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How Does Cryptocurrency Work?

How Does Cryptocurrency Work
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Cryptocurrency is probably one of the most talked-about topics in recent years. More and more people are learning how to use it and make profits.

What Is Cryptocurrency?

To understand how cryptocurrency makes money, we need to know what it refers to. Cryptocurrency is digital money based on blockchain technology secured by cryptography. This currency is decentralized and not managed by any specific authority.

The three major terminologies in the explanation are

Decentralized

Decentralized digital money means that there is no particular authority that controls the rise and fall of the currency.

Blockchain

Blockchain refers to a digital ledger that records transactions that authorized users have access to. This access can be shared amongst users to keep the information transparent.

Cryptography

It is the process that secures data from any unauthorized access by encryption.

Types of Cryptocurrencies

There are around 10,000 types of cryptocurrencies today with various values.

Some major cryptocurrencies are

Bitcoin

Bitcoin is undoubtedly the most expensive and widely accepted cryptocurrency. The value of this currency has exponentially increased over the years, and the people who invested in it initially have made huge profits. Today, you don’t necessarily have to buy an entire coin but can buy small fractions of bitcoin.

Altcoin

Altcoin refers to any digital cryptocurrency alternative to bitcoin. It includes famous, fast-growing currencies like Etherium and other cryptocurrencies with smaller values like Shiba Inu, Dogecoin and more.

How Does Cryptocurrency Work?

We have already established that cryptocurrencies are decentralized and not controlled by any regulatory authorities. It means that they don’t work with the banking system. So, let’s understand how they work.

Buying, Storing, Selling

There are many platforms today where you can buy and sell cryptocurrencies. Another conventional way to own crypto is to buy from brokers or individual owners. These currencies are stored in digital wallets that can be hot or cold. Hot wallets refer to the wallets connected to the internet, and cold storages are offline. Hot wallets offer quick transactions but are prone to thefts, while cold wallets are safer, but the transactions are difficult.

Mining

Mining refers to the process of generating cryptocurrencies. It is a complicated process that requires miners to solve mathematical puzzles using advanced computers. The reward of solving these puzzles is generally bitcoins.

Investing and Transacting

You have multiple options when you own cryptocurrency. It can be used to buy products, exchange for cash and even be traded.

Pros and Cons of Cryptocurrency

Pros

Crypto owners can earn passive income by staking. This refers to using cryptocurrencies to verify transactions on blockchain protocol and can help you grow your holdings without buying more crypto.
Cryptocurrencies are seen as currencies of the future that people should invest in before they get more expensive
Decentralizing the cryptocurrency removes banks from managing the money supply that can prevent reducing the value via inflation.

Cons

It is particularly risky for short-term investors since the values change quickly. People who aim to make profits in the short term by selling their crypto as soon as it gains value can also make huge losses in a short time.
Handling cryptocurrency is something the Government has not mastered yet. This means that there can be crackdowns or regulatory changes that can affect the market in numerous ways.

About the author

Ishani Mohanty

She is a certified research scholar with a Master's Degree in English Literature and Foreign Languages, specialized in American Literature; well trained with strong research skills, having a perfect grip on writing Anaphoras on social media. She is a strong, self dependent, and highly ambitious individual. She is eager to apply her skills and creativity for an engaging content.

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