What is Cryptocurrency? How Does it Work?

Cryptocurrency is a decentralised digital currency secured by cryptography and is based on blockchain technology. To grasp the concept of cryptocurrency, one must first comprehend three terms: blockchain, decentralisation, and cryptography.

In the case of cryptocurrencies, a blockchain is a digital ledger whose access is dispersed among authorised users. This ledger keeps track of transactions involving various assets, including money, real estate, and even intellectual property.

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The origins of bitcoin technology can be traced back to discovering a "blinding algorithm" in the 1980s. Secure and unchangeable digital transactions are at the heart of the algorithm. It is still essential in today's digital currency.

In 2008, a group of persons (now known as Satoshi Nakamoto) devised the guiding principles behind Bitcoin.

The first and the most popular cryptocurrency is Bitcoin in the market. Bitcoin was first introduced in 2009 exclusively. But, starting with WordPress in 2012, it would be years before it was formally acknowledged as a form of payment by large businesses.

What are the Advantages of Cryptocurrency?

The following are some of the advantages:

  1. Currency owners do not need to "trust" a single governmental institution because everyone in the network has access to the same information, which cannot be changed.
  2. Only the network's users have access to the data, which is carefully guarded. Shared ownership also means that all users must agree on the accuracy of the data, reducing the chances of data mismanagement or miscommunication. Consider it a democracy.
  3. A blockchain's most important feature is security.

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How Does Cryptocurrency Work?

The government and central regulatory institutions have no control over cryptocurrencies. Cryptocurrency, as a concept, operates outside of the banking system, employing various brands or types of coins, the most well known of which is Bitcoin.

1. Exploration and Mining

"Mining" is used to create cryptocurrencies (which are entirely digital). This is a lengthy procedure. Miners are obliged to solve specific mathematical challenges on specially equipped computer systems in exchange for bitcoins.

Mining one bitcoin would take only ten minutes in an ideal world, but the process takes around 30 days.

2. Purchasing, Selling and Storing of Goods

Users can now purchase or sell cryptocurrencies from central exchanges, brokers, and individual currency owners. The simplest way to buy or sell cryptocurrencies is through exchanges or websites like Coinbase.

Cryptocurrencies can be held in digital wallets once purchased. Digital wallets such as Hot" and "cold" exist. The term "hot" alludes to a wallet that is connected to the internet, making it simple to transact but also prone to theft and fraud. On the other hand, cold storage is safer, making transactions more difficult.

3. Investing or Transacting

Bitcoins and other cryptocurrencies may be transferred effortlessly from one digital wallet to another using only smartphones. Once you have them, you have the option to:

  1. Spend them on products and services
  2. Sell them for a profit
  3. Sell them for money
If you want to buy coins using Bitcoin, the quickest way is to use a debit card. These debit cards can also withdraw cash, much like an ATM. Banking accounts or peer-to-peer transactions can also convert cryptocurrency to cash.

Because cryptocurrencies are so unpredictable, it's best to start modestly and diversify your holdings. Put another way, don't put all your eggs in one basket.

As a beginner, it is beneficial to rely on expert advice and then gradually develop your knowledge by researching the subject. It is also necessary to understand your country's historical and present policies on cryptocurrency for this type of research to be successful. Also, never invest money more than you can afford to lose.

(Check out 'Learn & Grow with Wizely' to read and learn more about different investment options.)

Sakshi Mehrotra

Sakshi Mehrotra