How does Cryptocurrency Work? A Thorough Explanation

wallet address</strong></a> will be shown to the observer, which does, once again, prove the anonymity aspect of the entire ordeal.</p>\n<p>If you’d like to learn more about how all of this works, you can check out the section on <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/learn/decentralized-blockchain/">blockchain decentralization and anonymity</strong></a> - I go more in-depth into this topic there.</p>\n<p>Next up - <strong>the chance to earn huge returns on your investment.</strong></p>\n<p>Yes, this one’s a bit obvious, but it can still be considered somewhat of a benefit, or a “pro” of investing in crypto. That’s simply because there isn’t any other popular financial field that would allow you to earn such potential returns!</p>\n<p>A large part of the crypto appeal is the fact that this industry has managed to <strong>turn multiple people into millionaires, overnight.</strong> It’s like you playing in a lottery, but one that would allow you to increase and decrease your odds, depending on how well you’ve done your research.</p>\n<p>Of course, everything is never as simple as it seems, and there are huge downsides that accompany this factor, as well. We’ll talk about them later, though - for now, just keep in mind that many people would answer the question of “should you invest in crypto?” by giving you this very reason to do so - <strong>the potential for huge returns.</strong></p>\n<p>Moving on, another huge pro of investing in cryptocurrencies is the fact that, as I’ve pointed out earlier, there are seemingly <strong>countless ways to do so.</strong> And no, I’m not talking about using different exchange platforms to buy your crypto - instead, I’m referencing the variety of choices that this space houses.</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"Is cryptocurrency a good investment: Variety of choices.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/should_you_invest_in_crypto_03.o.jpg/" alt=\"Is cryptocurrency a good investment: Variety of choices.\" width=\"1000\" height=\"539\" /></p>\n<p>If you want to take the “traditional” path, you COULD go ahead, register on an exchange, and purchase crypto this way. On the other hand, there’s also the <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/learn/what-is-defi/">DeFi (or, decentralized finance) space to explore, with all of the different services that it offers. Then, there are <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/learn/what-are-nfts/">NFTs, which are a whole separate world, in of themselves.</p>\n<p><strong>These few categories then split off into a huge array of smaller subcategories</strong> - crypto borrowing and lending, advanced trading tools, royalty earnings with NFTs, different investment strategies, DAOs, and so on, and so forth. Each of these topics deserve a separate section of their own - I’ve already covered quite a few of them in our Crypto 101 Handbook, so don’t forget to check it out!</p>\n<p>One more huge “pro” of investing in cryptocurrencies is the fact that this financial field is often considered to be <strong>much more approachable than traditional finance</strong>, at least for the younger generation. That’s due to the fact that crypto is constantly popping up in various pop-culture events, especially when it comes to memes.</p>\n<p>Think about it yourself - Elon Musk and his support for Dogecoin, the surge of animal-themed coins and tokens, that whole situation with the WallStreetBets subreddit, and so on. Combine that with the fact that you can start investing in crypto with as little as a few dollars, and you can see why many people from the younger generation are wondering - <em>should I buy crypto?!</em></p>\n<p>With all of that being said, however, we couldn’t really finish off this section without talking about the negative aspects of investing in space, too. At the very top of these cons, you will find <strong>market volatility.</strong></p>\n<p><strong><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"Is cryptocurrency a good investment: Market volatility.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/should_you_invest_in_crypto_04.o.jpg/" alt=\"Is cryptocurrency a good investment: Market volatility.\" width=\"1000\" height=\"1067\" /></strong></p>\n<p>It’s something that I’ve explored earlier when talking about the appeal of crypto. Remember that example with the special apple? Well, sure - the price (or, worth) of that apple could go up, and make you a lot of money! However, it could also crash down, when you find out that all of your friends and neighbors have also acquired a huge amount of these apples.</p>\n<p>The same is true with crypto, as well. With it being so new and, frankly, still poorly regulated, <strong>no one really knows how much this technology is worth</strong>, and the speculatory nature of this ordeal can really put a dent in your wallet! Say, you decide to buy <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/buy-bitcoin-btc/">BTC when it’s worth $60,000, only to find that it has crashed all the way down to $30,000 the next week. That’s not a nice feeling to experience, especially if you only wanted to make a bit of profit, and aren’t “in it” for the long run!</p>\n<p>Another big con that you should consider before investing in crypto is that this space is still <strong>not properly regulated</strong>, in most areas around the world. Governments are trying to change this, but these bureaucratic processes are usually very slow and tedious.</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"Is cryptocurrency a good investment: Poorly regulated.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/should_you_invest_in_crypto_05.o.jpg/" alt=\"Is cryptocurrency a good investment: Poorly regulated.\" width=\"1000\" height=\"1045\" /></p>\n<p>Why does this matter? Well, <strong>it’s very easy to get scammed</strong>, or face tax-related issues when you’re dealing with an unregulated financial market. There are little-to-no fail-safes, and you become completely responsible for whatever happens to your assets. It requires a lot of knowledge and time in the market in order to make the smartest possible decisions!</p>\n<h2>Final Thoughts</h2>\n<p>To finish off, let’s wrap it up by stepping back, and taking a look at the question - <strong>should you invest in crypto?</strong></p>\n<p>Well, I believe that cryptocurrencies & crypto technology is a really cool innovation, and one that’s still very young. This means that there are going to be a lot of issues associated with it, and a lot of things that still need to be figured out. I mean, you could say that one of the cons of investing in crypto today is the fact that there are still very limited use cases for this technology!</p>\n<p>As time goes on, though, it’s obvious that crypto is becoming more and more adapted into our everyday lives. If you’re a fan of innovations, this is super-exciting! Whatever the case might be, however, and whatever you might decide to do, just keep in mind that, as of me writing this section, the space is still quite unpredictable, and <strong>you need to be very cautious with everything that you do!</strong></p>","meta_title":"Is Cryptocurrency a Good Investment? Pros, Cons, and Risks","meta_description":"Is Cryptocurrency a Good Investment? Read this and discover all the benefits, drawbacks, and dangers of investing in cryptocurrencies.","meta_keywords":"is cryptocurrency a good investment, is crypto a good investment, should i buy crypto, should you invest in crypto, how much should you invest in crypto, why you should invest in crypto, how to invest in cryptocurrency.","order":3,"language":"en","created_at":"2022-08-25T07:31:40.000000Z","updated_at":"2022-10-05T10:34:01.000000Z","modified_content":"<p>In this section, we’re going to answer the question - <strong>is cryptocurrency a good investment?</strong></p>\n<p> </p>\n<p>If you’re reading this, it’s probably no secret that you’re interested in cryptocurrencies. As you should be - the crypto industry has seen some unparalleled growth over the past few years!</p>\n<p>That said, however, online, on social media platforms, there’s a constant mixture of good and bad news surrounding the crypto space. One day the market is experiencing unprecedented growth, while the other - everything’s crashing down rapidly! All of that might lead you to wonder - is crypto a good investment?</p>\n<p>In this section, <strong>we’re going to talk about</strong> <strong>investing in crypto.</strong> To be a bit more specific, we’ll address the questions of what’s the general appeal of crypto, to begin with, what are the pros and cons of investing in this industry, and wrap things up with a clear conclusion, too.</p>\n<p><em>Without further ado, let’s get to it!</em></p>\n<div class=\"container\">\n <div class=\"row justify-content-center\">\n <div class=\"col-md-10 comparison-suggestion pb-3 mb-4\">\n <div class=\"d-flex flex-row\">\n <div class=\"text-center\">\n <div class=\"img-block-yt\">\n <img src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/assets/images/compare-crypto-exchanges.gif/"/n alt=\"Is Cryptocurrency a Good Investment? (5 PROS & CONS!)\"\n title=\"Is Cryptocurrency a Good Investment? (5 PROS & CONS!)\" class=\"border-0\">\n <p>Video Explainer</p>\n </div>\n </div>\n <div class=\"col-xs-10 col-sm-10 col-md-10 text-left py-3 yt-info\">\n <h4 class=\"mb-1\">Video Explainer: Is Cryptocurrency a Good Investment? The Pros & Cons</h4>\n <p class=\"py-1 mb-0 youtube-video-subtitle\">Reading is not your thing? Watch the \"Is Cryptocurrency a Good Investment? The Pros & Cons\" video explainer</p>\n </div>\n </div>\n <div class=\"row justify-content-center text-center\">\n <div class=\"col-12 col-md-11 px-3\">\n <div class=\"wrapper mb-0\">\n <div class=\"youtube mb-4 bg-transparent p-0 video-modal-popup\" data-toggle=\"modal\"\n data-target=\"#video-modal\" data-id=\"cqVkgcEa5NI\" data-title=\"CryptoFinallyExplained\">\n <div class=\"video-gradient-top\"></div>\n <p class=\"text-left dyk-video-title\">Is Cryptocurrency a Good Investment? (5 PROS & CONS!)</p>\n <img src=https://www.bitdegree.org/"https://i.ytimg.com/vi/cqVkgcEa5NI/hq720.jpg/"/n alt=\"Is Cryptocurrency a Good Investment? (5 PROS & CONS!)\"\n title=\"Is Cryptocurrency a Good Investment? (5 PROS & CONS!)\"\n class=\"p-0\">\n <img class=\"play-button\" data-target=\"#video-modal\"\n src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/assets/video-button.png/"/n alt=\"Is Cryptocurrency a Good Investment? (5 PROS & CONS!)\">\n </div>\n </div>\n </div>\n </div>\n <div class=\"row justify-content-center text-center\">\n <div>\n <a href=https://www.bitdegree.org/"https://www.youtube.com/c/CryptoFinallyExplained?sub_confirmation=1\%22\n class=\"btn yt-promo mb-2\" target=\"_blank\" rel=\"nofollow noopener\">\n <div class=\"row justify-content-center align-items-center mx-0 text-center\">\n <div class=\"col-4 col-md-4\">\n <i class=\"fab fa-youtube yt-dyk-btn\"></i>\n </div>\n <div class=\"col-8 col-md-8 text-center yt-promo-text\">\n <h4 class=\"m-0 text-white\">SUBSCRIBE</h4>\n <span>ON YOUTUBE</span>\n </div>\n </div>\n </a>\n </div>\n </div>\n </div>\n </div>\n</div>\n<div class=\"modal fade\" id=\"video-modal\" tabindex=\"-1\" role=\"dialog\" aria-labelledby=\"cqVkgcEa5NI\">\n <div class=\"modal-dialog modal-dialog-centered modal-lg\" role=\"document\">\n <div class=\"modal-content\">\n <div class=\"modal-body p-0\">\n <button type=\"button\" class=\"video-modal-close close\" data-dismiss=\"modal\" aria-label=\"Close\">\n <i aria-hidden=\"true\" class=\"fas fa-times\"></i>\n </button>\n <div id=\"iframe\"></div>\n </div>\n <a class=\"text-decoration-none\"\n href=https://www.bitdegree.org/"https://www.youtube.com/c/CryptoFinallyExplained?sub_confirmation=1\%22\n rel=\"nofollow noopener\" target=\"_blank\">\n <div class=\"modal-footer p-0 d-block bg-white\">\n <div class=\"row justify-content-center m-0\">\n <div class=\"col-3 col-md-4 col-lg-2 p-0\">\n <img class=\"w-100 h-100\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/assets/crypto-subscribe.jpg/" alt=\"Subscribe\">\n </div>\n <div class=\"col-9 col-md-8 col-lg-2 px-0 d-flex\">\n <div class=\"modal-subscribe w-100\">\n <p class=\"m-0 mt-1 mr-3\">SUBSCRIBE<br>\n <span class=\"m-0\">ON YOUTUBE</span>\n </p>\n </div>\n </div>\n <div class=\"col-12 col-md-12 col-lg-8 p-0 text-center d-flex justify-content-center align-items-center\">\n <div class=\"modal-subscribe-text\">\n <h4 class=\"m-0\">Understand crypto with ease</h4>\n <span>New explainer videos every week!</span>\n </div>\n </div>\n </div>\n </div>\n </a>\n </div>\n </div>\n</div>\n<h2>What’s the Appeal of Investing in Crypto?</h2>\n<p>So, naturally, the first question that we should look into is this - what’s the actual appeal of investing in crypto, and why do so many people do it nowadays?</p>\n<p>Well, as you might probably expect, there isn’t a single answer to this question. Let’s still look at some of the more-common ones, however.</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"Is cryptocurrency a good investment: What's the appeal of investing in crypto?\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/should_you_invest_in_crypto_01.o.jpg/" alt=\"Is cryptocurrency a good investment: What's the appeal of investing in crypto?\" width=\"1000\" height=\"393\" /></p>\n<p>First of all, cryptocurrencies are still relatively new. This opens them up to being <strong>a very speculatory asset class</strong> - no one really knows how much a crypto asset “should” be worth, and thus, there’s potentially some money to be made, if you’re lucky enough!</p>\n<p>Imagine it like this - let’s say that scientists have just discovered a new form of apples. These apples are super-healthy, juicy, delicious, and can stay fresh for a very long period of time. How much would an apple like that be worth?