save and spend their purchased currents from brokers.

Cryptocurrency means you don’t have physical property. The thing you carry is a tool through which you can pass, or some measure, from one individual to another without an honest third party.

Although bitcoin has been around since 2009, there is still so much room for financial application of cryptocurrencies and blockchain technology, with even more expected in the years ahead. In future, technology might be employed to trade in financial products including among others stock shares, debt instruments i.e bonds and so forth.

Cryptocurrency examples

There are thousands of cryptocurrencies. Some of the best known include:


Bitcoin was the first cryptocurrency and is still the most traded, having been founded in 2009. The creator of the currency, Satoshi Nakamoto, is generally accepted to have used a pseudonym to refer to a person or group of people whose true identity is still unknown.


Developed in 2015, Ethereum is a blockchain platform with its own cryptocurrency, called Ether (ETH) or Ethereum. It is the most popular cryptocurrency after Bitcoin.


This currency is most similar to bitcoin but has moved more quickly to develop new innovations, including faster payments and processes to allow more transactions.


Ripple is a distributed ledger system that was founded in 2012. Ripple can be used to track different kinds of transactions, not just cryptocurrency. The company behind it has worked with various banks and financial institutions.

Non-Bitcoin cryptocurrencies are collectively known as “altcoins” to distinguish them from the original.

How to buy cryptocurrency

You may be wondering how to buy cryptocurrency safely. There are typically three steps involved. These are:

Step 1: Choosing a platform

The first step is deciding which platform to use. Generally, you can choose between a traditional broker or dedicated cryptocurrency exchange:

  • Traditional brokers. These are online brokers who offer ways to buy and sell cryptocurrency, as well as other financial assets like stocks, bonds, and ETFs. These platforms tend to offer lower trading costs but fewer crypto features.
  • Cryptocurrency exchanges. There are many cryptocurrency exchanges to choose from, each offering different cryptocurrencies, wallet storage, interest-bearing account options, and more. Many exchanges charge asset-based fees.

When contrasting various platforms, take into account the available cryptocurrencies, the fees associated with them, their security features, the options for storage and withdrawal, and any available educational materials.

Step 2: Funding your account

Once you have chosen your platform, the next step is to fund your account so you can begin trading. Most crypto exchanges allow users to purchase crypto using fiat (i.e., government-issued) currencies such as the US Dollar, the British Pound, or the Euro using their debit or credit cards – although this varies by platform.

Crypto purchases with credit cards are considered risky, and some exchanges don’t support them. Some credit card companies don’t allow crypto transactions either. This is because cryptocurrencies are highly volatile, and it is not advisable to risk going into debt — or potentially paying high credit card transaction fees — for certain assets.

Some platforms will also accept ACH transfers and wire transfers. The accepted payment methods and time taken for deposits or withdrawals differ per platform. Equally, the time taken for deposits to clear varies by payment method.

An important factor to consider is fees. These include potential deposit and withdrawal transaction fees plus trading fees. Fees will vary by payment method and platform, which is something to research at the outset.

Step 3: Placing an order

You can use the web or mobile platform of your broker or exchange to place an order. If you want to buy cryptocurrency, you can do so by clicking “buy,” picking the type of order, entering the quantity you wish to buy, and finalizing the transaction. “Sell” orders follow the same procedure.

There are also other ways to invest in crypto. These include payment services like PayPal, Cash App, and Venmo, which allow users to buy, sell, or hold cryptocurrencies. In addition, there are the following investment vehicles:

  • Bitcoin trusts: You can buy shares of Bitcoin trusts with a regular brokerage account. These vehicles give retail investors exposure to crypto through the stock market.
  • Bitcoin mutual funds: There are Bitcoin ETFs and Bitcoin mutual funds to choose from.
  • Blockchain stocks or ETFs: You can also indirectly invest in crypto through blockchain companies that specialize in the technology behind crypto and crypto transactions. Alternatively, you can buy stocks or ETFs of companies that use blockchain technology.

The best option for you will depend on your investment goals and risk appetite.

Is cryptocurrency safe?

Blockchain technology is typically used in the development of cryptocurrencies. Blockchain explains the process of grouping transactions into “blocks” and assigning a time stamp. Although it’s a fairly technical and complex process, the end product is a digital ledger of cryptocurrency transactions that is difficult for hackers to alter.

In addition, transactions require a two-factor authentication process. For instance, you might be asked to enter a username and password to start a transaction. Then, you might have to enter an authentication code sent via text to your personal cell phone.

While securities are in place, that does not mean cryptocurrencies are un-hackable. Several high-dollar hacks have cost cryptocurrency start-ups heavily. Hackers hit Coincheck to the tune of $534 million and BitGrail for $195 million, making them two of the biggest cryptocurrency hacks of 2018.

In contrast to money that is backed by the government, virtual currencies are solely determined by supply and demand. This may lead to erratic fluctuations that bring substantial profits or losses to investors. Furthermore, investments in cryptocurrencies are protected by far fewer regulations than those in more conventional financial instruments like stocks, bonds, and mutual funds.

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