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How Cryptocurrency Works: Beginners Guide

How Cryptocurrency Works: Beginners Guide
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A cryptocurrency, commonly known as "crypto," is a kind of virtual currency that users use to purchase goods and services. It uses an online ledger and robust cryptography to secure online transactions. Despite being rejected in countries like China and Russia, among others, the global cryptocurrency market is expanding at a rapid pace.

Introduced after the aftermath of the 2008 global financial crisis. Cryptocurrencies gave people a way to control their own money without relying on companies, banks, or governments. These best-performing asset classes can disrupt unintuitive old systems and diversify investment portfolios, an increasing number of companies and investment firms are adopting them.

On Oct. 17, 2021, the total value of all cryptocurrencies was over $2.6 trillion. The most popular cryptocurrency, Bitcoin, has a significant impact on the market position of other altcoins. Bitcoin's value currently accounts for approximately 45% of the total crypto market cap, with a total value of $1.2 trillion.

Ethereum, on the other hand, accounts for 17% of the total crypto market valuation, totaling $505 billion as of May 2021. Internationally, the crypto market has grown by 233% since the beginning of 2021.

Over 13,000 different cryptocurrencies are listed on the stock exchange, according to CoinMarketCap.com. Because of the high demand for these digital currencies, the number is expected to grow in the future.

Elon Musk, the founder, CEO, and Chief Engineer at SpaceX and the crypto supporter, recently said that these cryptocurrencies cannot be destroyed and that their growth is unstoppable.

In this article, you'll learn everything that you need to know about cryptocurrencies, including what they are and how cryptocurrency works.

Ready to explore?

Let's get started...

What is A Cryptocurrency?

Cryptocurrency is a digital payment that can be exchanged for goods and services online. Many businesses worldwide have introduced their own currencies, known as tokens. Companies allow people to use these tokens or cryptocurrencies in exchange for the goods and services that they offer. In order to gain access to the good or service, users must first exchange real currency for cryptocurrency.

Cryptocurrencies operate on blockchain technology (a decentralized technology that manages and records transactions across many computers).

Aside from buying goods and services, cryptocurrencies are also used for trading and making money on the stock exchange. When investors purchase a cryptocurrency, they bet on the asset's future value, just like stock market investors buy shares to sell in the future when their prices rise. Stock valuations are, in essence, subsidized guesstimates of a company's future cash flows. But, with cryptocurrencies, this is not the case because there is no principal company. As a result, the value of a cryptocurrency is determined entirely by investor demand.

The value of cryptocurrencies is determined by one of two factors:

The likelihood of other investors purchasing the asset.

The utility of the cryptocurrency's blockchain.

Excited to know how cryptocurrency works?

Well, we’re moving towards that only. Scroll down to read...

How Cryptocurrency Works?

Cryptocurrency is based on Blockchain technology. Blockchain is a public ledger that stores cryptocurrency totals and transactions. It stores data in "blocks" that are chronologically linked or "chained" together.

Blockchain, unlike traditional currency, is not governed by a centralized authority. It is a distributed ledger that all cryptocurrency users can access. This system frequently incorporates "proof of work" or "proof of stake" processes to create new blocks and validate transactions.

Cryptocurrency functions similarly to a Payment gateway or a credit card, except that you exchange digital assets for goods and services rather than money.

For a transaction, currency with a peer is exchanged through a virtual wallet, a.k.a cryptocurrency wallet. A cryptocurrency wallet is a software that enables the transfer of funds from one account to another. In order to make a purchase, you must also have a password, also known as a private key. The private key is analogous to a bank account. You can own multiple keys and have funds sent to those keys.

Transactions are recorded on a blockchain, which displays the totals of the transactions without revealing the parties' identities. The process of verifying transactions with cryptocurrency is known as crypto mining. Crypto mining uses high-powered computers to solve cryptographic equations. But those who successfully solve problems through mining can earn cryptocurrency, reward coins, or tokens.

Some currencies, such as Bitcoin, Ethereum, etc., have dedicated platforms called exchanges. So, currency owners usually buy their cryptocurrency supply through their respective exchanges. For example, if you wish to buy bitcoins, you don't need to participate in crypto mining; you can buy Bitcoins from the Bitcoin exchange. These exchanges bring traders from all over the world together to buy and sell cryptocurrencies.

Wondering what's next?

The usage of cryptocurrencies.

How Cryptocurrencies Can Be Used?

You can use cryptocurrencies majorly for two purposes:

Making Purchases: You can use cryptocurrency to buy goods and services online. Cryptocurrency exchanges can be made for fiat currency—or national currencies like USD—and then traded for different digital currencies.

Making Investments/trading: You can also use cryptocurrency to trade on the stock exchange and make money. All you have to do is to purchase a certain amount at one price and sell it at a higher price when the value rises. However, be aware that cryptocurrency values are volatile; the total value, or market cap, can rapidly rise and fall.

So, this is all about cryptocurrency and how cryptocurrency works. I hope you found this article to be useful and that it has helped you better understand cryptocurrency.

Happy Trading… ☺ ☺

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