How does a cryptocurrency work?

Summary

• There are nearly 10000 cryptocurrencies traded in the crypto stock exchanges.
• Crypto currencies are highly volatile and should be invested in carefully and wisely.
• The only intrinsic value is their cryptic codes.

Cryptocurrency has been making a buzz for quite some time. Let us go back a bit to check the history of currency. The economic activities started in the world with the barter system, which was not easy to conduct. So, metal currency came into existence with centralized control. The metal currency changed into a paper currency, which is the current medium for selling and purchasing anything. These have a centralized control for issuance and supply. Cryptocurrency based on decentralization is breaking walls for acceptance among the public.

What is cryptocurrency?

Cryptocurrency, as the name suggests, is an encrypted currency that is digital or virtual. The unit of cryptocurrency is a complex computerized code. Miners who solve the code get the cryptocurrency in return for their hard work. This code-solving is complicated and can be done with massive computing power, which means using a massive system of powerful computers to solve complex computational problems or codes fast.

There are over 10000 cryptocurrencies in the market, and Bitcoin is the most popular name. These are traded on the Cryptocurrency Spot Exchanges. There are over 350 spot exchanges in the world.

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Crypto currency – how does it work?

After obtaining the cryptocurrency, one can transfer it to others or buy things by paying in crypto. There are trading portals to buy, sell or trade cryptocurrencies.

The question is, why deal in crypto, or how does it work? Not everybody tried to know how the currency works in the system. However, with cryptocurrency comes many jargons, and it is vital to understand them to make an opinion about them.

First, for receiving or spending cryptocurrency, one has to transact through a digital wallet. The requested transaction is then verified and broadcasted to the miners' network. The miners then verify the transaction before putting it into a ledger.

Also Read: Do you know how long it takes to mine one Bitcoin?

Crypto mining is a process in which the miners check for the recently broadcasted transaction and verify the transaction to be recorded in the ledger. Ledger in cryptocurrency case is the transaction blocks where all the verified transactions are recorded. Once the transactions are verified, these are recorded in the blocks and once that block is full, verified transactions go to the next block. These blocks are all connected in a sequence. This sequence makes the transaction record secure. This method to digitally store the transaction is called ‘Block Chain’ technology.

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Source: Pixabay

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The miners are unknown to each other. They compete to solve the code fast. Solving the code means verifying the transaction broadcasted in the network. After solving the complex cryptographical code, the miner broadcast it again in the network for other miners to verify the solution. When the solution is verified, it is permanently recorded in a blockchain ledger in the form of a transaction block. These blocks then become publicly accepted.

In return for all the hard work in solving the code first correctly, the miners get a reward in the form of crypto coins. These coins add to the total number of available coins for a transaction.

The mining is based on a ‘proof of work’ system where it is ‘difficult to compute’ but ‘easy to verify the transactions.

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The transaction is a transfer of cryptocurrency from one digital wallet to other. These transfers are verified for the authenticity that these are done from an actual owner of the wallet. The wallets are also secured by encrypted signature for doing any transaction.

Cryptocurrency is encrypted, digitized, kept in a digital wallet, and secured by an encrypted electronic signature for executing the transaction. It also has an encrypted address of the holder. So, no personal information is stored in the entire transaction process.

This currency system is decentralized and not regulated by governments. It means no government, miner, or wallet holder can hold control over the transactions made. In many countries, cryptocurrency is legalized now.

Also read: Who should invest in cryptocurrencies?

Can we buy cryptocurrency?

Anybody can buy cryptocurrency by availing of the many options available. These can be bought from the brokers. Like stocks, these are traded in cryptocurrency exchanges.

Why are these valued so much?

Cryptocurrencies are just digital currency; nothing tangible will be left in case of a breakdown. Why are they creating a buzz?

Few facts: No government or a higher authority can control these currencies. It is open to the public. These are limited, and that makes them valuable. The most crucial point is that people accept it for buying and selling goods, which created its value. Cryptocurrency is based on cryptography which makes them safe, unique, and valuable.

Finally, the crypto market is heavily volatile, and investors should understand the concept and process before dealing with it.

Please note: The above constitutes a preliminary view and any interest in stocks/cryptocurrencies should be evaluated further from an investment point of view.