How Does Cryptocurrency Work?

October 23, 2020 • Shannon Flynn


How does cryptocurrency work? The word “cryptocurrency” seems to pop up a lot in conversation these days. Like many things on the internet, understanding it can be challenging since it became so popular so fast. Unlike some other trends, though, it looks like crypto’s going to last, so it may help to learn more about it.

The world is on the verge of a tech-driven revolution, and cryptocurrencies are part of it. Technology is changing the way we live, upending decades-old approaches to things like finances. While cryptocurrency is still a relatively new phenomenon, it’ll likely be a significant part of that shift.

You may hear many people talk about this potential but may be unclear on what crypto is. If it does blow up like some expect, though, you should know a thing or two about it. To clear things up, here’s a guide on what crypto is, how it works and how you can use it. 

  1. The Basics of Cryptocurrency
  2. Positives and Negatives of Crypto
  3. How to Get into Crypto
  4. List of Countries with Banned Crypto
  5. Making Money from Your Assets
  6. Conclusion: Is it here to stay?

The Basics of Cryptocurrency

Cryptocurrency is a decentralized, entirely digital form of money. Decentralization means that it doesn’t belong to any central entity like a bank, which gives spenders more freedom. If you’re wondering what the point of cryptocurrency is, decentralization is the answer. It is, at least in theory, independent from market shifts, regulations and fees.

Decentralization is also the reason why there are so many cryptocurrencies available. Anyone can make one, and whether or not it takes off depends on if people use it. This is also the way a cryptocurrency gains value.

Like the stock market, supply and demand makes cryptocurrency valuable or not. Crypto doesn’t represent another asset like gold but represents one of itself. As a result, its worth depends on its availability and how much people want it.

People often contrast crypto against fiat currency. Fiat is also not backed by a commodity but gets its value from the government that issued it. Most modern sovereign currencies, like the U.S. dollar and the Euro, are fiat money.

You may also wonder what an exchange is since that word often appears in crypto conversations. This is a digital marketplace where people buy and sell cryptocurrencies.

There’s sometimes confusion about the distinction between digital currency vs. cryptocurrency. Digital currency is any entirely electronic form of money, and crypto is a specific form of legal tender that uses cryptography. This relies on blockchain technology and helps regulate and secure the funds.

Blockchain and Cryptocurrency

It’s impossible to talk about crypto without also talking about blockchain. The two are so closely related that many people don’t understand the difference between bitcoin and blockchain. Blockchains are the underlying technology that makes crypto possible but aren’t the currency itself.

A blockchain is a public ledger, a record of every crypto transaction that everyone can see but no one can change. Like crypto itself, blockchains are decentralized, so no one person or organization owns them. This system helps ensure crypto transactions are secure.

You may also come across the term “blockchain wallet.” This is a digital place where people can store their crypto. There are both hot and cold wallets, which refer to those connected to the internet and ones that aren’t.

Positives and Negatives of Cryptocurrency

There are plenty of reasons to invest in cryptocurrency, as well as why not to. Thanks to blockchain technology, there’s a much lower risk of fraud with cryptocurrency. Since it’s decentralized and doesn’t represent other assets, it’s also relatively immune to other market crashes.

On the negative side, since there’s a comparatively small amount of crypto, it can be volatile. Changes in supply and demand can have considerable effects on a cryptocurrency’s value. In that way, some of the things that make it an attractive investment also make it risky.

Traditionally, not many stores accept crypto as a form of payment, but that’s changing. There’s a growing number of cryptocurrency debit cards available that people can use anywhere that accepts cards. As more people invest in crypto, more places are starting to take it as payment. 

What Is Bitcoin and How Does It Work?

The words “bitcoin” and “cryptocurrency” often appear close to each other, making it easy to confuse them. Bitcoin is a specific cryptocurrency, the first and most popular one. It emerged in 2009 after the Great Recession to provide investors a safer, decentralized investment.

There’s a limited number of bitcoins, and people introduce them into the economy by mining. Bitcoin mining involves running complex calculations to verify transactions, financially rewarding whoever completes it first. This process laid the groundwork for the way most major cryptocurrencies today work.