</p>\n<p>Well, straight off the bat, no one would know! Do these apples have any downsides? Are they rare, and difficult to grow, or maybe in a year or so, everyone will have this type of an apple tree in their garden? Again - there’s a lot of speculation involved, and the price of that apple might sway quite a bit!</p>\n<p>Same as with those apples, <strong>people love to speculate about certain cryptocurrencies</strong>, as well. Which of them will grow in price, and which will fall? How can you maximize your potential returns? These and many more questions lead people to wonder - is cryptocurrency a good investment?</p>\n<p>Another big reason why certain individuals might want to invest in the space is simply because <strong>it’s an innovation.</strong> As I’ve pointed out a few times already, crypto is still very new - as time goes on, though, it’s becoming increasingly more adopted, by the day. Some people might simply enjoy being “ahead of the curve”, and want to participate in this technological advancement, as early as possible.</p>\n<p>A common example here would be the internet, in the early 2000s. When it just came about, there were countless numbers of skeptics who thought that it’s just a fad, and that it would go away in a few months or years. Well, as you probably know, the reality is very different! Many people hope that the same will be true with crypto, too.</p>\n<p>There are multiple additional reasons for why individuals are wondering - is cryptocurrency a good investment? That being said, though, if you’re one of those people who strive to be an early investor, simply because you love the technology behind the concept, <strong>make sure to check out other sections on our Crypto 101 Handbook</strong> - there are countless sections about all-things-crypto, to help you understand the space better!</p>\n<h2>The Pros & Cons of Investing in Crypto</h2>\n<p>Moving on, let’s now take a look at some of the biggest pros and cons of investing in cryptocurrencies. Once you have them laid out clearly, in front of you, the decision will be much simpler to make!</p>\n<p><strong>Let’s start with the pros.</strong></p>\n<p>The very first benefit of investing in cryptocurrencies is the joint <strong>anonymity & transparency</strong> factor. When you invest in crypto, you are able to remain completely anonymous while doing so, if you wish to.</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"Is cryptocurrency a good investment: Anonymity & Transparency.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/should_you_invest_in_crypto_02.o.jpg/" alt=\"Is cryptocurrency a good investment: Anonymity & Transparency.\" width=\"1000\" height=\"489\" /></p>\n<p>These days, with regulations getting stricter, it’s something that’s becoming increasingly more difficult to do. However, crypto enthusiasts still find ways to achieve at least partial <strong>anonymity</strong> - it all depends on just how far you’re willing to go!</p>\n<p><strong>Transparency</strong> is another key factor to consider, in that equation. Cryptocurrencies are based on blockchain technology, which is, by default, transparent. Unless we’re talking about some niche private blockchain, public ledgers will allow everyone to come in and check the code behind them, and search for various potential bugs and issues.</p>\n<p>All crypto transactions that are performed on such blockchains are public, as well. However, they won’t have your name attached to them - instead, only your <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/learn/crypto-terms/what-is-address/">wallet address</strong></a> will be shown to the observer, which does, once again, prove the anonymity aspect of the entire ordeal.</p>\n<p>If you’d like to learn more about how all of this works, you can check out the section on <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/learn/decentralized-blockchain/">blockchain decentralization and anonymity</strong></a> - I go more in-depth into this topic there.</p>\n<p>Next up - <strong>the chance to earn huge returns on your investment.</strong></p>\n<p>Yes, this one’s a bit obvious, but it can still be considered somewhat of a benefit, or a “pro” of investing in crypto. That’s simply because there isn’t any other popular financial field that would allow you to earn such potential returns!</p>\n<p>A large part of the crypto appeal is the fact that this industry has managed to <strong>turn multiple people into millionaires, overnight.</strong> It’s like you playing in a lottery, but one that would allow you to increase and decrease your odds, depending on how well you’ve done your research.</p>\n<p>Of course, everything is never as simple as it seems, and there are huge downsides that accompany this factor, as well. We’ll talk about them later, though - for now, just keep in mind that many people would answer the question of “should you invest in crypto?” by giving you this very reason to do so - <strong>the potential for huge returns.</strong></p>\n<p>Moving on, another huge pro of investing in cryptocurrencies is the fact that, as I’ve pointed out earlier, there are seemingly <strong>countless ways to do so.</strong> And no, I’m not talking about using different exchange platforms to buy your crypto - instead, I’m referencing the variety of choices that this space houses.</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"Is cryptocurrency a good investment: Variety of choices.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/should_you_invest_in_crypto_03.o.jpg/" alt=\"Is cryptocurrency a good investment: Variety of choices.\" width=\"1000\" height=\"539\" /></p>\n<p>If you want to take the “traditional” path, you COULD go ahead, register on an exchange, and purchase crypto this way. On the other hand, there’s also the <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/learn/what-is-defi/">DeFi (or, decentralized finance) space to explore, with all of the different services that it offers. Then, there are <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/learn/what-are-nfts/">NFTs, which are a whole separate world, in of themselves.</p>\n<p><strong>These few categories then split off into a huge array of smaller subcategories</strong> - crypto borrowing and lending, advanced trading tools, royalty earnings with NFTs, different investment strategies, DAOs, and so on, and so forth. Each of these topics deserve a separate section of their own - I’ve already covered quite a few of them in our Crypto 101 Handbook, so don’t forget to check it out!</p>\n<p>One more huge “pro” of investing in cryptocurrencies is the fact that this financial field is often considered to be <strong>much more approachable than traditional finance</strong>, at least for the younger generation. That’s due to the fact that crypto is constantly popping up in various pop-culture events, especially when it comes to memes.</p>\n<p>Think about it yourself - Elon Musk and his support for Dogecoin, the surge of animal-themed coins and tokens, that whole situation with the WallStreetBets subreddit, and so on. Combine that with the fact that you can start investing in crypto with as little as a few dollars, and you can see why many people from the younger generation are wondering - <em>should I buy crypto?!</em></p>\n<p>With all of that being said, however, we couldn’t really finish off this section without talking about the negative aspects of investing in space, too. At the very top of these cons, you will find <strong>market volatility.</strong></p>\n<p><strong><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"Is cryptocurrency a good investment: Market volatility.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/should_you_invest_in_crypto_04.o.jpg/" alt=\"Is cryptocurrency a good investment: Market volatility.\" width=\"1000\" height=\"1067\" /></strong></p>\n<p>It’s something that I’ve explored earlier when talking about the appeal of crypto. Remember that example with the special apple? Well, sure - the price (or, worth) of that apple could go up, and make you a lot of money! However, it could also crash down, when you find out that all of your friends and neighbors have also acquired a huge amount of these apples.</p>\n<p>The same is true with crypto, as well. With it being so new and, frankly, still poorly regulated, <strong>no one really knows how much this technology is worth</strong>, and the speculatory nature of this ordeal can really put a dent in your wallet! Say, you decide to buy <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/buy-bitcoin-btc/">BTC when it’s worth $60,000, only to find that it has crashed all the way down to $30,000 the next week. That’s not a nice feeling to experience, especially if you only wanted to make a bit of profit, and aren’t “in it” for the long run!</p>\n<p>Another big con that you should consider before investing in crypto is that this space is still <strong>not properly regulated</strong>, in most areas around the world. Governments are trying to change this, but these bureaucratic processes are usually very slow and tedious.</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"Is cryptocurrency a good investment: Poorly regulated.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/should_you_invest_in_crypto_05.o.jpg/" alt=\"Is cryptocurrency a good investment: Poorly regulated.\" width=\"1000\" height=\"1045\" /></p>\n<p>Why does this matter? Well, <strong>it’s very easy to get scammed</strong>, or face tax-related issues when you’re dealing with an unregulated financial market. There are little-to-no fail-safes, and you become completely responsible for whatever happens to your assets. It requires a lot of knowledge and time in the market in order to make the smartest possible decisions!</p>\n<h2>Final Thoughts</h2>\n<p>To finish off, let’s wrap it up by stepping back, and taking a look at the question - <strong>should you invest in crypto?</strong></p>\n<p>Well, I believe that cryptocurrencies & crypto technology is a really cool innovation, and one that’s still very young. This means that there are going to be a lot of issues associated with it, and a lot of things that still need to be figured out. I mean, you could say that one of the cons of investing in crypto today is the fact that there are still very limited use cases for this technology!</p>\n<p>As time goes on, though, it’s obvious that crypto is becoming more and more adapted into our everyday lives. If you’re a fan of innovations, this is super-exciting! Whatever the case might be, however, and whatever you might decide to do, just keep in mind that, as of me writing this section, the space is still quite unpredictable, and <strong>you need to be very cautious with everything that you do!</strong></p>","preview_url":"https://www.bitdegree.org/crypto/learn/is-cryptocurrency-a-good-investment","youtube_video":{"id":124,"channel_id":1,"sort":26,"video_title":"Is Cryptocurrency a Good Investment? (5 PROS & CONS!)","description":"Is cryptocurrency a good investment, and what are the pros & cons of doing it?\n\nWith cryptocurrencies becoming as popular as they are, it’s no wonder that more and more people ask - is crypto a good investment? Additionally, what about the pros and cons associated with this activity - which outweighs which?\n\nIn this video, I’ll be addressing all of those questions, and a couple more. I will tell you about what makes crypto such an appealing field for investors, as well as cover some of the biggest benefits and shortcomings of this particular financial market.\n\nDo you think investing in crypto is worth it? Or are you someone who stays away from doing it? Share your opinions, in the comments below!\n\nVideo Time Table:\n\n0:00 Introduction to Is Cryptocurrency a Good Investment\n0:59 What's the Appeal of Investing in Crypto?\n3:07 The Pros & Cons of Investing in Crypto\n08:03 Wrap-up: Is Cryptocurrency a Good Investment?\n\nMore Related Videos:\n\n? How to Avoid Rug Pulls in Crypto?\nhttps://www.youtube.com/watch?v=tNPU6AY4o74\n? How to Get Free Crypto?\nhttps://www.youtube.com/watch?v=aNjehGx3WqM\n? How to Avoid Crypto Taxes?\nhttps://www.youtube.com/watch?v=ERzU_Xz_P-o\n? What Does Staking Mean in Crypto?\nhttps://www.youtube.com/watch?v=irhlfrCrywo \n\nGet Quick Crypto Tips on Twitter - Follow:\nhttps://twitter.com/crypto_xplained\n\n#IsCryptocurrencyaGoodInvestment #IsCryptoaGoodInvestment #ShouldIBuyCrypto","video_id":"cqVkgcEa5NI","duration":543,"view_count":305,"thumbnail_url":"https://i.ytimg.com/vi/cqVkgcEa5NI/hq720.jpg","thumbnail_width":1280,"thumbnail_height":720,"published_at":"2022-09-08 15:03:30","created_at":"2022-09-08T23:00:02.000000Z","updated_at":"2023-05-21T23:00:04.000000Z","channel":{"id":1,"title":"CryptoFinallyExplained","channel_id":"UCOryUY0yxC08eJtK23mNgiA","main_playlist_id":"UUOryUY0yxC08eJtK23mNgiA"}}},"prevSection":{"id":33,"featured_image_id":7751,"original_id":null,"youtube_video_id":111,"author_id":42,"translator_id":null,"chapter_id":2,"title":"What is a Cryptocurrency?","slug":"what-is-a-cryptocurrency","definition":"Did you know that there are thousands of cryptocurrencies out there and the number keeps growing?","status":"published","content":"<p>In this section, I’m going to tell you what is a cryptocurrency!</p>\n<p>The world of <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-cryptocurrency/">cryptocurrencies and <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-blockchain/">blockchain technology</strong></a>, as a whole, is full of complicated concepts and ideas. To top that off, there seem to be new concepts being introduced to the general public, every other day or so! This can, for a fact, make it difficult for newbies to enter the industry.</p>\n<p>Even the most difficult concepts can become approachable and understandable, if you have your fundamentals straight, though! And that is exactly what I’m here to help you with - by explaining crypto topics in a fun and beginner-friendly manner! In crypto, all fundamentals start out with figuring out what is a cryptocurrency.</p>\n<p><strong>In this section, we’re going to talk about cryptocurrencies.</strong> I’ll tell you what they are, what’s the purposes behind them, and we’ll also talk about how they are different from traditional, global currencies.