What is a Cryptocurrency? Learn how it works

What is a cryptocurrency?

Cryptocurrency is a decentralized digital currency that runs through blockchain technology. Most of us have seen currency in paper notes or coins, but cryptocurrencies are virtual currency that does not exist in the physical form.

This currency is decentralized. Now, most of you may be thinking, about what is decentralized. Let me explain!

All the different currencies that are being used all over the world are controlled by the banks and governments of the respective countries. The currencies are being controlled by a controlling body. Whereas cryptocurrencies are decentralized currencies, they are not controlled by any controlling body, neither the banks nor the government. That’s the beauty of cryptocurrency.

Now let us know,

How did cryptocurrencies get started?

Before knowing how cryptocurrencies got started, first, let us know where did the name cryptocurrency come from?

Cryptocurrency’s name came from the word cryptography. Cryptography is a process that is used to secure information through codes. So, due to this, no other person can access someone’s information. Here “Crypt” means “hidden”. Similarly, Cryptocurrencies are digital currencies run through blockchain technology, where someone’s information cannot be accessed by someone. It can also be called hidden currency.

The first cryptocurrency was bitcoin which was launched by an individual or group pseudonym “Satoshi Nakamoto“. In 2008 he published a whitepaper on Bitcoin. If you want to read it, you can check it out here.

He described Bitcoin as a Peer-to-Peer Electronic Cash System. Through this one can send payment to the other person without going through a financial institution.

Types of Cryptocurrency

The very first cryptocurrency is bitcoin and after the success and popularity of bitcoin, many other cryptocurrencies started coming to the market.

According to Google, there are currently over 4,000 different cryptocurrencies in the market. The second most popular cryptocurrency after Bitcoin is Ethereum. It holds the second-highest market cap after bitcoin.

UPDATE

As of August 2023, the total market capitalization of bitcoin is more than $400 billion.

Some of the other popular cryptocurrencies are Ethereum, Tether, Dogecoin, Cardano, etc.

How did cryptocurrencies become so popular?

After the success of Bitcoin, people started becoming more aware of the new currency. It was a very new concept and it completely changed the way we look at currencies.

This currency is decentralized and is not controlled by any central authority. Due to this people have another option of not depending on financial institutions.

As said above bitcoin is a Peer-to-Peer Electronic cash system that is nothing but computers connected around the world to carry out transactions. They are secure and one individual cannot control the transaction.

Due to these reasons, cryptocurrencies are popular.

How does cryptocurrency work?

Cryptocurrency is being run through blockchain technology. Blockchain as the name suggests is a database. But here the data is stored in the form of blocks and all the blocks are chained together to form a chain.

Blockchain is the technology behind Bitcoin and other cryptocurrencies that makes them so secure. To understand the workings of cryptocurrencies we will take the example of bitcoin. Although every cryptocurrency works in a different way some core concepts are the same for everyone.

Let’s take a real-life example and understand it. You are playing cricket along with your other three friends. Now while playing you realize you don’t have anyone to count your scores. So, one of your friends suggested that he is going to get one person who would count their scores and wickets in the match. But then you realize that you cannot trust the other person and he/she may manipulate the scores. So, you came up with an idea that all the players would keep a piece of paper with them and each one would update the score after every ball when the game will be overall would compare the 4 pieces of paper and then decide who won the match. If someone manipulates the score, it will not change on the other 3 papers, and in this way, no one can cheat.

Similarly, this is the way in which blockchain works. There are a lot of computers that are connected peer-to-peer. They are known as nodes. Today there are over 47000 nodes all around the world.

All of the computers maintain a ledger that has records of all the Bitcoin transactions that have happened. Whenever any transaction happens every 10 minutes it is shared with the nodes and the transaction gets recorded in every copy of the ledger of all the nodes around the world.

Now, every node/computer gets a challenging math problem that they need to solve, and whichever computer solves the problem first gets rewarded some bitcoins. This is known as bitcoin mining and the people doing it are known as bitcoin miners.

All the bitcoins that are being supplied to the market are being obtained through mining. Without mining, new bitcoins won’t come to the market. Like if gold is not mined from gold mines, no more gold would be produced similarly bitcoin would have to be mined to generate new bitcoins.

Huge computers are being used to mine bitcoins. Huge server rooms around the world are operating daily in mining Bitcoin.

Best cryptocurrency to invest in 2023

The investment strategy I follow is to invest in the long term. The best ones right now would be Bitcoin and Ethereum. Both have a high market cap and would give good profits in the long run. But keep in mind that do invest by doing proper research first and don’t invest a huge sum of money in the beginning which if you lose you will regret. Invest some small amounts, see the results and then invest further.

Conclusion

So that was all about cryptocurrencies and how they work. Hope you have understood about crypto. If you have any doubts you can put them in the comments and I will reply to you. Thanks for reading.