Bitcoin is by far the most successful crypto and influenced virtually all others that followed. It’s one of the few well-known cryptocurrencies, leading many people to think it’s the only one. 

How to Get Into Cryptocurrency

This beginner’s guide to cryptocurrency wouldn’t be complete without instructions on how to get started in crypto. The first step is to look into different currencies and exchanges. To get the most information before making a decision, you should learn how to research cryptocurrency.

You can find plenty of info about crypto on news sites or forums like Bitcointalk. Look for things like how a cryptocurrency works, how much of it there is and its market cap. A cryptocurrency’s market cap meaning is its supply in circulation multiplied by the current price of one coin. It’s the same thing as in the stock market, but with bitcoins instead of company shares. If a cryptocurrency has a higher cap, then it’s likely a more valuable investment.

After finding a desired coin, cryptocurrency trading for beginners is relatively straightforward. Here’s how it works.

How to Invest in Currencies

Now that you know how to pick a cryptocurrency, you should familiarize yourself with a few notable options. Bitcoin is the most popular crypto and often has the highest market cap too. Ethereum is another reliable investment, and other examples of digital currency to invest in include Tether, XRP and Litecoin.

Next, you may wonder, “how do I buy cryptocurrency?” To buy crypto, all you have to do is go to an exchange like Binance, which allows you to exchange cash for crypto and vice versa. Different exchanges can offer various rates, so it may help to look around to find the best deal.

You can keep crypto you buy on the exchange, but it’s best to get a crypto wallet. Many cryptocurrency websites offer recommendations for which wallets to choose.

There are other ways to gain cryptocurrency apart from buying it. With bitcoin, users can mine blocks to earn new coins, but this requires a lot of computing power. It’s not an easy process, but it can be a rewarding one.

Cryptocurrency Banned Countries List

Keep in mind that using and owning crypto isn’t legal everywhere. Here’s a list of countries where crypto is illegal as of the time of writing. Remember that these may change as time goes on.

  • Afghanistan
  • Pakistan
  • Algeria
  • Bolivia
  • Bangladesh
  • The Republic of Macedonia
  • Saudi Arabia
  • Qatar
  • Vanuatu
  • Vietnam

Some countries haven’t banned crypto altogether but do restrict it to varying degrees. These are:

  • China
  • India
  • Ecuador
  • Indonesia
  • Morocco
  • Zambia
  • Nepal
  • Egypt
  • American Samoa

How to Use Your Crypto After Investing

After investing, you’ll probably wonder how to cash in cryptocurrency. Crypto owners can sell their coins on an exchange or use it like regular currency. There are plenty of things you can buy with Bitcoin and other cryptocurrencies, and the list is growing.

Some online stores, like Etsy, allow users to pay in crypto. If sites don’t accept crypto, customers can use platforms like Bitrefill to buy vouchers for popular stores and brands. Various apps automatically convert crypto to cash, enabling near-instant, flexible crypto purchases, but these typically have fees.

Some of the best apps for crypto include Cash App, which enables peer-to-peer bitcoin transfers, and Coinbase, a mobile wallet. You can also get crypto debit cards from companies like Bitpay and CoinJar.

Making Money from Cryptocurrency

When it comes to how to make money from cryptocurrency, there are also various options. The most straightforward way is to sell it on an exchange. The next best way to make money with bitcoin is through mining.

Other services give people new and exciting ways of making money with blockchain. One gamified service, “Cryptokitties,” lets you buy virtual cats with crypto, breed them and sell them for a profit. Examples of cryptocurrency in the gaming industry like this are some of the fastest-growing ways to make money with crypto.

Games like “Cryptokitties” or “Age of Rust” reward players with crypto for playing. Many of these involve some amount of gambling, but not all do.

How Does Cryptocurrency Work?

Cryptocurrency is becoming more legitimate by the day. As its users grow and more services support it, it’s turning into a more viable replacement for cash. If current trends continue, it looks like cryptocurrency will stick around for a while.

It will probably be some time before crypto goes mainstream. Still, that shift is likely to happen at some point and could be sooner than people realize. Learning about crypto can help you prepare for the future.