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What is Cryptocurrency & How it Works?

Donny Gamble
February 12, 2022
What is Crypto
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You’re seen fortunes made overnight in Forbes articles, read about the guy who paid for pizza with Bitcoin all those years ago, and you keep hearing it pop up everywhere you go.

So, what is cryptocurrency? It’s a bit of a process to understand, so we’ll break it down into steps. Cryptocurrency is a digital currency formula that acts as a technological framework for coins. Coins are specific currencies generated using the method of cryptocurrency.

But what is cryptocurrency beyond the coin? Let’s talk about the foundation of crypto, what it means in the current financial landscape, and where it’s projected to go in the future.

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Crypto Needs a Framework to Run Properly

The concept of cryptocurrency is that it’s money for the people, by the people. When you purchase a coin that’s generated by cryptocurrency, these are the working parts at play:

  • Coins Are Mined: Simply put, various PCs (yours could be a mining PC) mine cryptocurrency coins with electrical and processing power. They do this by helping the cryptocurrency framework validate transactions, and solve mathematical problems to generate new coins.
  • Encryption is Key: These coins are encrypted on the cryptocurrency network. In the case of Bitcoin, it uses blockchain technology to prevent fraud, verify funds, transactions, and the number of coins that are available.
  • Public Ledger Accountability: Everyone who owns cryptocurrency has a ledger made available to them that lists out every transaction being made without giving personal information. This is to make it completely open-ended to coin holders. You can see everything that’s happening so you know there’s no funny business going on.
  • Digital Supremacy: Without the internet and electricity, cryptocurrency wouldn’t exist, which is why these cryptocurrencies reward miners with coins in exchange for keeping the blockchain going. It’s an ecosystem at play, and it’s one that keeps everything in the hands of the coin holder.
  • Cold Storage: If you’re worried about your crypto being hacked, you’re not alone. Being completely digital, it’s not something you can tangibly hold in your hands. Instead, your cryptocurrency can actually be held in an IRA and put into cold storage. It’s essentially digital storage that isn’t connected to the internet in any way, so it can’t be hacked.

Alright, so we know what it is, but now we need to know what it does. Currently, in the US, we treat it a lot like a stock, but it can do more than what we treat it as.

  • Low-Cost Money Transfers: You can convert money into crypto, send that crypto to someone you want to pay, and they can then exchange it in their currency. Cryptocurrency is like a financial vehicle.
  • Make (Mostly) Private Transactions: You can use Bitcoin and other crypto to pay for things without being digitally traced… kind of. They can’t trace the Bitcoin, but they can trace other transaction markers, so if you’re smart you can use this to have total anonymity for your entire financial future.
  • Invest in IPOs: Companies will accept Bitcoin as an investment, even if it means they turn it into cash and spend it on what they need. The crypto still comes from you. You could be a high-stakes investor all because you bought some coins once upon a time.
  • 24/7 Trading: If trading crypto is your thing, the market is open 24/7 because it’s not regulated by one specific body. If you wake up at 3:00 AM and want to buy some Ethereum, be our guest; nothing’s stopping you.

Should You Invest in Crypto?

Yes. Cryptocurrency, as of right now, isn’t going anywhere. We can see numerous investors talking about cryptocurrency, countries allowing Bitcoin and Ethereum to become legal tender, and fortunes made in a few short months (legitimately, but of course with some luck involved).

Cryptocurrency doesn’t have dividends, it doesn’t guarantee you a spot on a board of investors, and there are no earnings reports. You’re not holding a stock: you’re holding a unit of currency that is worth whatever the public says it’s worth based on their investments and utility.

Cryptocurrency will only fall if everyone loses faith in it all at the same time, or if we see a massive, quick spiral down. There’s no indication of that happening, but of course, nothing is 100% guaranteed.

As far as anyone can see, cryptocurrency is only getting bigger and rolling out to more countries, and becoming more readily available to citizens of the world. 

Even with some nations trying to ban certain types of coins, they’re only doing that to make their own cryptocurrency as a national legal tender.

Goes to show that even if they don’t want to welcome the power shift to the people, they’re still on board with cryptocurrency being a good idea on its own.

Summary

Cryptocurrency is a newer technology that aims to solve the global chokehold that governments have on money. While cryptocurrency is often treated as a short-term high-risk stock option by many people, it has applications that are still stretching beyond the buy low and sell high mindset.

Is cryptocurrency going to replace the US dollar? No, countries will still have their own currencies, but everyone will have Bitcoin and other cryptocurrencies.

Because of widespread acceptance and a growing trend of crypto being used as actual legal tender, there’s no telling what the future holds, only that it looks bright for crypto.

It can be an investment or a currency depending on how you treat it, and it’s absolutely something you should invest in.

Cryptocurrency FAQ's

What is the point of cryptocurrency?

Cryptocurrency exists as a currency that isn’t controlled by a single body of government or entity. It’s the only true way to have a decentralized currency that is controlled by the people, including its wealth.

Much like the free market, cryptocurrency operates based on the value that individuals place in specific coins, so people can choose how the value of a coin rises or falls.

There’s no Federal Reserve, and no Wall Street to tell you what something is worth. Even when regulation from the government comes in to ruin the party, it’s only relative to storing it as an asset in an IRA, or paying some amount of tax because of how it translates to local currency. 

They can’t control Bitcoin, or any cryptocurrency.

What’s the difference between Bitcoin and cryptocurrency?

Bitcoin is a currency, whereas cryptocurrency is the method in which it operates. A digital currency is only good if it’s effective and secure, so any cryptocurrency coin uses the crypto framework to administer transactions and verify the transfer of funds.

Think of it as Bitcoin being the US dollar: a medium to transfer currency, but the value isn’t in the paper itself, rather the verification of funds and wealth behind the dollar is what actually has value. 

Bitcoin is only as good as its cryptocurrency program is to ensure its validity.

Is cryptocurrency safe?

With it being an entirely digital asset, there’s certainly a risk for fraud. Cryptocurrency utilizes a unique way to verify transactions to keep fraud at an all-time low, but as technology advances, the risk for fraudulent crypto and practices will certainly rise.

If you don’t want to invest your USD into a decentralized currency, then you can invest in companies through the stock market that have exposure to cryptocurrency.

In short, you fund them so that they can invest in and fund crypto assets, but your money is in the company instead of the individual coin or cryptocurrency.

Coinbase

Coinbase is a secure platform that makes it easy to buy, sell, and store cryptocurrency like Bitcoin, Ethereum, and more.

About the author 

Donny Gamble

I’m Donny. I’m a world traveler, investor, entrepreneur, and online marketing aficionado who has a big appetite to compete and disrupt big markets. I thrive on being able to create things that impact change, difficult challenges, and being able to add value in negative situations.

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