</p>\n<p><em>Without further ado, let’s get to it!</em></p>\n<h2>What is a Cryptocurrency?</h2>\n<p>So, how can the concept of cryptocurrencies be explained in a beginner-friendly way?</p>\n<p>The simplest possible answer to that question is that <strong>cryptocurrencies are digital money that’s based on blockchain technology. </strong>For the sake of keeping this section on topic, I won’t get into the details of what blockchains are - there's <a href=https://www.bitdegree.org/"/crypto/learn/what-is-blockchain/">a whole separate section</strong></a> about that in our Crypto 101 Handbook.</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"What is a cryptocurrency: Cryptography.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what_is_cryptocurrency_01.o.png/" alt=\"What is a cryptocurrency: Cryptography.\" width=\"1000\" height=\"228\" /></p>\n<p><strong>The term “crypto” is a shortened version of “cryptography”. </strong>If you’d like to learn what is <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-cryptography/">cryptography, it’s honestly also a huge topic, in of its own - to put it short, though, it’s a form of solving and cracking difficult codes. So, the term “cryptocurrency” could be viewed as “digital, coded money”, in a very specific sense!</p>\n<p>At the time of writing this cryptocurrency explanation, there are currently around 20,000 different crypto assets out there, on the market. Not all of them are successful, though - it is estimated that around 1/5th of all cryptocurrencies have failed. <em>That’s a huge number!</em></p>\n<p>Since examples are what I do best, allow me to give you one, in order to explain cryptocurrency, and to illustrate how crypto money is different from <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-fiat/">fiat money</strong></a> - in other words, our traditional, global currencies that we use, every single day (USD, EUR, and so on).</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"What is a cryptocurrency: Fiat money.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what_is_cryptocurrency_02.o.jpg/" alt=\"What is a cryptocurrency: Fiat money.\" width=\"1000\" height=\"346\" /></p>\n<p>Imagine that you and your friend both decided to shop for concert tickets, online. A globally-huge pop star is coming to your city, and so, the tickets are hot - everyone’s trying to get their hands on them!</p>\n<p>Both you and your friend keep refreshing the ticket vendor’s webpage, waiting for those tickets to become available to be purchased. As soon as they go live, both of you rush to enter your details, too - <strong>every moment counts, after all!</strong></p>\n<p>In just a few minutes, your friend already has their tickets in the email, while you’re still struggling to enter your credit card details on the page. Once you’ve finally managed to do so, you are faced with an error - the bank is undergoing maintenance, and credit card payments won’t be completed until that’s done, sometime tomorrow.</p>\n<p>The end result? Your friend will go to the concert, while you’re going to have to find a different event… And wait for your credit card to start working again!</p>\n<p>Now, then - why was your friend able to complete their purchase? <strong>Whelp, you’ve guessed it - they were paying in crypto.</strong></p>\n<h2>Cryptocurrencies VS Traditional Money</h2>\n<p>Now, keeping that example in mind, I want to continue this “what is cryptocurrency for dummies” explanation by exploring some of the main differences between cryptocurrencies and traditional money & payment systems. This will hopefully help you get a better understanding of why crypto has become as popular as it is - well, at least part of the reason.</p>\n<p>The key differences between crypto and fiat money lie in <strong>governance, privacy, transparency, transaction speeds, and transaction costs.</strong></p>\n<h3>Governance</h3>\n<p>First things first - <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-governance/">governance. This is something that is really at the core of crypto technology, and is one of the main reasons why cryptocurrencies came to be, in general! Ever since the creation of <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/buy-bitcoin-btc/">Bitcoin in 2009, cryptocurrencies have always prided themselves on being <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-decentralization/">decentralized (with a few exceptions).</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"What is a cryptocurrency: Governance.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what_is_cryptocurrency_03.o.jpg/" alt=\"What is a cryptocurrency: Governance.\" width=\"1000\" height=\"535\" /></p>\n<p>Decentralization essentially means that <strong>there is no single, central governing authority behind the cryptocurrency.</strong> With traditional money, you have governments and central banks watching over their currencies - for example, in the United States, the FED (or, the Federal Reserve System) is responsible for managing things such as <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-inflation/">inflation, and how much new money flows into the economy, every year.</p>\n<p>With crypto, there’s no FED, and no other single governing party that would influence how a particular cryptocurrency will act. Instead, this is something that is decided by the market, itself - in other words, <strong>the holders of the cryptocurrency are responsible for what happens with it.</strong></p>\n<p>So, here’s another example. Think about the aforementioned Bitcoin, the biggest and most well-known cryptocurrency on the market. Every single aspect surrounding this crypto asset is decided by the community behind it. While the anonymous individual or a group of people (known as <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/who-is-satoshi-nakamoto/">Satoshi Nakamoto</strong></a>) had created Bitcoin, after that was done, the rest was left with the community behind the asset. <strong>In other words, if you wanted to make some changes to Bitcoin, you would need to get the larger part of the community behind it!</strong></p>\n<h3>Privacy and Transparency</h3>\n<p>This leads us to the next two points that I want to emphasize - <strong>privacy and transparency.</strong></p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"What is a cryptocurrency: Privacy and transparency.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what_is_cryptocurrency_04-62f36932ea36a.o.jpg/" alt=\"What is a cryptocurrency: Privacy and transparency.\" width=\"1000\" height=\"241\" /></p>\n<p>With traditional currencies, both of those things are pretty limited. Sure, you can go to the shop, and buy some bread with cash - no one will really know that it’s YOU who bought that bread, since there’s no credit card statement, and the transaction happened in cash.</p>\n<p>That being said, that cash that you paid DID come from somewhere, didn’t it? Perhaps you’ve just withdrawn it from the ATM machine on the other side of the road? Or maybe you’ve borrowed it from a friend, or a colleague?</p>\n<p>My point here is simple - <strong>no matter where you get your money from, it’s always tracked and logged by the government.</strong> If you DO manage to receive money from somewhere that the government doesn’t see, you are obligated to inform the relevant tax authorities in your country, in the form of a tax return filing, at the end of the year, or at any other designated point in time.</p>\n<p>A quick sidenote - if, at the time you're reading this, <strong>tax season </strong>is around the corner, make sure to check out our <a href=https://www.bitdegree.org/"/crypto/learn/how-to-avoid-crypto-taxes/">dedicated section</strong></a> on how to avoid or minimize crypto taxes - legally, of course!</p>\n<p>Now, as you figure out what are cryptocurrencies, you’ll notice that things are a bit different with this form of payment. The more you look into it, the more intricate and complicated it will appear to be - for that reason, we’re not going to look into the various exceptions, but let’s instead talk about the broader rules of the cryptocurrency industry.</p>\n<p><strong>So, with crypto, all of the transactions that you perform are going to be public.</strong> If it’s something that you weren’t aware of, it can sound scary.<em> </em>Do not fret, though - while your transaction WILL be public, no one will know that it’s YOU who is performing them. Each transaction is encrypted, and unless you go out and tell the whole world your personal <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-address/">cryptocurrency wallet address</strong></a>, no one will know.</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"What is a cryptocurrency: Crypto wallet address.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what_is_cryptocurrency_05.o.jpg/" alt=\"What is a cryptocurrency: Crypto wallet address.\" width=\"1000\" height=\"498\" /></p>\n<p>This is exactly how cryptocurrencies allow you to retain your privacy, while also being transparent assets themselves, too! Since you can trade cryptocurrencies anonymously, you don’t need to worry about someone snooping around your transactions - on top of that, since all of those transactions are public, transparency is easy to prove, as well!</p>\n<p>Now, look - I do have to mention that <strong>you WILL probably need to report your transactions, and any potential income, to the relevant tax authorities in your country or region. </strong>Of course, each situation is different, and depends on crypto regulations in your area, but that’s just something that should be kept in mind!</p>\n<h3>Transaction Speed & Cost</h3>\n<p>The last big area where cryptocurrencies are quite different from traditional currencies has to do with <strong>the speed and cost of your transactions.</strong> Once again, allow me to illustrate this with an example.</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"What is a cryptocurrency: Transaction speed & cost.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what_is_cryptocurrency_06.o.png/" alt=\"What is a cryptocurrency: Transaction speed & cost.\" width=\"1000\" height=\"851\" /></p>\n<p>Imagine that you want to purchase a new pair of pants. You go online, and find an eShop that sells exactly what you’re looking for. The pants cost $30 - that’s a bargain, you say! Even the shipping is free, too!</p>\n<p>That being said, as you make the purchase, you see that you were actually charged $35, instead of $30. Looking into it, you eventually learn that the shop is located on the other side of the world, and since that region falls into some sort of a different economic zone, there are extra charges from your bank, in order to perform that transaction.</p>\n<p>Naturally, in reality, things are quite a bit more complicated than that, - still, though, the example illustrates my point, nonetheless!</p>\n<p><strong>Transactions that involve traditional currencies - or traditional payment gateways, for that matter - can get quite costly.</strong> It all depends on a variety of factors, but, once again - the point remains the same, either way!</p>\n<p>On top of that, such transactions can also take a lot of time to be processed, as well. While we’re used to credit or debit card payments being processed almost immediately, oftentimes, the same cannot be said about wire and bank transfers, in general. <strong>If you perform a bank transfer at night, your transaction might not be processed until the next day!</strong> And this is only if you’re sending money to someone in the same region that you’re located in, too!</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"What is a cryptocurrency: Transaction processing time.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what_is_cryptocurrency_07.o.jpg/" alt=\"What is a cryptocurrency: Transaction processing time.\" width=\"1000\" height=\"977\" /></p>\n<p>Understanding what are cryptocurrencies, things are very different, in both regards. <strong>When it comes to transaction costs, depending on the cryptocurrency that you might be transacting with, the fees could be as low as a fraction of a penny! </strong>Imagine sending a few thousand dollars to your family, on the other side of the world, and not even paying a cent for that transaction.</p>\n<p><em>Could it get any better?</em> Yes, it can - if that transaction was processed and completed in a matter of seconds. Once again, this is completely possible with cryptocurrency technology!</p>\n<p>To wrap everything up, let me just say this - apart from everything I just talked about, there are multiple other benefits associated with cryptocurrencies, and the blockchain technology behind them!</p>","meta_title":"What is a Cryptocurrency: A Begginer-Friendly Explanation","meta_description":"Searching for a simple yet thorough answer to the question \"what is a cryptocurrency?\" Find the most beginner-friendly explanation here!","meta_keywords":"what is a cryptocurrency, cryptocurrency for beginners, what is cryptocurrency, what is crypto, what is crypto currency, crypto meaning, cryptocurrency meaning, cryptocurrency for dummies, what is cryptocurrency for dummies, what is cryptography, what are cryptocurrencies, explain cryptocurrency, what is cryptocurrency used for, what is a crypto coin, what is crypto money, how many crypto millionaires are there, who created cryptocurrency, what does cryptocurrency mean, how do you use cryptocurrency, where does cryptocurrency come from, how many cryptocurrencies have failed, how many cryptocurrency are there, why use cryptocurrency, is cryptocurrency worth it, whose currency is worth the most, what is crypto investment","order":1,"language":"en","created_at":"2022-08-10T07:50:28.000000Z","updated_at":"2022-10-05T10:34:01.000000Z","modified_content":"<p>In this section, I’m going to tell you what is a cryptocurrency!