Skip to content

Everything You Need To Know About Cryptocurrency – How Cryptocurrency Work and What Problems It Solve?

  • by

At first, the man exchanged goods. Then came the age of metal currencies like gold and silver. Today we pay with banknotes, credit cards, or use virtual currencies on the Internet. Economists consider cryptocurrencies to be the next big revolution in global payments. For instance; after Bitcoin, Ethereum is going to be the next big cryptocurrency.

There are very many of them nowadays. These three cryptocurrencies are the subject of much discussion: Bitcoin, Ethereum, and Ripple. Ripple seems to be the cheapest cryptocurrency that has the huge potential to grow after Ethereum.

what-is-Cryptocurrencies
what-is-Cryptocurrencies

Definition of Cryptocurrencies

Cryptocurrencies are the term for digital currencies. The word “cryptocurrency” is actually a combination of the two terms cryptography and currency. Cryptography is the science of encryption.

A cryptocurrency is a digital currency. The basis for this currency is cryptography. A cryptocurrency can be used like ordinary money. This means that it can be exchanged, bought or sold. You can also use it to transfer and save the holdings.

It is important that you understand that there are a variety of cryptocurrencies. There are some cryptocurrencies whose functionality and application are significantly more far-reaching. Than the points we just mentioned, there is also an investment environment.

Explanation of Cryptocurrencies

Cryptocurrencies like Bitcoin, Ethereum, or Ripple only exist virtually. As the money in your bank account, virtual currencies are physically non-existent. The difference to your money in the bank is that you can always convert your numbers in the account into cash.

This is not possible with cryptocurrencies, as they only exist digitally and are not deposited with a bank. Virtual currencies don’t need a bank at all. A transaction takes place solely within the so-called blockchain.

The blockchain is the only system for cryptocurrencies that enables trading. And all transactions for virtual currencies. As a means of payment, cryptocurrencies have the crucial difference that they work without banks. On the other hand, money in your pocket or in your account is always a securitized debt.

how-does-Cryptocurrencies-work
how-does-Cryptocurrencies-work

For a purely digital currency, the equivalent comes from trust in a shared network; the blockchain. The blockchain is the central instrument and foundation for every digital currency. Every transaction is encrypted and combined. Into so-called data blocks using complicated arithmetic operations.

These are stored decentrally and can be viewed by every user. When it comes to security, the blockchain has a decisive advantage. In the case of cryptocurrencies, the data blocks generated are stored on different computers.

Each user becomes a backup for the entire network (the chain). If someone wants to intervene in this system, they have to hack practically all computers participating in the blockchain. This is impossible, especially with large blockchain associations. With millions of participants such as the Bitcoin blockchain.

How do cryptocurrencies work?

Since cryptocurrencies are by definition based on cryptography. They also use concepts that are used for encryption.

Since virtual currencies such as Bitcoin and Ethereum are stored digitally in the blockchain. Nobody can manipulate them just like that. The blockchain is a kind of open book that generates virtual currencies. Assigns them to owners, and documents every transaction. Digital means of payment can only exist as digital currency within the blockchain.

Upholders see the greatest advantage here. The movements of cryptocurrencies can be traced at any point in time. And everyone can see how many virtual currencies (for example in Bitcoin) are in circulation.

In addition, the maximum amount that can be generated for Bitcoin is set in advance. The code of the digital currency is limited to 21 million Bitcoin (BTC). Like the Reserve Bank of India (RBI) or the American Federal Reserve Bank (FED).

Or other state institutions cannot get involved in this system. In crisis areas, trade and transactions can be carried out even if the banking system there collapses. As general, transactions are possible across all national borders. In most cases, there are little or no fees.

how-does-Cryptocurrencies-work
how-does-Cryptocurrencies-work

How does the transaction actually work?

Trading cryptocurrencies has become a very popular hobby. The speculation on Bitcoin or Ethereum is enormous. Bitcoin is now home to over 170 billion USD in market capitalization. With Ethereum it is still 34 billion.

Those who invest in cryptocurrency, only swap their money into the system for virtual currencies. So you exchange real INR or USD for BTC and other coins. This happens on a coin exchange, also called a crypto exchange platform.

Providers like Coinbase or Kraken are the first gateway to digital currency. You can also get your so-called wallet here. A Bitcoin wallet is comparable to an account with your bank. This code is assigned to you. And represents your address or account number for cryptocurrencies.

You can use a coin exchange to deposit virtual money in the form of cryptocurrencies at this address. You are now part of the blockchain and can send virtual currencies back and forth. All you need for the transaction is the recipient’s wallet address.

When you buy cryptocurrency from the market, it can only be transferred digitally. When selecting the coin exchange, you have to make sure that the means of payment. This means, the cryptocurrency requested by the recipient, is also in your wallet.

Since each currency uses its own system, no conversion takes place. The crypto money will just disappear if someone requests Ripple cryptocurrency and you send a different coin.

Leave a Reply

Your email address will not be published. Required fields are marked *