What is cryptocurrency and how does it work?
Cryptocurrency – meaning and definition
Cryptocurrency, sometimes called crypto-currency or crypto, is a form of currency that exists digitally or virtually and uses cryptography to secure transactions. Cryptocurrencies do not have a central issuing or regulating authority, instead using a decentralized system to record transactions and issue new units.
What is cryptocurrency?
Cryptocurrency is a digital payment system that does not rely on banks to verify transactions. It is a peer-to-peer system that enables sending and receiving payments anywhere. Rather than carrying and exchanging money in the real world, cryptocurrency payments exist purely as digital entries in an online database describing specific transactions. When you transfer cryptocurrency funds, the transactions are recorded in a public ledger. Cryptocurrencies are stored in digital wallets.
Cryptocurrency gets its name because it uses encryption to verify transactions. This means advanced coding is involved in storing and transmitting cryptocurrency data between wallets and public ledgers. The goal of encryption is to provide security and safety.
The first cryptocurrency was Bitcoin, which was founded in 2009 and is still the most popular today. Much of the interest in cryptocurrencies is trading for profit, with speculators occasionally driving prices sky high.
What Is a Blockchain?
A blockchain is an open, distributed ledger that records transactions in code. In practice, it’s a little like a checkbook that’s distributed across countless computers around the world. Transactions are recorded in “blocks” that are then linked together on a “chain” of previous cryptocurrency transactions.
“Imagine a book where you write down everything you spend money on each day,” says Buchi Okoro, CEO and co-founder of African cryptocurrency exchange Quidax. “Each page is similar to a block, and the entire book, a group of pages, is a blockchain.”
With a blockchain, everyone who uses a cryptocurrency has their own copy of this book to create a unified transaction record. Each new transaction as it happens is logged, and every copy of the blockchain is updated simultaneously with the new information, keeping all records identical and accurate.
To prevent fraud, each transaction is checked using a validation technique, such as proof of work or proof of stake.
How does cryptocurrency work?
Cryptocurrencies run on a distributed public ledger called blockchain, a record of all transactions updated and held by currency holders.
Units of cryptocurrency are created through a process called mining, which involves using computer power to solve complicated mathematical problems that generate coins. Users can also buy the currencies from brokers, then store and spend them using cryptographic wallets.
If you own cryptocurrency, you don’t own anything tangible. What you own is a key that allows you to move a record or a unit of measure from one person to another without a trusted third party.
Although Bitcoin has been around since 2009, cryptocurrencies and applications of blockchain technology are still emerging in financial terms, and more uses are expected in the future. Transactions including bonds, stocks, and other financial assets could eventually be traded using the technology
How Does Cryptocurrency Gain Value?
To illustrate how some cryptos can appreciate in value, let’s look at the ultimate crypto bellwether: Bitcoin.
Bitcoin nearly quadrupled in value throughout 2020, closing out the year above $28,900. By April 2021, the price of BTC had more than doubled from where it started the year, but all those gains had been lost by July. Then BTC more than doubled again, hitting an intraday high above $68,990 on November 10, 2021—and then dropped to around $46,000 at the end of 2021. As of early June 2022, Bitcoin trades for just over $31,000 per coin.
While the original crypto is down by 35% year to date, Bitcoin has seen an appreciation of more than 1,000% over the past five years.
What can you buy with cryptocurrency?
When it was first launched, Bitcoin was intended to be a medium of everyday transactions, making it possible to buy everything from a cup of coffee to big-ticket items like computers or real estate. It has not been fully implemented and, while the number of institutions accepting cryptocurrency is increasing, large transactions involving it are rare. Nevertheless, it is possible to buy various products from e-commerce websites using crypto. Here are some examples:
Technology and e-commerce sites:
Several companies that sell technology products accept crypto on their websites, such as newegg.com, AT&T, and Microsoft. Overstock, an e-commerce platform, was among the first sites to accept Bitcoin. Shopify, Rakuten, and Home Depot also accept it.
Some luxury retailers accept crypto as a payment method. For example, online luxury retailer Bitdials offers Rolex, Patek Philippe and other high-end watches in exchange for Bitcoin.
Some car dealers – from mass-market brands to high-luxury vendors – already accept cryptocurrency as payment.
In April 2021, Swiss insurer AXA announced that it began accepting Bitcoin as a mode of payment for all lines of insurance except life insurance (due to regulatory issues). Premier Shield Insurance, which sells home and auto insurance policies in the US, also accepts Bitcoin for premium payments.
If you want to spend cryptocurrency at a retailer that doesn’t accept it directly, you can use a cryptocurrency debit card, such as BitPay in the US.