</p>\n<p>The world of <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-cryptocurrency/">cryptocurrencies and <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-blockchain/">blockchain technology</strong></a>, as a whole, is full of complicated concepts and ideas. To top that off, there seem to be new concepts being introduced to the general public, every other day or so! This can, for a fact, make it difficult for newbies to enter the industry.</p>\n<p>Even the most difficult concepts can become approachable and understandable, if you have your fundamentals straight, though! And that is exactly what I’m here to help you with - by explaining crypto topics in a fun and beginner-friendly manner! In crypto, all fundamentals start out with figuring out what is a cryptocurrency.</p>\n<p><strong>In this section, we’re going to talk about cryptocurrencies.</strong> I’ll tell you what they are, what’s the purposes behind them, and we’ll also talk about how they are different from traditional, global currencies.</p>\n<p><em>Without further ado, let’s get to it!</em></p>\n<div class=\"container\">\n <div class=\"row justify-content-center\">\n <div class=\"col-md-10 comparison-suggestion pb-3 mb-4\">\n <div class=\"d-flex flex-row\">\n <div class=\"text-center\">\n <div class=\"img-block-yt\">\n <img src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/assets/images/compare-crypto-exchanges.gif/"/n alt=\"What is a Cryptocurrency: For Beginners (Animated Explainer)\"\n title=\"What is a Cryptocurrency: For Beginners (Animated Explainer)\" class=\"border-0\">\n <p>Video Explainer</p>\n </div>\n </div>\n <div class=\"col-xs-10 col-sm-10 col-md-10 text-left py-3 yt-info\">\n <h4 class=\"mb-1\">Video Explainer: What is a Cryptocurrency?</h4>\n <p class=\"py-1 mb-0 youtube-video-subtitle\">Reading is not your thing? Watch the \"What is a Cryptocurrency?\" video explainer</p>\n </div>\n </div>\n <div class=\"row justify-content-center text-center\">\n <div class=\"col-12 col-md-11 px-3\">\n <div class=\"wrapper mb-0\">\n <div class=\"youtube mb-4 bg-transparent p-0 video-modal-popup\" data-toggle=\"modal\"\n data-target=\"#video-modal\" data-id=\"eVLUrZtKhBk\" data-title=\"CryptoFinallyExplained\">\n <div class=\"video-gradient-top\"></div>\n <p class=\"text-left dyk-video-title\">What is a Cryptocurrency: For Beginners (Animated Explainer)</p>\n <img src=https://www.bitdegree.org/"https://i.ytimg.com/vi/eVLUrZtKhBk/hq720.jpg/"/n alt=\"What is a Cryptocurrency: For Beginners (Animated Explainer)\"\n title=\"What is a Cryptocurrency: For Beginners (Animated Explainer)\"\n class=\"p-0\">\n <img class=\"play-button\" data-target=\"#video-modal\"\n src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/assets/video-button.png/"/n alt=\"What is a Cryptocurrency: For Beginners (Animated Explainer)\">\n </div>\n </div>\n </div>\n </div>\n <div class=\"row justify-content-center text-center\">\n <div>\n <a href=https://www.bitdegree.org/"https://www.youtube.com/c/CryptoFinallyExplained?sub_confirmation=1\%22\n class=\"btn yt-promo mb-2\" target=\"_blank\" rel=\"nofollow noopener\">\n <div class=\"row justify-content-center align-items-center mx-0 text-center\">\n <div class=\"col-4 col-md-4\">\n <i class=\"fab fa-youtube yt-dyk-btn\"></i>\n </div>\n <div class=\"col-8 col-md-8 text-center yt-promo-text\">\n <h4 class=\"m-0 text-white\">SUBSCRIBE</h4>\n <span>ON YOUTUBE</span>\n </div>\n </div>\n </a>\n </div>\n </div>\n </div>\n </div>\n</div>\n<div class=\"modal fade\" id=\"video-modal\" tabindex=\"-1\" role=\"dialog\" aria-labelledby=\"eVLUrZtKhBk\">\n <div class=\"modal-dialog modal-dialog-centered modal-lg\" role=\"document\">\n <div class=\"modal-content\">\n <div class=\"modal-body p-0\">\n <button type=\"button\" class=\"video-modal-close close\" data-dismiss=\"modal\" aria-label=\"Close\">\n <i aria-hidden=\"true\" class=\"fas fa-times\"></i>\n </button>\n <div id=\"iframe\"></div>\n </div>\n <a class=\"text-decoration-none\"\n href=https://www.bitdegree.org/"https://www.youtube.com/c/CryptoFinallyExplained?sub_confirmation=1\%22\n rel=\"nofollow noopener\" target=\"_blank\">\n <div class=\"modal-footer p-0 d-block bg-white\">\n <div class=\"row justify-content-center m-0\">\n <div class=\"col-3 col-md-4 col-lg-2 p-0\">\n <img class=\"w-100 h-100\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/assets/crypto-subscribe.jpg/" alt=\"Subscribe\">\n </div>\n <div class=\"col-9 col-md-8 col-lg-2 px-0 d-flex\">\n <div class=\"modal-subscribe w-100\">\n <p class=\"m-0 mt-1 mr-3\">SUBSCRIBE<br>\n <span class=\"m-0\">ON YOUTUBE</span>\n </p>\n </div>\n </div>\n <div class=\"col-12 col-md-12 col-lg-8 p-0 text-center d-flex justify-content-center align-items-center\">\n <div class=\"modal-subscribe-text\">\n <h4 class=\"m-0\">Understand crypto with ease</h4>\n <span>New explainer videos every week!</span>\n </div>\n </div>\n </div>\n </div>\n </a>\n </div>\n </div>\n</div>\n<h2>What is a Cryptocurrency?</h2>\n<p>So, how can the concept of cryptocurrencies be explained in a beginner-friendly way?</p>\n<p>The simplest possible answer to that question is that <strong>cryptocurrencies are digital money that’s based on blockchain technology. </strong>For the sake of keeping this section on topic, I won’t get into the details of what blockchains are - there's <a href=https://www.bitdegree.org/"/crypto/learn/what-is-blockchain/">a whole separate section</strong></a> about that in our Crypto 101 Handbook.</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"What is a cryptocurrency: Cryptography.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what_is_cryptocurrency_01.o.png/" alt=\"What is a cryptocurrency: Cryptography.\" width=\"1000\" height=\"228\" /></p>\n<p><strong>The term “crypto” is a shortened version of “cryptography”. </strong>If you’d like to learn what is <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-cryptography/">cryptography, it’s honestly also a huge topic, in of its own - to put it short, though, it’s a form of solving and cracking difficult codes. So, the term “cryptocurrency” could be viewed as “digital, coded money”, in a very specific sense!</p>\n<p>At the time of writing this cryptocurrency explanation, there are currently around 20,000 different crypto assets out there, on the market. Not all of them are successful, though - it is estimated that around 1/5th of all cryptocurrencies have failed. <em>That’s a huge number!</em></p>\n<p>Since examples are what I do best, allow me to give you one, in order to explain cryptocurrency, and to illustrate how crypto money is different from <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-fiat/">fiat money</strong></a> - in other words, our traditional, global currencies that we use, every single day (USD, EUR, and so on).</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"What is a cryptocurrency: Fiat money.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what_is_cryptocurrency_02.o.jpg/" alt=\"What is a cryptocurrency: Fiat money.\" width=\"1000\" height=\"346\" /></p>\n<p>Imagine that you and your friend both decided to shop for concert tickets, online. A globally-huge pop star is coming to your city, and so, the tickets are hot - everyone’s trying to get their hands on them!</p>\n<p>Both you and your friend keep refreshing the ticket vendor’s webpage, waiting for those tickets to become available to be purchased. As soon as they go live, both of you rush to enter your details, too - <strong>every moment counts, after all!</strong></p>\n<p>In just a few minutes, your friend already has their tickets in the email, while you’re still struggling to enter your credit card details on the page. Once you’ve finally managed to do so, you are faced with an error - the bank is undergoing maintenance, and credit card payments won’t be completed until that’s done, sometime tomorrow.</p>\n<p>The end result? Your friend will go to the concert, while you’re going to have to find a different event… And wait for your credit card to start working again!</p>\n<p>Now, then - why was your friend able to complete their purchase? <strong>Whelp, you’ve guessed it - they were paying in crypto.</strong></p>\n<h2>Cryptocurrencies VS Traditional Money</h2>\n<p>Now, keeping that example in mind, I want to continue this “what is cryptocurrency for dummies” explanation by exploring some of the main differences between cryptocurrencies and traditional money & payment systems. This will hopefully help you get a better understanding of why crypto has become as popular as it is - well, at least part of the reason.</p>\n<p>The key differences between crypto and fiat money lie in <strong>governance, privacy, transparency, transaction speeds, and transaction costs.</strong></p>\n<h3>Governance</h3>\n<p>First things first - <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-governance/">governance. This is something that is really at the core of crypto technology, and is one of the main reasons why cryptocurrencies came to be, in general! Ever since the creation of <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/buy-bitcoin-btc/">Bitcoin in 2009, cryptocurrencies have always prided themselves on being <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-decentralization/">decentralized (with a few exceptions).</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"What is a cryptocurrency: Governance.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what_is_cryptocurrency_03.o.jpg/" alt=\"What is a cryptocurrency: Governance.\" width=\"1000\" height=\"535\" /></p>\n<p>Decentralization essentially means that <strong>there is no single, central governing authority behind the cryptocurrency.</strong> With traditional money, you have governments and central banks watching over their currencies - for example, in the United States, the FED (or, the Federal Reserve System) is responsible for managing things such as <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-inflation/">inflation, and how much new money flows into the economy, every year.</p>\n<p>With crypto, there’s no FED, and no other single governing party that would influence how a particular cryptocurrency will act. Instead, this is something that is decided by the market, itself - in other words, <strong>the holders of the cryptocurrency are responsible for what happens with it.</strong></p>\n<p>So, here’s another example. Think about the aforementioned Bitcoin, the biggest and most well-known cryptocurrency on the market. Every single aspect surrounding this crypto asset is decided by the community behind it. While the anonymous individual or a group of people (known as <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/who-is-satoshi-nakamoto/">Satoshi Nakamoto</strong></a>) had created Bitcoin, after that was done, the rest was left with the community behind the asset. <strong>In other words, if you wanted to make some changes to Bitcoin, you would need to get the larger part of the community behind it!</strong></p>\n<h3>Privacy and Transparency</h3>\n<p>This leads us to the next two points that I want to emphasize - <strong>privacy and transparency.</strong></p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"What is a cryptocurrency: Privacy and transparency.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what_is_cryptocurrency_04-62f36932ea36a.o.jpg/" alt=\"What is a cryptocurrency: Privacy and transparency.\" width=\"1000\" height=\"241\" /></p>\n<p>With traditional currencies, both of those things are pretty limited. Sure, you can go to the shop, and buy some bread with cash - no one will really know that it’s YOU who bought that bread, since there’s no credit card statement, and the transaction happened in cash.</p>\n<p>That being said, that cash that you paid DID come from somewhere, didn’t it? Perhaps you’ve just withdrawn it from the ATM machine on the other side of the road? Or maybe you’ve borrowed it from a friend, or a colleague?</p>\n<p>My point here is simple - <strong>no matter where you get your money from, it’s always tracked and logged by the government.</strong> If you DO manage to receive money from somewhere that the government doesn’t see, you are obligated to inform the relevant tax authorities in your country, in the form of a tax return filing, at the end of the year, or at any other designated point in time.</p>\n<p>A quick sidenote - if, at the time you're reading this, <strong>tax season </strong>is around the corner, make sure to check out our <a href=https://www.bitdegree.org/"/crypto/learn/how-to-avoid-crypto-taxes/">dedicated section</strong></a> on how to avoid or minimize crypto taxes - legally, of course!</p>\n<p>Now, as you figure out what are cryptocurrencies, you’ll notice that things are a bit different with this form of payment. The more you look into it, the more intricate and complicated it will appear to be - for that reason, we’re not going to look into the various exceptions, but let’s instead talk about the broader rules of the cryptocurrency industry.</p>\n<p><strong>So, with crypto, all of the transactions that you perform are going to be public.</strong> If it’s something that you weren’t aware of, it can sound scary.<em> </em>Do not fret, though - while your transaction WILL be public, no one will know that it’s YOU who is performing them. Each transaction is encrypted, and unless you go out and tell the whole world your personal <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-address/">cryptocurrency wallet address</strong></a>, no one will know.</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"What is a cryptocurrency: Crypto wallet address.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what_is_cryptocurrency_05.o.jpg/" alt=\"What is a cryptocurrency: Crypto wallet address.\" width=\"1000\" height=\"498\" /></p>\n<p>This is exactly how cryptocurrencies allow you to retain your privacy, while also being transparent assets themselves, too! Since you can trade cryptocurrencies anonymously, you don’t need to worry about someone snooping around your transactions - on top of that, since all of those transactions are public, transparency is easy to prove, as well!