EXPLAINED | Cryptocurrency: What Is It? How Does It Work?

What is a blockchain? Where can you buy cryptocurrencies? Here’s everything you need to know on crypto.

Bitcoin is not only the oldest but also the highest valued cryptocurrency.

Source : Getty

Cryptocurrency still remains a mystical subject for many keen investors in India. While cryptos are slowly gaining recognition from investors and regulators alike, with countries and leading brands adopting it as an official tender, there are still a sizeable number of people who wish to invest in crypto, but don’t have a sound idea of what it exactly is. Our guide is here to help you get down to the basics: what is a cryptocurrency and how does it work?

What is a blockchain? What is cryptography?

Before we get into cryptocurrency, it is important to understand what a blockchain is. In a nutshell, a blockchain is a distributed public ledger that helps keep a record of all transactions made by holders of currencies.

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Now, we must also understand what is cryptography. It is a process that helps secure data and protects it from unauthorised access, by using different kinds of encryption. Cryptography is the primary reason why cryptocurrencies and crypto transactions are considered to be secure.

What is cryptocurrency?

A cryptocurrency is a digital coin that runs on a blockchain, using cryptography to help secure transactions.

Unlike other currencies which are issued and regulated by a central authority of each country, cryptocurrencies use a decentralised method to keep a score of transactions and mint new coins.

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Cryptocurrencies are essentially borderless. Since it is based on a peer-to-peer system, anyone sitting anywhere in the world can exchange crypto coins with another person as needed.

How is a cryptocurrency created?

If you are exploring cryptocurrencies, chances are you may have heard of cryptocurrency mining. As the name suggests, it is the process of creating new cryptocurrencies into circulation. A highly competitive process, crypto mining uses a proof-of-work method to verify and add new transactions to the blockchain.

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The process of crypto mining is extremely power consuming, as you need to run powerful PCs which need to constantly solve complex mathematical problems to generate coins.

How do you store cryptocurrencies?

You store cryptos in digital wallets. These wallets primarily store your private keys, which you need to access your digital assets.

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There are two kinds of crypto wallets — hot and cold. A hot wallet is connected online, making transactions faster and easier, but is prone to hacks. A cold wallet, on the other hand, is not connected to the Internet and hence is the safest method to store your cryptos.

What is the oldest cryptocurrency?

Arguably the most popular crypto coin in the market, Bitcoin is not only the oldest but also the highest valued crypto. Created in 2008 by an unknown person (or a group of anonymous people) who goes by the pseudonym Satoshi Nakamoto, Bitcoin went into circulation in 2009.

At the time of writing, Bitcoin price stood at $29,571.45, as per CoinMarketCap data. On Indian exchange WazirX, Bitcoin price in India stood at Rs 24.13 lakhs per coin. Bitcoin has a maximum supply cap of 21 million coins, out of which 19.06 million are currently in circulation.

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Apart from Bitcoin, there are several other crypto coins to consider, from Ethereum to Tesla CEO Elon Musk’s favourite Dogecoin.

Where can you buy cryptocurrencies?

Cryptocurrencies can be purchased via individual currency owners who are looking to sell, brokers, and crypto exchanges. Out of these, exchanges offer the safest and easiest way to buy cryptos. There are several exchanges to choose from in India, including the likes of CoinSwitch Kuber, Mudrex, and Unocoin.

How can you use cryptocurrencies?

Once purchased, you can use cryptocurrencies to trade, exchange for cash, or buy goods and services with them.

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If you decide to invest in crypto, keep in mind that the value of crypto coins is extremely volatile. Sometimes, it can grow by leaps and bounds, while at other times, it may lose all its value within a matter of days, as was recently seen in the case of LUNA. 

So, it is advised that investors must research thoroughly and understand the price movement and market trends clearly before deciding to invest in crypto.