What is Cryptocurrency and How Does It Work

What is Cryptocurrency

In recent years, there has been a paradigm shift in business and how currencies are handled. Without a doubt, the biggest revelation in terms of eCommerce has been cryptocurrency. Cryptocurrency has been able to not only alter how money can be handled, but also ways through which people can transact irrespective of geographical location.

That being said, many people still know very little or nothing at all about cryptocurrencies. This article aims to change that by providing detailed insisted to what crypto is and how it works.

What are cryptocurrencies?

Essentially, a cryptocurrency is a digital currency that people can use just like normal currency, to purchase and pay for goods and services. However, unlike typical fiat currencies, such as the US Dollar, which are controlled by a central authority, such as a country’s federal bank, cryptocurrencies are controlled by a decentralized system.

This decentralized system works using cryptography. Cryptography combines two words, crypto, which means vault or hidden, and the suffix graphy, which means writing. Cryptography uses complex computer code to protect information and networks of computers. Only the person or the people who were intended to read the said information can do so.

Differences between fiat currencies and cryptocurrencies

To properly understand the differences between these two types of currencies, you have to understand what exactly what fiat currencies are.

Fiat currencies are government-issued currencies that are not backed by any actual asset, such as gold. Since they are simply paper vouchers, governments and banks how much money is printed, therefore altering the value of all the monies in circulation. 

Cryptocurrencies however are created through mining, or other computer algorithms, Their value is not determined by any bank, government or corporation, The main reason cryptocurrencies were created was so that people would have greater control over the value of money. 

So what are the benefits of cryptocurrencies over fiat currencies?

Perhaps the most obvious advantage is the safety that comes with cryptocurrencies. They are digital currencies protected by perhaps the most complex computer codes and blockchains in the world. Moreover, they are not stored in one particular location, but are stored in millions of computer and internet-accessible devices worldwide. This means that it is virtually impossible to hack the system and steal cryptocurrencies.

Cryptocurrencies are also more portable when compared to fiat currencies. With cryptocurrencies, you will be able to make transactions with people worldwide without dealing with absurd costs that come with changing one fiat currency to another.

Cryptos are also more divisible. Fiat currencies have a set lowest denomination, one that you cannot divide past. However, cryptocurrencies can be divided into numerous decimal points because they are virtual.

Durability also comes into play when it comes to the benefits of cryptocurrencies. One of the reasons why federal banks have to keep on printing new money is because fiat currencies disintegrate over time and thus have to be replaced. Since cryptocurrencies are digital, they can be used for eternity and do not begin to decay after numerous transactions.

How does Cryptocurrency work?

All cryptocurrencies have the same template when it comes to their functionality and operation. They work using a technology called a blockchain. A blockchain is a decentralized code that is spread across millions of computers all over the world. The said blockchain is also responsible for managing and recording all the transactions concerning the specific cryptocurrency. This is what makes cryptocurrencies safe and secure to use.

Fiat currencies are created by printing new money, while cryptocurrencies are created through a process called mining. Cryptocurrency mining, essentially, is how digital transactions are verified and recorded in the blockchain.

To mine cryptocurrencies, users have to solve hard and complex mathematical problems. They are, in turn, rewarded with a denomination of cryptocurrencies, and that is how cryptocurrency coins are created. Cryptocurrency miners do not have to put in money to get the currencies. Rather, they receive the currency as a reward for completing the blocks of transactions.

Like any other financial currency, there has to be a means through which it is valued. When it comes to cryptocurrencies, it is scarcity and rarity that determine the value of the cryptocurrency. The scarcer the cryptocurrency, the higher it is valued.

This means that the price of cryptocurrencies fluctuates a lot, and they cannot be determined by one party. Today there might be an influx in the number of coins for a particular cryptocurrency in the market since many people want to sell it. Thus, since it is available, the price and valuation of the said cryptocurrency will drop.

The opposite is also true. The longer users hoard the cryptocurrency, the scarcer it will be and hence the higher its valuation will be.

What can Crypto be used for?

One of the main reasons cryptocurrencies have become so big is that they can be used for many tasks. Not only can they be used as direct alternatives to fiat currencies, but they also have their own distinct benefits in terms of usability.

Cryptos can be to purchases products and services, just like fiat coins. Over the last couple of years, more and more businesses and enterprises have begun to recognize the value of cryptocurrencies such as bitcoin. This appreciation has led to the said businesses making it possible for users to pay for goods and services using cryptocurrencies.