</p>\n<p>Now, look - I do have to mention that <strong>you WILL probably need to report your transactions, and any potential income, to the relevant tax authorities in your country or region. </strong>Of course, each situation is different, and depends on crypto regulations in your area, but that’s just something that should be kept in mind!</p>\n<h3>Transaction Speed & Cost</h3>\n<p>The last big area where cryptocurrencies are quite different from traditional currencies has to do with <strong>the speed and cost of your transactions.</strong> Once again, allow me to illustrate this with an example.</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"What is a cryptocurrency: Transaction speed & cost.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what_is_cryptocurrency_06.o.png/" alt=\"What is a cryptocurrency: Transaction speed & cost.\" width=\"1000\" height=\"851\" /></p>\n<p>Imagine that you want to purchase a new pair of pants. You go online, and find an eShop that sells exactly what you’re looking for. The pants cost $30 - that’s a bargain, you say! Even the shipping is free, too!</p>\n<p>That being said, as you make the purchase, you see that you were actually charged $35, instead of $30. Looking into it, you eventually learn that the shop is located on the other side of the world, and since that region falls into some sort of a different economic zone, there are extra charges from your bank, in order to perform that transaction.</p>\n<p>Naturally, in reality, things are quite a bit more complicated than that, - still, though, the example illustrates my point, nonetheless!</p>\n<p><strong>Transactions that involve traditional currencies - or traditional payment gateways, for that matter - can get quite costly.</strong> It all depends on a variety of factors, but, once again - the point remains the same, either way!</p>\n<p>On top of that, such transactions can also take a lot of time to be processed, as well. While we’re used to credit or debit card payments being processed almost immediately, oftentimes, the same cannot be said about wire and bank transfers, in general. <strong>If you perform a bank transfer at night, your transaction might not be processed until the next day!</strong> And this is only if you’re sending money to someone in the same region that you’re located in, too!</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"What is a cryptocurrency: Transaction processing time.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what_is_cryptocurrency_07.o.jpg/" alt=\"What is a cryptocurrency: Transaction processing time.\" width=\"1000\" height=\"977\" /></p>\n<p>Understanding what are cryptocurrencies, things are very different, in both regards. <strong>When it comes to transaction costs, depending on the cryptocurrency that you might be transacting with, the fees could be as low as a fraction of a penny! </strong>Imagine sending a few thousand dollars to your family, on the other side of the world, and not even paying a cent for that transaction.</p>\n<p><em>Could it get any better?</em> Yes, it can - if that transaction was processed and completed in a matter of seconds. Once again, this is completely possible with cryptocurrency technology!</p>\n<p>To wrap everything up, let me just say this - apart from everything I just talked about, there are multiple other benefits associated with cryptocurrencies, and the blockchain technology behind them!</p>","preview_url":"https://www.bitdegree.org/crypto/learn/what-is-a-cryptocurrency","youtube_video":{"id":111,"channel_id":1,"sort":28,"video_title":"What is a Cryptocurrency: For Beginners (Animated Explainer)","description":"Wondering what is a cryptocurrency?\n\nCryptocurrencies are something that we see and come across, every single day, whether it be by buying, selling, and trading them, or simply reading about them online. However, at the end of the day, when you boil it down, do you really know what is a cryptocurrency?\n\nThat is exactly the question that I aim to answer in this video! I will tell you both what cryptocurrencies are, as well as how they are different from (and, oftentimes - superior to) traditional, fiat money.\n\nAre you looking to get into cryptocurrencies? If so, which ones are you a fan of? Let me know, in the comment section below!\n\nVideo Time Table:\n\n0:00 Introduction to What is a Cryptocurrency\n0:58 What is a Cryptocurrency Explained\n2:58 Cryptocurrencies vs Traditional Money\n8:41 Wrapping up: What is a Cryptocurrency?\n\nMore Related Videos:\n\n? Crypto Token VS Coin\nhttps://www.youtube.com/watch?v=kNAC7CXFOTw\n? What is Blockchain?\nhttps://www.youtube.com/watch?v=O2-XxMo5PFs\n? What is a Smart Contract?\nhttps://www.youtube.com/watch?v=0VCMtKx9AxU\n? What is Cardano in Crypto?\nhttps://www.youtube.com/watch?v=bn6Vxt_RTbI\n\nGet Quick Crypto Tips on Twitter - Follow:\nhttps://twitter.com/crypto_xplained\n\n#WhatisaCryptocurrency #CryptocurrencyForBeginners #WhatisCrypto","video_id":"eVLUrZtKhBk","duration":546,"view_count":530,"thumbnail_url":"https://i.ytimg.com/vi/eVLUrZtKhBk/hq720.jpg","thumbnail_width":1280,"thumbnail_height":720,"published_at":"2022-08-17 15:16:36","created_at":"2022-08-17T23:00:02.000000Z","updated_at":"2023-05-21T23:00:04.000000Z","channel":{"id":1,"title":"CryptoFinallyExplained","channel_id":"UCOryUY0yxC08eJtK23mNgiA","main_playlist_id":"UUOryUY0yxC08eJtK23mNgiA"}}},"chapterTitle":"Cryptocurrencies","cryptoBookSection":{"id":34,"featured_image_id":7901,"original_id":null,"youtube_video_id":119,"author_id":42,"translator_id":null,"chapter_id":2,"title":"How Does Cryptocurrency Work?","slug":"how-does-cryptocurrency-work","definition":"Did you know that cryptocurrencies and crypto transactions are considered to be an improvement over traditional banking institutions and conventional money transfer methods?","status":"published","content":"<p>In this section, I’m going to tell you how does cryptocurrency work!</p>\n<p>Nowadays, <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-cryptocurrency/">cryptocurrencies seem to be all around us - we trade crypto, transact in crypto, send it to our friends and relatives, buy and sell goods and services for crypto, and can even borrow and lend it out, too!</p>\n<p>As we perform all of those processes, though, do you ever think about what’s going on in the background? I’ll let you in on a little secret - <strong>there’s a lot of stuff happening, with every single transaction!</strong> So, then - let’s figure out how cryptocurrencies ACTUALLY work!</p>\n<p>In this section, we’re going to dive deep into the question of how does cryptocurrency work. Specifically, we’ll explore what makes cryptocurrencies unique, what happens during a transaction, and why these questions are something you should even care about, in the first place.</p>\n<p><em>So, let’s get to it!</em></p>\n<h2>What Makes Cryptocurrencies Unique?</h2>\n<p>In order to really get a grasp on what is cryptocurrency and how does it work, you need to first understand the underlying technology that crypto is built upon - <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-blockchain/">blockchains. This is, evidently, something that I’ve explored thoroughly in <a href=https://www.bitdegree.org/"/crypto/learn/what-is-blockchain/">a separate section</strong></a>. If you still haven’t read it, do so - it will help you get a better understanding of what we’re talking about today!</p>\n<p>That being said, for the context of this section, we’ll focus on one of the key functions of blockchain technology - <strong>automated and immutable bookkeeping.</strong></p>\n<p><strong><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"How does cryptocurrency work: What makes cryptocurrencies unique?\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/how_does_cryptocurrency_work_01.o.jpg/" alt=\"How does cryptocurrency work: What makes cryptocurrencies unique?\" width=\"1000\" height=\"673\" /></strong></p>\n<p>You see, <strong>a blockchain is simply a huge digital database.</strong> You can think about it as multiple boxes, being connected by a single chronological chain. Each box holds information about the transactions that you perform, and the chain helps with keeping everything organized and, well… Chronological!</p>\n<p>This is the very first thing that makes cryptocurrencies unique - the fact that each cryptocurrency is based on a blockchain, and that all transactions that involve cryptocurrencies are recorded on the said blockchain, too. For a visual example, you can imagine it as a bank - every money transfer and credit card transaction that you make is recorded by your bank!</p>\n<p>Now, admittedly, cryptocurrencies and crypto transactions are widely considered to be an improvement over traditional banking institutions, and default money transferring methods. One of the biggest reasons why that’s the case is just that - transparent and immutable bookkeeping.</p>\n<p><strong>Traditional banks can run into a wide array of troubles</strong>, when it comes to managing the personal information of their customers. Data breaches, power outages, and good, old-fashioned human error are just a few things that can go wrong! With blockchains generally being completely transparent and <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-decentralization/">decentralized, all of these aforementioned issues are, admittedly, non-threatening.</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"How does cryptocurrency work: Traditional banking problems.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/how_does_cryptocurrency_work_02.o.jpg/" alt=\"How does cryptocurrency work: Traditional banking problems.\" width=\"1000\" height=\"763\" /></p>\n<p><strong>Then, there’s the anonymity aspect, too.</strong> With your traditional banking institutions, anonymity is out of the question - you have to identify yourself, be transparent about where your money is coming from, who you’re sending your money to, and so on. So, if you have a friend named Tim, and want to send him some money, you’ll need to tell the bank WHY you’re sending your money to Tim, as well as make sure that Tim isn’t a suspicious individual who would be involved in some shady business.</p>\n<p>Now, sure, that’s an exaggeration, but you get the idea - with traditional banks, everything is pretty strict, in this regard. With crypto, though, it’s somewhat the opposite - <strong>the same blockchain technology behind cryptocurrencies aims to preserve your anonymity!</strong></p>\n<p>Specifically, this is done with the help of <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-wallet/">cryptocurrency wallets</strong></a>. Each wallet has a unique code associated with it - it’s called a “<a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-address/">public wallet address</strong></a>”. When you transact with crypto, while all of the information is stored on the blockchain and is public for everyone to see, all that anyone will see is your wallet address sending an X amount of cryptocurrency to Tim’s wallet address.</p>\n<p>In other words, no one will know that it’s YOU sending the crypto to TIM.</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"How does cryptocurrency work: Public wallet address.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/how_does_cryptocurrency_work_03.o.jpg/" alt=\"How does cryptocurrency work: Public wallet address.\" width=\"1000\" height=\"1088\" /></p>\n<p>One last point that I’d like to stress, when it comes to cryptocurrencies and how they work, is the fact that <strong>there are multiple different crypto projects, as well as blockchains out there.</strong> Each of these crypto projects have their own, special functions, and many of them have very unique working models, too.</p>\n<p>That is to say - in this section, we’re focusing on the general aspects of how does crypto work, from the perspective of cryptocurrency transactions.</p>\n<p>That’s the general gist of things, as far as the unique features of crypto technology are concerned. As you might expect, there’s a lot more to cover, in this regard, but as I’ve mentioned earlier, it’s something for a different section, altogether. So, if you’re not familiar with any of the concepts that we’ve discussed, up to this point in the section, <strong>check out other sections on our Crypto 101 Handbook</strong> - it covers each and every single of those topics, in-depth!</p>\n<h2>What Happens During a Crypto Transaction?</h2>\n<p>Now that you’re familiar with the unique features of cryptocurrencies, in general, it’s time to check out how does crypto work, transaction-wise - specifically, <strong>what happens when you perform a cryptocurrency transaction. </strong>For consistency’s sake, let’s stick to the same example I gave earlier - you sending some crypto to Tim.</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"How does cryptocurrency work: What happens during a crypto transaction?\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/how_does_cryptocurrency_work_04.o.jpg/" alt=\"How does cryptocurrency work: What happens during a crypto transaction?\" width=\"1000\" height=\"497\" /></p>\n<p>Also, let’s say that you’ve decided to send <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/buy-bitcoin-btc/">Bitcoin to Tim - evidently, this would work the same with most other cryptocurrencies out there, but Bitcoin is probably still the simplest example.</p>\n<p>So, in order to perform this transaction, you will need to have a cryptocurrency wallet, with BTC inside of it. Most wallets work the same - <strong>you enter the receiver wallet address, the amount of crypto that you’d like to send, and pass a few confirmations.</strong></p>\n<p>Now, as soon as you send that BTC, your transaction will be submitted to the network. In the case of Bitcoin, it will need to be verified, in order to be confirmed. This is the core security measure that’s employed by blockchain technology - it’s called a “<a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-consensus/">consensus algorithm</strong></a>”, and it helps keep the cryptocurrency network secure and fraud-resistant.</p>\n<p>It’s a really intimidating-sounding term, but what it boils down to is <strong>a method of how the blockchain confirms the validity of a transaction.</strong> Different blockchains use different methods, and with Bitcoin, the consensus algorithm is called “<a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-proof-of-work-pow/">Proof-of-Work”.
