What is cryptocurrency, and how does it work?

Cryptocurrency – is the hot buzzword of the investing world today. Although this currency has only been available in the market for a decade, within this time, it has become the most invested digital asset.

Cryptocurrencies were launched in the market as a digital alternative to traditional fiat currencies. However, their invention far surpasses what it can offer as a currency.

If you join the investment market today, you will hear people talking about the new investment opportunities cryptocurrencies offer.

So, what exactly are your cryptocurrencies?

Have you ever heard about Bitcoin, Ethereum, Dogecoin, Ripple, or Litecoin? Nope—don’t worry, they are not some embarrassing rock bands from the 80s and 90s. They are actually a type of currency that doesn’t exist in a physical form.

Today, we are going to introduce this new currency to you and show you its hidden potential.

What is cryptocurrency?

Cryptocurrencies are decentralised digital currencies. This currency is based on Blockchain technology and is secured by cryptography.

To better understand what cryptocurrency is, one needs to first understand the terminology – Blockchain, Decentralisation, and Cryptography – used in the cryptocurrency market.

The blockchain is the technology working behind cryptocurrency and is responsible for making it decentralised. Blockchains store data in blocks, which are then interlinked through cryptography. The blockchain is based on the public ledger principle, distributing access among authorised users.

The access is shared among the users; hence, any information shared in the network is transparent, immutable, and immediate. Unlike in traditional finance, the blockchain is used in such a way that not one single person or group has control, making it decentralised.

How does cryptocurrency work?

As we have already said, cryptocurrencies are decentralised, which means there is no single authority controlling the network. As a concept, cryptocurrency works outside the norm of the banking system using digital currencies like Bitcoin, Ethereum, and Litecoin.

Mining

Cryptocurrencies don’t have any physical form, but that doesn’t mean they do not have any digital form either. For an investor to invest in an asset, they need to be certain that assets exist.

Cryptocurrencies exist in digital form and are generated through the cryptocurrency mining process. This is a complex process of solving mathematical problems, and when a block of problems is solved, cryptocurrency is generated.

It would take only 10 minutes to generate one cryptocurrency in an ideal world. But in reality, it takes almost 30 days.

Buying, selling, storing

The only way to make money in cryptocurrency is by buying, selling, and storing. Users today can buy cryptocurrencies from exchange platforms at a low price and sell them when they are making a profit. In fact, you can even earn interest on crypto by just holding it for a year.

Once bought, cryptocurrencies can be stored in a digital wallet. There are two types of digital wallets – Hot & Cold. Hot wallets are referred to as online wallets, and cold wallets are offline wallets.

Transaction or investing

Primarily, cryptocurrencies were launched in the market as a transaction medium. Then, however, people started using it as an asset to invest in.

Today, you can transact cryptocurrencies from one digital wallet to another with a few clicks. Once you own them, you can decide whether you want them to be used for goods and services, trade them on exchange platforms, or exchange them for cash.

Should you invest in cryptocurrencies?

Pros

• Decentralised, Immutable, And Transparent: The entire network works on shared ownership. In addition to that, you enjoy a high level of security through Cryptography.
• Hedge Against Inflation: It has been seen that cryptocurrency runs against the traditional investment market, which makes it a perfect hedge against inflation. One of the reasons for cryptocurrency behaving like this is because it shares its nature with Gold. They are in limited supply. Hence, mining is capped – e.g. there will only ever be 21 million bitcoins available.
• Private & Secure: Blockchain technology ensures anonymity and makes the transaction tamper-proof.

Cons

• Prone To High Risks: Cryptocurrencies bring a lot of risks to the table. Perhaps this is because it is a new technology, and we are yet to understand it completely.
• Scalability Problem: It is highly complex. The complexity is related to the Blockchain system. Crypto regulations are not in our favour which makes scalability a problem.

A better way to invest

When investing in cryptocurrency, never invest what you can’t afford to lose. Before making any investment decision, you must conduct thorough research and know the pitfalls of investing in cryptocurrency.

Crypto investing is by no means a new phenomenon, but the surge of its popularity and value, coupled with the failing traditional financial structures, have made people turn towards cryptocurrencies as a means of earning passive income.

If you do decide to invest in cryptocurrencies, ensure you do your research and check coinpass referral for a better understanding.

 

The above information does not constitute any form of advice or recommendation by London Loves Business and is not intended to be relied upon by users in making (or refraining from making) any investment decisions. Appropriate independent advice should be obtained before making any such decision. London Loves Business bears no responsibility for any gains or losses.