In the short term, cryptos are used as trading commodities. People buy and sell cryptocurrencies on online sites and platforms that facilitate trading. Thus, users are able, with precise timing, to make profits based on cryptocurrency trading.

In the long term, cryptocurrencies are prudent investment options. Take, for example, Bitcoin. Since it was introduced to the world in 2009, it had steadily proliferated in terms of valuation and use, meaning that anyone who invested in Bitcoin when it was started could be a billionaire right now.

Another use for cryptocurrencies is transferring funds. You can send cryptocurrencies to someone else, who will then sell the cryptocurrencies for fiat currencies. Thus, you have been able to transfer money, perhaps the other side of the world, without any fuss.

What is Bitcoin?

Over the duration of the article, the term Bitcoin has popped up on several occasions. What exactly is bitcoin, what does it do, and why is it so popular?

Bitcoin is a type of cryptocurrency that was founded in 2009. It is one of the oldest and by far the most influential cryptocurrency in the market right now. It, like other cryptocurrencies, uses peer-to-peer technology, meaning that there is no central entity that controls it.

Like all the other cryptocurrencies, bitcoins are created through mining, and specific platforms handle bitcoin transactions.

Users can store their bitcoins in digital wallets, which can be installed on their phones, computers, or any other device to access the internet. It is also possible to send bitcoin from one digital wallet to another, thus making it possible, as aforementioned, to send money indirectly from one person to another.

There are security systems set in place in the digital wallet to ensure that only the wallet owner can access the bitcoins in it. Moreover, this also makes

Every bitcoin transaction, be it buying bitcoin, selling it, or even transferring it from one wallet to another, is stored in the blockchain. Thus all information is safe and secure, as is the bitcoin, the digital wallet.

What are Altcoins?

As mentioned before, Bitcoin is, without a doubt, the largest and most used cryptocurrency in the world. So much so that a singular name, Altcoins, sometimes refers to all the other cryptocurrencies. Altcoins is a combination of two words, Alt, which is short for alternative, and coins, referring to the fact that they are cryptocurrencies.

Though they share many similarities with Bitcoin, such as functionality and, in some cases, are akin to how they operate, the altcoins operate under their own rules. Thus, how you will handle and interact with the altcoin will differ from one coin to another.

There are many altcoins in the market right now, some more popular and more influential than others. This differs; some are easier to use, some have more secure data systems than others et cetera.

What are Stable Coins?

A stable coin is a cryptocurrency that has its valuation tied to a specific commodity or entity, meaning that any fluctuation of the said commodity will result in the fluctuation of the cryptocurrencies. There are also stablecoins whose valuation is not attached to a said commodity but is rather regulated by a set algorithm.

What is a Crypto Wallet?

A crypto wallet is a place in which cryptocurrencies are stored. There are two main types of crypto wallets; software wallets and hardware wallets.

Software wallets are the wallets that are in computers, phones, and other devices. Platforms that trade cryptocurrencies also have wallets where users can store their cryptocurrencies when transacting. To access software cryptocurrencies, all you need is a device that can access the internet and the software, application, or site where the wallet is based.

Hardware wallets are akin to USBs; they are small, portable devices where you place cryptocurrencies. With hardware devices, you can carry the currencies wherever you go since they are stored in the devices.

What is a crypto exchange?

A crypto exchange is a platform through which cryptocurrencies buyers and sellers can interact and make trades. The currency seller is referred to as a maker, and the buyer of the currency is referred to as a taker.

Moreover, the crypto exchange also functions as a brokerage. The user can deposit money by wiring the money, bank transfer, or other means of deposit and buying the cryptocurrencies. Crypto exchanges normally have digital software wallets, where the user can deposit the crypto either temporarily or permanently.

There is a myriad of crypto exchanges, with each offering something different from the rest. Some are far better than others, and thus people prefer them. They include coinbase, which is one of the most used crypto exchanges in the world.


As you have seen, there are a lot of upsides that come with dealing with cryptocurrencies. Cryptos are safer, more secure, faster, and people can use them regardless of location. It should come a no surprise then that businesses and enterprises worldwide are integrating them into their system.

That being said, cryptos are more complex when compared to fiat currencies, and only a small minority of people understand everything they entail. Thus, it will take some time before cryptos become the standard cryptos.

Notwithstanding, this should not take away from the fact that cryptos have so much potential. Especially when it comes to investment and facilitating transactions between parties bases on opposite sides of the world.

When issues such as properly evaluating cryptocurrencies and dealing with frequent fluctuations are addressed, plus developing a way to make dealing with cryptos easy, the future is bright for this promising yet nascent commodity.

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