/n
Have you ever heard the term “<a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-miner/">cryptocurrency miner</strong></a>”? Well, this is what Proof-of-Work refers to - miners are people who employ their computers (or other special devices) to earn cryptocurrency for them! <strong>Miners earn crypto for confirming transactions happening on the blockchain</strong> - such as your transaction, where you send Tim your Bitcoin.</p>\n<p>As you might imagine, this is an entire, huge topic, in of its own! For now, though, just keep in mind what I said earlier - when you perform the transaction, it’s placed in a queue, on the blockchain, and awaits confirmation. Now, if your transaction is legitimate, it will receive all of the required confirmations, and the Bitcoin that you’ve sent will reach Tim’s wallet in no time.</p>\n<p>On the flip side, if you decide to “trick the system”, and try to perform some sort of a hacker-like faulty transaction, it will get denied, pretty fast - <strong>that’s the magic of consensus algorithms and blockchain security!</strong></p>\n<p>You should be aware of this entire process if you’re looking at how does investing in cryptocurrency work, as well. As you purchase crypto, or perform any other transactions, many of those processes will be happening in the background!</p>\n<p>All of that being said, that’s essentially how crypto transactions work! Mind you, as we’ve established earlier, each cryptocurrency is going to have this process look a bit different from the other. Especially nowadays, with so many new blockchain projects constantly springing up, all around. The premise, though, will remain the same, either way!</p>\n<h2>Why Should You Know How Cryptocurrencies Work?</h2>\n<p>So, then - now that you have a general idea of how cryptocurrencies work, it’s also worth addressing the “why” - specifically, <strong>why it’s important to know this</strong>, in the first place!</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"How does cryptocurrency work: Why should you know how cryptocurrencies work?\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/how_does_cryptocurrency_work_05.o.jpg/" alt=\"How does cryptocurrency work: Why should you know how cryptocurrencies work?\" width=\"1000\" height=\"585\" /></p>\n<p>Naturally, since you’re reading this, you do probably already have some reasons of your own. However, the point that I want to emphasize is that EVERYONE should learn about crypto - how it works, what happens during transactions, and so on.</p>\n<p>The biggest reason for why that’s the case is pretty simple, actually - <strong>with crypto becoming as popular as it is, it’s being integrated into our everyday lives! </strong>While the integrations are still very slow, I urge you to think about it - the simplest example would be major payment gateways, such as PayPal and Visa starting to accept and perform cryptocurrency transfers.</p>\n<p>Following that, if you understand how cryptocurrencies work, <strong>you will also have a much better chance of protecting yourself from potential scams and hacking attempts. </strong>No malicious individual or organization will be able to come in and trick you, since you will already understand the differences between a normal cryptocurrency transaction, and some shady dealing happening in the background.</p>\n<p>Lastly, learning about how cryptocurrencies work is also one of the very first steps that you can take when it comes to studying the crypto world, as a whole! Cryptocurrencies, and the blockchain technology behind them, are some of the core, essential elements that make up the entire industry.</p>\n<p>This is very true if you want to look into how does the crypto market work, or even how does investing in cryptocurrency work, as well! When you understand the technology behind crypto, and what happens during transactions, you’ll be much better-equipped to start your investment journey!</p>\n<p>All that you need to do in order to understand the importance of crypto tech is <strong>take a look at <a href=https://www.bitdegree.org/"/crypto/learn/what-is-defi/">DeFi, or decentralized finance.</strong> It’s a new-and-emerging form of finance, and one that already houses some huge investors, and incredible amounts of money. Well, no matter if it’s a cryptocurrency lending platform, a gambling game based on blockchain technology, or some sort of a wallet project, everything essentially boils down to the very fundamentals of how cryptocurrencies work!</p>","meta_title":"How does Cryptocurrency Work? A Thorough Explanation","meta_description":"Trying to find an answer to the question \"how does cryptocurrency work?\" You'll find a thorough and beginner-friendly explanation here!","meta_keywords":"how does cryptocurrency work, how does crypto work, what is cryptocurrency and how does it work, how does cryptocurrency work for dummies, what makes a cryptocurrency valuable, how does investing in cryptocurrency work, how does the crypto market work","order":2,"language":"en","created_at":"2022-08-10T13:26:33.000000Z","updated_at":"2022-10-17T08:45:53.000000Z","modified_content":"<p>In this section, I’m going to tell you how does cryptocurrency work!</p>\n<p>Nowadays, <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-cryptocurrency/">cryptocurrencies seem to be all around us - we trade crypto, transact in crypto, send it to our friends and relatives, buy and sell goods and services for crypto, and can even borrow and lend it out, too!</p>\n<p>As we perform all of those processes, though, do you ever think about what’s going on in the background? I’ll let you in on a little secret - <strong>there’s a lot of stuff happening, with every single transaction!</strong> So, then - let’s figure out how cryptocurrencies ACTUALLY work!</p>\n<p>In this section, we’re going to dive deep into the question of how does cryptocurrency work. Specifically, we’ll explore what makes cryptocurrencies unique, what happens during a transaction, and why these questions are something you should even care about, in the first place.</p>\n<p><em>So, let’s get to it!</em></p>\n<div class=\"container\">\n <div class=\"row justify-content-center\">\n <div class=\"col-md-10 comparison-suggestion pb-3 mb-4\">\n <div class=\"d-flex flex-row\">\n <div class=\"text-center\">\n <div class=\"img-block-yt\">\n <img src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/assets/images/compare-crypto-exchanges.gif/"/n alt=\"How Does Cryptocurrency Work? (Explained with Animation)\"\n title=\"How Does Cryptocurrency Work? (Explained with Animation)\" class=\"border-0\">\n <p>Video Explainer</p>\n </div>\n </div>\n <div class=\"col-xs-10 col-sm-10 col-md-10 text-left py-3 yt-info\">\n <h4 class=\"mb-1\">Video Explainer: How Does Cryptocurrency Work?</h4>\n <p class=\"py-1 mb-0 youtube-video-subtitle\">Reading is not your thing? Watch the \"How Does Cryptocurrency Work?\" video explainer</p>\n </div>\n </div>\n <div class=\"row justify-content-center text-center\">\n <div class=\"col-12 col-md-11 px-3\">\n <div class=\"wrapper mb-0\">\n <div class=\"youtube mb-4 bg-transparent p-0 video-modal-popup\" data-toggle=\"modal\"\n data-target=\"#video-modal\" data-id=\"rAtJ7Lw90KA\" data-title=\"CryptoFinallyExplained\">\n <div class=\"video-gradient-top\"></div>\n <p class=\"text-left dyk-video-title\">How Does Cryptocurrency Work? (Explained with Animation)</p>\n <img src=https://www.bitdegree.org/"https://i.ytimg.com/vi/rAtJ7Lw90KA/hq720.jpg/"/n alt=\"How Does Cryptocurrency Work? 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(Explained with Animation)\">\n </div>\n </div>\n </div>\n </div>\n <div class=\"row justify-content-center text-center\">\n <div>\n <a href=https://www.bitdegree.org/"https://www.youtube.com/c/CryptoFinallyExplained?sub_confirmation=1\%22\n class=\"btn yt-promo mb-2\" target=\"_blank\" rel=\"nofollow noopener\">\n <div class=\"row justify-content-center align-items-center mx-0 text-center\">\n <div class=\"col-4 col-md-4\">\n <i class=\"fab fa-youtube yt-dyk-btn\"></i>\n </div>\n <div class=\"col-8 col-md-8 text-center yt-promo-text\">\n <h4 class=\"m-0 text-white\">SUBSCRIBE</h4>\n <span>ON YOUTUBE</span>\n </div>\n </div>\n </a>\n </div>\n </div>\n </div>\n </div>\n</div>\n<div class=\"modal fade\" id=\"video-modal\" tabindex=\"-1\" role=\"dialog\" aria-labelledby=\"rAtJ7Lw90KA\">\n <div class=\"modal-dialog modal-dialog-centered modal-lg\" role=\"document\">\n <div class=\"modal-content\">\n <div class=\"modal-body p-0\">\n <button type=\"button\" class=\"video-modal-close close\" data-dismiss=\"modal\" aria-label=\"Close\">\n <i aria-hidden=\"true\" class=\"fas fa-times\"></i>\n </button>\n <div id=\"iframe\"></div>\n </div>\n <a class=\"text-decoration-none\"\n href=https://www.bitdegree.org/"https://www.youtube.com/c/CryptoFinallyExplained?sub_confirmation=1\%22\n rel=\"nofollow noopener\" target=\"_blank\">\n <div class=\"modal-footer p-0 d-block bg-white\">\n <div class=\"row justify-content-center m-0\">\n <div class=\"col-3 col-md-4 col-lg-2 p-0\">\n <img class=\"w-100 h-100\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/assets/crypto-subscribe.jpg/" alt=\"Subscribe\">\n </div>\n <div class=\"col-9 col-md-8 col-lg-2 px-0 d-flex\">\n <div class=\"modal-subscribe w-100\">\n <p class=\"m-0 mt-1 mr-3\">SUBSCRIBE<br>\n <span class=\"m-0\">ON YOUTUBE</span>\n </p>\n </div>\n </div>\n <div class=\"col-12 col-md-12 col-lg-8 p-0 text-center d-flex justify-content-center align-items-center\">\n <div class=\"modal-subscribe-text\">\n <h4 class=\"m-0\">Understand crypto with ease</h4>\n <span>New explainer videos every week!</span>\n </div>\n </div>\n </div>\n </div>\n </a>\n </div>\n </div>\n</div>\n<h2>What Makes Cryptocurrencies Unique?</h2>\n<p>In order to really get a grasp on what is cryptocurrency and how does it work, you need to first understand the underlying technology that crypto is built upon - <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-blockchain/">blockchains. This is, evidently, something that I’ve explored thoroughly in <a href=https://www.bitdegree.org/"/crypto/learn/what-is-blockchain/">a separate section</strong></a>. If you still haven’t read it, do so - it will help you get a better understanding of what we’re talking about today!</p>\n<p>That being said, for the context of this section, we’ll focus on one of the key functions of blockchain technology - <strong>automated and immutable bookkeeping.</strong></p>\n<p><strong><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"How does cryptocurrency work: What makes cryptocurrencies unique?\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/how_does_cryptocurrency_work_01.o.jpg/" alt=\"How does cryptocurrency work: What makes cryptocurrencies unique?\" width=\"1000\" height=\"673\" /></strong></p>\n<p>You see, <strong>a blockchain is simply a huge digital database.</strong> You can think about it as multiple boxes, being connected by a single chronological chain. Each box holds information about the transactions that you perform, and the chain helps with keeping everything organized and, well… Chronological!</p>\n<p>This is the very first thing that makes cryptocurrencies unique - the fact that each cryptocurrency is based on a blockchain, and that all transactions that involve cryptocurrencies are recorded on the said blockchain, too. For a visual example, you can imagine it as a bank - every money transfer and credit card transaction that you make is recorded by your bank!</p>\n<p>Now, admittedly, cryptocurrencies and crypto transactions are widely considered to be an improvement over traditional banking institutions, and default money transferring methods. One of the biggest reasons why that’s the case is just that - transparent and immutable bookkeeping.</p>\n<p><strong>Traditional banks can run into a wide array of troubles</strong>, when it comes to managing the personal information of their customers. Data breaches, power outages, and good, old-fashioned human error are just a few things that can go wrong! With blockchains generally being completely transparent and <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-decentralization/">decentralized, all of these aforementioned issues are, admittedly, non-threatening.</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"How does cryptocurrency work: Traditional banking problems.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/how_does_cryptocurrency_work_02.o.jpg/" alt=\"How does cryptocurrency work: Traditional banking problems.\" width=\"1000\" height=\"763\" /></p>\n<p><strong>Then, there’s the anonymity aspect, too.</strong> With your traditional banking institutions, anonymity is out of the question - you have to identify yourself, be transparent about where your money is coming from, who you’re sending your money to, and so on. So, if you have a friend named Tim, and want to send him some money, you’ll need to tell the bank WHY you’re sending your money to Tim, as well as make sure that Tim isn’t a suspicious individual who would be involved in some shady business.</p>\n<p>Now, sure, that’s an exaggeration, but you get the idea - with traditional banks, everything is pretty strict, in this regard. With crypto, though, it’s somewhat the opposite - <strong>the same blockchain technology behind cryptocurrencies aims to preserve your anonymity!</strong></p>\n<p>Specifically, this is done with the help of <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-wallet/">cryptocurrency wallets</strong></a>. Each wallet has a unique code associated with it - it’s called a “<a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-address/">public wallet address</strong></a>”. When you transact with crypto, while all of the information is stored on the blockchain and is public for everyone to see, all that anyone will see is your wallet address sending an X amount of cryptocurrency to Tim’s wallet address.