We have all heard about cryptocurrency, but sometimes it feels that not many people other than crypto developers actually know what it is and how it works. But as it keeps expanding in the digital world, it is hard not to feel curious about its specifics.

If you are part of the group of people to which cryptocurrency is still an enigma, that is about to change. Today, we are going to explain what cryptocurrency is and how it works.

What Is a Cryptocurrency?

Cryptocurrency is decentralized digital money that uses blockchain technology (more on this in the next section). There is no physical money, as it is exclusively digital. Additionally, you cannot put cryptocurrency in a traditional bank, as it only exists within the blockchain and is not regulated by any central authority. 

But you are probably wondering how safe this actually is. The answer is simple: it is safe because cryptocurrency is protected by cryptography, a method that secures sensitive data from unauthorized access using encryption techniques.

There are tens of thousands of different cryptocurrencies out there. The most prominent ones include Bitcoin, Ethereum, and Crypto tokens.

What Is Blockchain?

To understand how cryptocurrency works, you must first understand what blockchain is. 

Blockchain is a decentralized, immutable, and shared database or ledger that keeps records of transactions and related data made in cryptocurrency. Blockchain technology does not need a central authority. Instead, it is distributed across a network of computers. 

The information is saved in encrypted blocks that are linked. They are impossible to tamper with due to their sequentiality. 

How Does a Cryptocurrency Work?

Cryptocurrencies are created through a process called mining. It consists of solving complex mathematical puzzles developed by the creator of the cryptocurrency on specific computer systems. It can take several days for miners to unlock one unit of cryptocurrency, depending on the complexity of the puzzle and the potency of the computer system. 

You can also buy cryptocurrency instead of mining it. Currently, you are able to acquire it through exchanges – the most popular method these days – brokers or individual owners who are selling. If you do not have cryptocurrency, your first purchases will be in traditional money. Then, once you create a crypto portfolio, you are able to start trading.

Cryptocurrency owners store their digital currency in digital wallets. These wallets can be custodial (best known as “hot wallet”) or noncustodial (“cold wallet”). The first is less safe from hackers but makes transactions easier. The latter requires a few extra steps, as it is a piece of hardware protected by a code only the user knows. If the user loses the key or the wallet, the contents will be lost forever. 

And what can you do with cryptocurrency? Well, the same you can do with money: buy or invest. 

Making cryptocurrency transactions is becoming easier as interest in digital money piques. You can trade your assets, exchange them for fiat money, or buy goods and services. There are plenty of businesses, from retailers to even colleges, now that accept cryptocurrency as payment. If you do not feel affected by extreme volatility, investing can also be a good option for your cryptocurrency.