What Is Cryptocurrency: Definition, Types And How Does It Work

Cryptocurrency, or crypto, is a form of digitally or virtually existing currency that is secured by cryptography. These digital assets do not feature any regulatory body. Instead, they utilise a decentralised system to record different transactions and release new units. To understand ‘what is cryptocurrency’, you need to be well-versed in how it works and the different terms associated with this virtual asset. Go through the following sections to get a detailed insight into cryptos.

What Is Cryptocurrency?

Cryptocurrency is a decentralised virtual or digital money based on blockchain technology. Cryptos are a p2p system enabling anyone to send and receive payments from anywhere. It does not merely rely on banks for the verification of transactions. To understand what is cryptocurrency in detail, you need to know three terms, specifically decentralised, blockchain and cryptography.

Blockchain, in simple terms, is a digital ledger. Its access is provided to authorised users. This particular ledger records transactions of various assets, including houses, money or even intellectual property.

The users receive the access, and all the information shared remains transparent, immutable and immediate. In this regard, immutable means that everything that the blockchain documents cannot be tampered with by anyone.

Centralised money is the regular money used by the general public, which the central bank authorises. However, when it comes to cryptocurrencies, there is no such authority responsible for the fluctuations. This is why they are referred to as decentralised digital assets.

Cryptography is a method to secure data from unauthorised usage via encryption techniques. That said, most claims that blockchain makes, such as immutability and transparency, are provided by cryptography.

How does Cryptocurrency Work?

Cryptocurrencies work completely outside the banking system, utilising different types of coins. Regarding this, Bitcoin is the most significant player. Before you buy cryptocurrency, you should be well-versed in how it works.

Know how cryptos are generated and transacted here:

1. Mining

You can generate cryptocurrencies through mining. This process is complex and requires solving mathematical puzzles to generate coins in exchange. Ideally, you can mine one Bitcoin in just 10 minutes. However, in reality, the entire process takes almost 30 days to complete.

2. Buying the coin, selling and storing it

If you are wondering how to buy cryptocurrency, know that several brokers, central exchanges or currency owners provide this provision. After buying, you can store cryptocurrencies in a digital wallet. Now, these wallets can be hot or cold. Hot refers to the wallet that has an internet connection. This facilitates easy transactions but also exposes you to fraud and online threats. On the other hand, a cold wallet is safer but makes it harder to transact.

3. Investing and transacting

You can easily transfer cryptos from one wallet to another through your mobile phone. After buying cryptocurrency online, you can either choose to buy goods and services through them, conduct trading or exchange them for cash.

What are the Examples of Cryptocurrency?

As of March 2022, there are more than 18,000 cryptocurrencies globally. However, not all of them are active.

Some of the most popular cryptocurrency examples are:

• Bitcoin
  Launched in 2009, Bitcoin is the first and most commonly traded cryptocurrency. Satoshi Nakamoto invented this coin, which is supposedly an individual’s pseudonym or the name of a group of individuals.

• Ethereum
  Ethereum came into existence in 2015. It is a blockchain platform featuring its own cryptocurrency – Ether (ETH) or Ethereum. It is one of the most popular cryptos following Bitcoin.

• Litecoin
  This coin is somewhat similar to Bitcoin but has developed newer features to stand out. These developments include faster payments and a procedure that allows faster transactions.

• Ripple
  Ripple is another famous cryptocurrency, which came into existence in 2012. You can utilise this coin to track various transactions, other than just cryptocurrency. The company works with various banks and financial institutions to render its services.

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What are the Essential Cryptocurrency Terms to Know?

You cannot grab the answer to “what is cryptocurrency” without understanding the important terms related to this digital asset. Find details about a few of them below:

• Altcoin
  This is a combination of two words – alternative and coin. It refers to all alternatives to Bitcoin. Specifically, altcoins are cryptocurrencies other than Bitcoin. 

• Address
  An address is a location where you can receive, send or store cryptos. As with any zip code or your house address, every crypto address features a unique combination of characters.

• Blockchain
  This is a digital ledger or an extensive database containing details about verified transactions on particular crypto. It stores all information electronically in a secured format.

• Blocks
  In simple terms, blocks are what create the blockchain. Each block features information pertaining to all transactions on crypto. They have limited storage capacity. Upon exhausting this capacity, they are transferred to previously exhausted blocks, thus creating a data chain, known as the blockchain.

• dApps
  This term refers to decentralised apps. It implies a digital platform running on a P2P network or on a blockchain instead of a single computer. Decentralised apps can take different forms, ranging from mobile games to social media sites.

• DeFi
  This term refers to decentralised finance. Specifically, it is a blockchain-based type of finance that refuses to rely on brokerages, banks or any financial intermediaries. A popular example of decentralised finance is decentralised exchange protocols. They help automate crypto transactions between buyers and sellers, without the need for intermediaries.

• NFT
  NFT, or non-fungible token, is a form of digital asset, conferring the ownership of a digital good. These may include digital art or other collectables. In simple words, NFT is a unique data unit featuring storage on a ledger and can take the form of any item, including photos, videos or digital files.

• Token
  This is the denomination of a virtual coin. It refers to a tradable asset residing on its own blockchain, allowing the holder to utilise it for economic or investment purposes.

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What are the Advantages and Disadvantages of Cryptocurrency?

Before you follow the steps to buy cryptocurrency, it is crucial for you to understand the pros and cons attached to this virtual asset.

Find details about its advantages and disadvantages below:

Advantages:

• Cryptos are private and completely secured
• They are transparent, decentralised and immutable
• They provide a hedge against inflation

Disadvantages:

• They are a relatively newer concept that may be difficult to understand by certain individuals
• Cryptocurrencies are extremely volatile and carry high risks

Is Cryptocurrency Safe?

Cryptocurrency is inherently secure since the primary blockchain technology that backs cryptocurrency is safe. This safety is credited to the decentralised and public nature of the distributed ledger technology and the fact that every transaction undergoes a highly secure encryption process.

However, since cryptocurrencies are not under government supervision, they lack the standard protective measure that other currencies receive. This also makes them quite volatile.

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Final Word

Cryptocurrencies are created with blockchain technology, which is a fairly complex process and offers a higher grade of security. In addition, transactions pertaining to cryptos require two-factor authentication. So, this might comfort you a bit if you are wondering ‘what is cryptocurrency’ and whether it is safe or not. However, do note the crypto swings and volatility before trading through them.

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FAQs on Cryptocurrency

Disclaimer: Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions.

This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article. 

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