What is cryptocurrency and how does it work?


If you’ve been paying any attention at all, then you’ve probably heard about cryptocurrency. Even if you’ve been out of the loop for the past few months, you should know that they are here to stay and will continue to grow in value. If you’re not up to date on this fast-paced and dynamic space, then this article is for you!

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I break down everything you need to know about cryptocurrencies, including what they are, why people care about them, examples of cryptocurrency use cases, potential risks involved and more.

What is a cryptocurrency?

A cryptocurrency is a digital currency that uses cryptography to regulate the issuing and use of money. A blockchain is the technology that underlies all cryptocurrencies, and is what makes them work.

You can think of a cryptocurrency as a digital version of money — it’s not issued by a government or central bank, but is instead created and managed through a decentralized computer network. The network allows everyone to create their own virtual money called a “coin” that’s easily traceable.

How Does a Cryptocurrency Work?

Whenever two parties make a transaction with the use of a cryptocurrency — be it Bitcoin, Ethereum or Litecoin — they are doing so using cryptography. This helps prevent fraud and ensures that payments are legitimate. Depending on the chosen blockchain network, you may be able to create an “account” for your virtual coins. This is the equivalent of a traditional bank account. When you make a payment with your virtual coins, the transaction is “recorded” on the blockchain. This is equivalent to writing a check or tokenizing your assets. In both cases, information is “mined” or created from “going back” to a previous block on the blockchain. Once this is done, the coins are “minted” or released to the network and “created” a new unique digital address.

Bitcoin and Other Cryptocurrencies

The first cryptocurrency to be released was Bitcoin in 2008. Since then, there have been a number of other cryptocurrencies that have been released including Ethereum in 2014, Litecoin in 2011 and Bitcoin Cash in November 2018.


While each of these cryptocurrencies has its own unique properties, they all have something in common — they are all based on the blockchain technology that underlies the entire internet.

Pros of Using Cryptocurrency

No government or third-party could control it — Cryptocurrencies are decentralized and rely on a blockchain network for security and transparency. This means there is no central authority handling transactions as with centralized banks, media outlets or governments. You can create your own digital money — Crypto assets essentially create new money as there is no central authority to regulate or create units of currency. This means you can create money the way you see fit. The price appreciation is predictable — Cryptocurrencies are based on the decentralized blockchain network and are therefore highly predictable. You can set your watch and know exactly what your money is worth. There are fewer risks associated with it — With no central authority to regulate or oversight, there are no risks of fraud or mismanagement with cryptocurrencies. They are also easy to store and use.

Cons of Using Cryptocurrency

You’ll need to learn new technologies — Although cryptocurrencies are based on the blockchain, they have different risks and requirements when it comes to technology. This includes understanding blockchain and its risks and how to secure your assets. You’ll most likely lose some of your investment — Even though cryptocurrencies are highly predictable and decentralized, the investment process is not. This means it’s possible to lose some of your investment if certain risks occur. Not recommended for international transactions — Although international transactions are riskier with cryptocurrencies, they are still different from other asset classes such as stocks or bonds.

BIP (Bitcoin Improvement Protocol) Evolution

In December 2017, the BIP (Bcash protocol evolution) was released. This is a series of updates aimed at improving the BIP-39-based BIP-39 “shim”. The BIP-39 “shim” is a technical innovation that is intended to reduce the risk of cyber-attacks. This article will focus on the improvements made to the BIP-39 “shim”. The BIP-39 “shim” was originally developed to reduce the risk of money laundering. However, it has since been extended to include additional risk assessment techniques.

Final Words: Should You Use Cryptocurrency?

If you’re not aware of cryptocurrencies, or if you’ve been out of the loop for the past few months, you’re in luck! Here are a few things to consider as you start to learn more about them:

Cryptocurrencies are a new type of money that is not issued by any government or central bank. They are instead created through computer code. This type of money is decentralized and can exist outside of any government or central bank. You can use it however you like, there’s no centralized bank or government that can touch it.

  • They are not tied to a specific country’s currency so they are perfectly suited to cross international borders.
  • They are not volatile like traditional fiat currencies, which can go up and down in value quickly depending on external factors.
  • There are thousands of different cryptocurrencies to choose from and many of them can be used to make instant payments.

As with most investments, you should do your research before deciding to invest in cryptocurrencies. You should also consider whether or not you really need to. There are risks associated with investing in digital currency, but if you’re willing to take those risks in order to receive even more benefits, then go for it.

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