What Is Cryptocurrency And How Does It Work?

• Michael Willson
• January 13, 2025

It is the year 2022, and the cryptocurrency space is booming. Since bitcoin’s inception in 2009, the cryptocurrency space has come a long way. However, people arriving late to the party have little to no knowledge about cryptocurrency and its function. 

This article will educate such persons about cryptocurrencies and how it works. 

What Is Cryptocurrency? 

A cryptocurrency is any digitally generated currency  secured by cryptography, making it difficult to counterfeit or double spend. The first decentralized digital cryptocurrency was created in 2009 by Satoshi Nakamoto. By 2013, the currency’s value,  bitcoin, hit the $1000 mark. Since then, more and more digital cryptocurrencies have been created. As of today, there are over 10,000 cryptocurrencies in existence. At the moment, the top two coins are Bitcoin and Ethereum. While there are a lot of other coins, these two have established their dominance in the cryptocurrency space. 

How Does Cryptocurrency Work? 

The way cryptocurrency works are different from the way regular banking works. In the typical banking system, transactions are verified by the banking system. However, in cryptocurrency, the marketing is different. Cryptocurrency works on a distributed public ledger called a blockchain—a recording of all the transaction activities initiated by the currency holders. 

Most cryptocurrencies are created via a process called mining. This process involves solving complex math equations to generate coins. The primary way cryptocurrencies are generated is that other people who don’t mine purchase the currencies from brokers and can spend them using crypto-wallets. 

Types Of Cryptocurrencies

All cryptocurrencies are classified into two broad sections: the coins and the tokens. 

• Coins

Coins are created on the various blockchains of different crypto programs as a currency of exchange. There are different crypto coins available in the cryptocurrency space. Asides from bitcoin, all the other coins are referred to as altcoins, and examples of these include Ethereum, Cardano, Solana, lite coin, Dogecoin, etc. These coins are used as means of exchange on their various crypto programs. Also, they can be swapped for each other via exchange apps like Binance. These altcoins are also known as stable coins  because they tie their value to other commodities like gold or the US dollar. They are giving people a way to store up the equivalent value of that commodity on the blockchain. 

• Tokens

Tokens are different from coins. They are programmable assets that are built on a blockchain. They are used to initiate the formulations and implementation of unique  contracts. Tokens can be used outside the blockchain environment to establish assets ownership. These tokens can also represent value units such as money, digital assets, coins, electricity, etc. Tokens can be sent and received as well. 

NFTs are a new breed of cryptocurrency. They are one-of-a-kind assets that cannot be replaced because they generate assets digitally. Since only one of them exists, it cannot be exchanged. To Know what does NFT stand for and other related questions, you can click on the link. 

Advantages And Disadvantages Of Cryptocurrency 

Like everything in the world, cryptocurrency has its upside and downside. This section presents the advantages and disadvantages of cryptocurrency. 

Advantages 

• Cheaper Transaction Fees

Usually, the transaction fees of carrying out regular banking transfers are significantly higher than compared to that of cryptocurrencies. When carrying out crypto transactions, a small amount of crypto, known as a gas fee, is charged. Usually, nothing when compared with what is charged by regular banks. Cryptocurrency offers a cheaper way to do transactions. 

• Secure  And Quick Transactions 

Cryptocurrency transfers are unlike traditional bank transfers. The former can take a long time to be completed and is not entirely safe. Hacking is a regular occurrence when it comes to conventional transfers. It can also take up to 5 days to complete and validate a transfer. Cryptocurrency transfers happen almost immediately and are secured  thanks to blockchain technology. The use of pseudonyms also adds anonymity to transfers. 

• Growing Acceptance

Crypto has come a long way. In 2009, Bitcoin was a Blacksheep to the financial institution. Today, tons of coins have achieved a certain level of success and have been generally accepted in the financial world. Every day, more people are embracing cryptocurrency because of its many benefits. The more people accept these currencies, the more established and recognized they would become. 

• Higher Returns

One of the parts that make cryptocurrencies worth the while is the high returns  possible from buying or even trading them. A person who bought crypto worth 1000 USD in 2010 would have made a huge fortune already. Furthermore, the possibility of earning higher returns with other newer cryptocurrencies is real. Some coins get traction very fast and end up increasing in value. Such a coin would offer an excellent advantage for those trading in crypto.

Disadvantages 

• Illegal Activities

One of the reasons why financial institutions around the world are wary of the activity of cryptocurrency is the possibility of using it to transfer illegal funds. What’s worse, the decentralized nature of the blockchain makes it impossible to identify as a criminal if transactions happen. 

• Volatility 

Perhaps the greatest bane of cryptocurrencies. Their value is never stable and could plummet at any time. It makes  a high-risk venture, as anything could happen at any time. 

• Tax Implications 

Many countries are trying to instill task laws on crypto earnings. However, there is no easy way or method to measure what a person must pay—a pointer to future wars between financial institutions and crypto owners/ traders. 

• Data Loss 

If a cryptocurrency owner loses a key to the wallet, it’s the end of the road for all  the funds and investments in that wallet —one of the most deadly things  could happen to a crypto owner or trader. It’s  to square one. 

• No Cancellation Policy 

Once you send a certain amount of crypto to a wallet, you cannot withdraw or cancel the transaction. It doesn’t matter whether you made a mistake or not. You have lost whatever you sent wrongly. In crypto, you cannot change your mind. 

Conclusion

The cryptocurrency space is  ever-evolving —a pointer in the right direction. To fully gain the traction needed, one would have to stay in the area and continue learning—so happy learning.