What is cryptocurrency & how does it work?

Cryptocurrency, sometimes called cryptocurrency or crypto, is any form of currency that exists digitally or virtually and uses cryptography to secure transactions. Cryptocurrencies have no centralized issuing or regulating authority, instead using a decentralized system to record transactions and issue new units.

What is Cryptocurrency?

Cryptocurrency is a digital payment system that does not rely on banks to verify transactions. It is a peer-to-peer system that enables anyone to send and receive payments anywhere. Rather than being carried and exchanged in the real world, cryptocurrency payments exist purely as digital entries in an online database that describe specific transactions. When you transfer cryptocurrency funds, the transactions are recorded in a public ledger. Cryptocurrency is stored in a digital wallet.

Cryptocurrency got its name because it uses encryption to authenticate transactions. This means that advanced coding is involved in storing and transferring cryptocurrency data between wallets and public ledgers. The purpose of encryption is to provide protection and security.

The first cryptocurrency was Bitcoin, which was founded in 2009 and is still the most popular today. Much of the interest in cryptocurrencies is trading for profit, with speculation sometimes driving prices sky high.

How does Cryptocurrency work?

Cryptocurrencies run on a distributed public ledger called a blockchain, a record of all transactions that is updated and held by currency holders.

Cryptocurrency units are created through a process called mining, which involves using computer power to solve complex mathematical problems that generate coins. Users can also buy currencies from brokers, then store and spend them using cryptographic wallets.

If you own a cryptocurrency, you own nothing tangible. You own a key that allows you to transfer a record or unit of measurement from one person to another without a trusted third party.

Although Bitcoin has been around since 2009, the applications of cryptocurrencies and blockchain technology are still emerging in financial terms, and more uses are expected in the future. Transactions including bonds, stocks, and other financial assets can eventually be traded using the technology.

How to buy cryptocurrency

When it was first launched, Bitcoin was intended to be a medium for everyday transactions, making it possible to buy everything from a cup of coffee to a big-ticket item like a computer or even real estate. It is not well-rounded and, while the number of institutions accepting cryptocurrencies is increasing, large transactions involving it are rare. Nevertheless, it is possible to buy a wide variety of products from e-commerce websites using crypto. Here are some examples:

Technology and E-Commerce Sites:

A number of companies that sell tech products accept crypto on their websites, such as newegg.com, AT&T, and Microsoft. Overstock, an e-commerce platform, was among the first sites to accept Bitcoin. Shopify, Rakuten, and Home Depot also accept it.

Luxury items:

Some luxury retailers accept crypto as a form of payment. For example, online luxury retailer Bitdials offers Rolex, Patek Philippe, and other high-end watches in exchange for Bitcoin.

Cars:

Some car dealers – from mass-market brands to high-end luxury dealers – already accept cryptocurrency as payment.

Insurance:

In April 2021, Swiss insurance company AXA announced that it had begun accepting Bitcoin as a payment method for all of its lines of insurance except life insurance (due to regulatory issues). Premier Shield Insurance, which sells home and auto insurance policies in the US, also accepts bitcoin for premium payments.

If you want to spend cryptocurrency at a retailer that doesn’t accept it directly, you can use a cryptocurrency debit card, such as BitPay in the US.

Is cryptocurrency safe?

Cryptocurrencies are typically created using blockchain technology. Blockchain describes how transactions are recorded in “blocks” and time-stamped. This is a fairly complex, technical process, but the result is a digital ledger of cryptocurrency transactions that is difficult for hackers to tamper with.

In addition, transactions require a two-factor authentication process. For example, you may be asked to enter a username and password to initiate a transaction. After that, you may have to enter a verification code sent via text to your personal cell phone.

While securities are in place, that doesn’t mean cryptocurrencies are unhackable. Several high-dollar hacks have cost cryptocurrency startups dearly. Hackers hit Coincheck with $534 million and BitGrail with $195 million, making them the two biggest cryptocurrency hacks of 2018.

Unlike government-backed money, the value of virtual currencies is entirely driven by supply and demand. This can create wild swings that create significant gains or huge losses for investors. And cryptocurrency investments are subject to much less regulatory protection than traditional financial products like stocks, bonds, and mutual funds.

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