</p>\n<p>In other words, no one will know that it’s YOU sending the crypto to TIM.</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"How does cryptocurrency work: Public wallet address.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/how_does_cryptocurrency_work_03.o.jpg/" alt=\"How does cryptocurrency work: Public wallet address.\" width=\"1000\" height=\"1088\" /></p>\n<p>One last point that I’d like to stress, when it comes to cryptocurrencies and how they work, is the fact that <strong>there are multiple different crypto projects, as well as blockchains out there.</strong> Each of these crypto projects have their own, special functions, and many of them have very unique working models, too.</p>\n<p>That is to say - in this section, we’re focusing on the general aspects of how does crypto work, from the perspective of cryptocurrency transactions.</p>\n<p>That’s the general gist of things, as far as the unique features of crypto technology are concerned. As you might expect, there’s a lot more to cover, in this regard, but as I’ve mentioned earlier, it’s something for a different section, altogether. So, if you’re not familiar with any of the concepts that we’ve discussed, up to this point in the section, <strong>check out other sections on our Crypto 101 Handbook</strong> - it covers each and every single of those topics, in-depth!</p>\n<h2>What Happens During a Crypto Transaction?</h2>\n<p>Now that you’re familiar with the unique features of cryptocurrencies, in general, it’s time to check out how does crypto work, transaction-wise - specifically, <strong>what happens when you perform a cryptocurrency transaction. </strong>For consistency’s sake, let’s stick to the same example I gave earlier - you sending some crypto to Tim.</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"How does cryptocurrency work: What happens during a crypto transaction?\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/how_does_cryptocurrency_work_04.o.jpg/" alt=\"How does cryptocurrency work: What happens during a crypto transaction?\" width=\"1000\" height=\"497\" /></p>\n<p>Also, let’s say that you’ve decided to send <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/buy-bitcoin-btc/">Bitcoin to Tim - evidently, this would work the same with most other cryptocurrencies out there, but Bitcoin is probably still the simplest example.</p>\n<p>So, in order to perform this transaction, you will need to have a cryptocurrency wallet, with BTC inside of it. Most wallets work the same - <strong>you enter the receiver wallet address, the amount of crypto that you’d like to send, and pass a few confirmations.</strong></p>\n<p>Now, as soon as you send that BTC, your transaction will be submitted to the network. In the case of Bitcoin, it will need to be verified, in order to be confirmed. This is the core security measure that’s employed by blockchain technology - it’s called a “<a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-consensus/">consensus algorithm</strong></a>”, and it helps keep the cryptocurrency network secure and fraud-resistant.</p>\n<p>It’s a really intimidating-sounding term, but what it boils down to is <strong>a method of how the blockchain confirms the validity of a transaction.</strong> Different blockchains use different methods, and with Bitcoin, the consensus algorithm is called “<a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-proof-of-work-pow/">Proof-of-Work”.
/n
Have you ever heard the term “<a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-miner/">cryptocurrency miner</strong></a>”? Well, this is what Proof-of-Work refers to - miners are people who employ their computers (or other special devices) to earn cryptocurrency for them! <strong>Miners earn crypto for confirming transactions happening on the blockchain</strong> - such as your transaction, where you send Tim your Bitcoin.</p>\n<p>As you might imagine, this is an entire, huge topic, in of its own! For now, though, just keep in mind what I said earlier - when you perform the transaction, it’s placed in a queue, on the blockchain, and awaits confirmation. Now, if your transaction is legitimate, it will receive all of the required confirmations, and the Bitcoin that you’ve sent will reach Tim’s wallet in no time.</p>\n<p>On the flip side, if you decide to “trick the system”, and try to perform some sort of a hacker-like faulty transaction, it will get denied, pretty fast - <strong>that’s the magic of consensus algorithms and blockchain security!</strong></p>\n<p>You should be aware of this entire process if you’re looking at how does investing in cryptocurrency work, as well. As you purchase crypto, or perform any other transactions, many of those processes will be happening in the background!</p>\n<p>All of that being said, that’s essentially how crypto transactions work! Mind you, as we’ve established earlier, each cryptocurrency is going to have this process look a bit different from the other. Especially nowadays, with so many new blockchain projects constantly springing up, all around. The premise, though, will remain the same, either way!</p>\n<h2>Why Should You Know How Cryptocurrencies Work?</h2>\n<p>So, then - now that you have a general idea of how cryptocurrencies work, it’s also worth addressing the “why” - specifically, <strong>why it’s important to know this</strong>, in the first place!</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"How does cryptocurrency work: Why should you know how cryptocurrencies work?\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/how_does_cryptocurrency_work_05.o.jpg/" alt=\"How does cryptocurrency work: Why should you know how cryptocurrencies work?\" width=\"1000\" height=\"585\" /></p>\n<p>Naturally, since you’re reading this, you do probably already have some reasons of your own. However, the point that I want to emphasize is that EVERYONE should learn about crypto - how it works, what happens during transactions, and so on.</p>\n<p>The biggest reason for why that’s the case is pretty simple, actually - <strong>with crypto becoming as popular as it is, it’s being integrated into our everyday lives! </strong>While the integrations are still very slow, I urge you to think about it - the simplest example would be major payment gateways, such as PayPal and Visa starting to accept and perform cryptocurrency transfers.</p>\n<p>Following that, if you understand how cryptocurrencies work, <strong>you will also have a much better chance of protecting yourself from potential scams and hacking attempts. </strong>No malicious individual or organization will be able to come in and trick you, since you will already understand the differences between a normal cryptocurrency transaction, and some shady dealing happening in the background.</p>\n<p>Lastly, learning about how cryptocurrencies work is also one of the very first steps that you can take when it comes to studying the crypto world, as a whole! Cryptocurrencies, and the blockchain technology behind them, are some of the core, essential elements that make up the entire industry.</p>\n<p>This is very true if you want to look into how does the crypto market work, or even how does investing in cryptocurrency work, as well! When you understand the technology behind crypto, and what happens during transactions, you’ll be much better-equipped to start your investment journey!</p>\n<p>All that you need to do in order to understand the importance of crypto tech is <strong>take a look at <a href=https://www.bitdegree.org/"/crypto/learn/what-is-defi/">DeFi, or decentralized finance.</strong> It’s a new-and-emerging form of finance, and one that already houses some huge investors, and incredible amounts of money. Well, no matter if it’s a cryptocurrency lending platform, a gambling game based on blockchain technology, or some sort of a wallet project, everything essentially boils down to the very fundamentals of how cryptocurrencies work!</p>","preview_url":"https://www.bitdegree.org/crypto/learn/how-does-cryptocurrency-work","youtube_video":{"id":119,"channel_id":1,"sort":27,"video_title":"How Does Cryptocurrency Work? (Explained with Animation)","description":"How does cryptocurrency work?\n\nThese days, transacting with cryptocurrencies has become a pretty common practice. Whether it be trading, sending crypto to friends, or even participating in DeFi activities, oftentimes, we don’t really think about what’s happening in the background.\n\nIn this video, I aim to address just that! I’ll tell you how does cryptocurrency work, from the perspective of what happens when you perform a cryptocurrency transaction. I’ll also talk about what makes cryptocurrenies unique, and explore some reasons why all of this should matter to you, in the first place!\n\nDo you know some examples of a unique crypto working model? If so, do share them in the comments down below!\n\nVideo Time Table:\n\n0:00 Introduction to How Does Cryptocurrency Work\n0:58 What Makes Cryptocurrencies Unique?\n4:24 What Happens During a Crypto Transaction?\n6:49 Why Should You Know How Cryptocurrencies Work?\n8:39 Wrap-up: How Does Cryptocurrency Work?\n\nMore Related Videos:\n\n? What is a Cryptocurrency?\nhttps://www.youtube.com/watch?v=eVLUrZtKhBk\n? What is Blockchain?\nhttps://www.youtube.com/watch?v=O2-XxMo5PFs\n? Blockchain Transaction Easily Explained\nhttps://www.youtube.com/watch?v=h1zkHIBFiS4\n\nGet Quick Crypto Tips on Twitter - Follow:\nhttps://twitter.com/crypto_xplained\n\n#HowDoesCryptocurrencyWork #HowDoesCryptoWork #WhatisCryptocurrencyandHowDoesitWork","video_id":"rAtJ7Lw90KA","duration":549,"view_count":507,"thumbnail_url":"https://i.ytimg.com/vi/rAtJ7Lw90KA/hq720.jpg","thumbnail_width":1280,"thumbnail_height":720,"published_at":"2022-08-31 15:21:42","created_at":"2022-08-31T23:00:02.000000Z","updated_at":"2023-05-21T23:00:04.000000Z","channel":{"id":1,"title":"CryptoFinallyExplained","channel_id":"UCOryUY0yxC08eJtK23mNgiA","main_playlist_id":"UUOryUY0yxC08eJtK23mNgiA"}},"featured_image":{"id":7901,"uuid":"8cbcfe71-8bbf-4b46-88b5-3c093730a696","public_url":"https://assets.bitdegree.org/crypto/storage/media/how-does-cryptocurrency-work-featured-image.o.jpg","path":"crypto/storage/media/how-does-cryptocurrency-work-featured-image.o.jpg","original_path":"crypto/storage/media/how-does-cryptocurrency-work-featured-image.jpg","name":"how-does-cryptocurrency-work-featured-image.o.jpg","original_name":"how-does-cryptocurrency-work-featured-image.jpg","title":null,"alt":null,"width":768,"height":478,"disk":"spaces","status":"uploaded","readable_file_size":"131.98KB"}},"chapterList":[{"id":1,"title":"Blockchain","slug":"blockchain","updated":null,"chapter":"https://assets.bitdegree.org/crypto/assets/crypto-book/chapters/learn-blockchain.jpg","chapter_simple":"https://assets.bitdegree.org/crypto/assets/crypto-book/chapters-simple/blockchain-101.jpg","rating":100,"sections":[{"slug":"what-is-blockchain","title":"What 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Explained","featured_image_id":7442,"status":"published","chapter_id":1,"language":"en","order":4,"modified_content":null,"preview_url":"https://www.bitdegree.org/crypto/learn/crypto-fees","featured_image":{"id":7442,"uuid":"f554012e-7fe1-4636-9718-81abd3499361","public_url":"https://assets.bitdegree.org/crypto/storage/media/crypto-fees-featured-image.o.jpg","path":"crypto/storage/media/crypto-fees-featured-image.o.jpg","original_path":"crypto/storage/media/crypto-fees-featured-image.jpg","name":"crypto-fees-featured-image.o.jpg","original_name":"crypto-fees-featured-image.jpg","title":null,"alt":null,"width":768,"height":478,"disk":"spaces","status":"uploaded","readable_file_size":"78.90KB"},"youtube_video":null},{"slug":"what-is-bridging-in-crypto","title":"The Key Notion Behind the Concept of Bridging in 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For?","featured_image_id":7272,"status":"published","chapter_id":1,"language":"en","order":6,"modified_content":null,"preview_url":"https://www.bitdegree.org/crypto/learn/types-of-blockchains","featured_image":{"id":7272,"uuid":"6ad01272-67ac-4719-8e88-7f01752a0628","public_url":"https://assets.bitdegree.org/crypto/storage/media/types-of-blockchains-featured-image.o.jpg","path":"crypto/storage/media/types-of-blockchains-featured-image.o.jpg","original_path":"crypto/storage/media/types-of-blockchains-featured-image.jpg","name":"types-of-blockchains-featured-image.o.jpg","original_name":"types-of-blockchains-featured-image.jpg","title":null,"alt":null,"width":768,"height":478,"disk":"spaces","status":"uploaded","readable_file_size":"110.34KB"},"youtube_video":null}]},{"id":2,"title":"Cryptocurrencies","slug":"cryptocurrencies","updated":null,"chapter":"https://assets.bitdegree.org/crypto/assets/crypto-book/chapters/learn-cryptocurrencies.jpg","chapter_simple":"https://assets.bitdegree.org/crypto/assets/crypto-book/chapters-simple/cryptocurrencies-101.jpg","rating":100,"sections":[{"slug":"what-is-a-cryptocurrency","title":"What is a Cryptocurrency?","featured_image_id":7751,"status":"published","chapter_id":2,"language":"en","order":1,"modified_content":null,"preview_url":"https://www.bitdegree.org/crypto/learn/what-is-a-cryptocurrency","featured_image":{"id":7751,"uuid":"791c4203-70ae-4c68-8a02-bc1769331e86","public_url":"https://assets.bitdegree.org/crypto/storage/media/what-is-cryptocurrency-featured-image.o.jpg","path":"crypto/storage/media/what-is-cryptocurrency-featured-image.o.jpg","original_path":"crypto/storage/media/what-is-cryptocurrency-featured-image.jpg","name":"what-is-cryptocurrency-featured-image.o.jpg","original_name":"what-is-cryptocurrency-featured-image.jpg","title":null,"alt":null,"width":768,"height":478,"disk":"spaces","status":"uploaded","readable_file_size":"90.10KB"},"youtube_video":null},{"slug":"how-does-cryptocurrency-work","title":"How Does Cryptocurrency 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All Crypto From

Scratch!

Crypto 101 Handbook

Chapter 1: Blockchain

1.1

What is the Blockchain?
1.2

Anonymous & Decentralized Blockchains: The Cornerstone of Crypto
1.3

What is a Blockchain Transaction in Crypto?
1.4

The Different Types of Crypto Fees Explained
1.5

The Key Notion Behind the Concept of Bridging in Crypto
1.6

Different Types of Blockchains: What to Look Out For?
Chapter 2: Cryptocurrencies

2.1

What is a Cryptocurrency?
2.2

How Does Cryptocurrency Work?
2.3

Is Cryptocurrency a Good Investment? The Pros & Cons
2.4

Coin VS Token: How Do They Differ?
2.5

What are Stablecoins, Altcoins & Wrapped Coins?
2.6

Bitcoin: the Pioneer of the Crypto World
2.7

The Ultimate Blockchain for dApp Creation: Ethereum
2.8

What is Cardano and What is It Used For?
2.9

Shiba Inu: the Dogecoin Killer
2.10

Is Solana an Improved Version of Ethereum?
2.11

The Bridge Between Blockchains: Polkadot
2.12

Polygon: the Essential Scaling Solution for Ethereum
2.13

The Practical Use of Crypto
Chapter 3: Crypto Exchanges

3.1

How do Cryptocurrency Exchanges Work?
3.2

DEX VS CEX: Two Sides of the Crypto Exchange Industry
3.3

Crypto Day Trading: The Difference Between Buying, Trading, and Swapping
3.4

KYC & AML: The Key to Complying With Legal Industry Standards
3.5

From Fiat to Crypto: How to Buy Crypto for the First Time
3.6

Taking Profits: Turning Crypto Into Fiat
3.7

You’ve Got Crypto: What Can You Do With It?
Chapter 4: Crypto Wallets

4.1

What is a Crypto Wallet?
4.2

Hot Wallet VS Cold Wallet: Which One to Pick?
4.3

What are Non-Custodial Crypto Wallets?
4.4

Metamask: The Leading Non-Custodial Wallet
4.5

The Key Crypto Wallet Safety Practices: How Safe Can Crypto Be?
Chapter 5: NFTs

5.1

What are Non-Fungible Tokens (NFTs)?
5.2

NFT Trading: The Ins and Outs
5.3

Tips and Tricks of Choosing the Right NFTs
5.4

How to Store NFTs: Best Practices
5.5

How to Create Your Own NFTs?
5.6

Making Passive Money with NFTs
Chapter 6: dApps & Defi

6.1

What is Decentralized Finance (DeFi)?
6.2

DeFi 2.0: The New Version of Decentralized Finance
6.3

What Are dApps and How Do They Work?
6.4

Picking the Right dApps: Dos and Don'ts
6.5

Web 3.0: The Future of the Internet
6.6

What is the Core Purpose of Smart Contracts?
6.7

The Notion of a Decentralized Autonomous Ogranization (DAO)
6.8

What is the Goal of Staking Crypto Assets?
6.9

What is a Liquidity Pool and How Does It Work?
6.10

Automated Market Maker: the Cornerstone of the Decentralized Crypto Exchange Industry
6.11

The Main Yield Farming Techniques
6.12

Crypto Oracles: The Link Between Blockchain and Outside World Data
6.13

The Peculiarities of Decentralized Crypto Gambling
6.14

Metaverse: A New Perception of Reality
Chapter 7: Trading & Investing

7.1

Where Can You Trade Cryptocurrencies?
7.2

Investing in Crypto: What Investing Options Do You Have?
7.3

ICO vs IDO vs IEO: Which One is the One?
7.4

What are Crypto Airdrops and How to Get Them?
7.5

How to Get Free Crypto Assets?
7.6

What is Crypto Arbitrage: The Main Principles
7.7

What is FUD: How to Use It to Your Advantage While Investing in Crypto?
7.8

Investing in Cryptocurrency: How to Manage Your Risks?
7.9

What is a Rug Pull in Crypto?
7.10

How to Spot and Avoid Rug Pulls?
7.11

The Key Legal Techniques of Avoiding Crypto Taxes
Chapter 8: Crypto Analysis

8.1

Bearish and Bullish Markets: Do They Matter?
8.2

5 Best Crypto Technical Analysis Indicators You Must Know About
8.3

Technical Analysis: What are Candlesticks, Trendlines, and Patterns?
8.4

Crypto Tracking: How to Track Your Favorite Coins & Tokens?
8.5

Crypto Research Fundamentals & Social Signals: Your Daily Trading Strategy
Chapter 9: Mining

coming soon

Chapter 10: Crypto Terms

10.1

All Crypto Terms

Handbook Cover Page

Chapter 2: Cryptocurrencies

How Does Cryptocurrency Work?

Did you know that cryptocurrencies and crypto transactions are considered to be an improvement over traditional banking institutions and conventional money transfer methods?

Easy

8 minutes

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In this section, I’m going to tell you how does cryptocurrency work!

Nowadays, cryptocurrencies seem to be all around us - we trade crypto, transact in crypto, send it to our friends and relatives, buy and sell goods and services for crypto, and can even borrow and lend it out, too!

As we perform all of those processes, though, do you ever think about what’s going on in the background? I’ll let you in on a little secret - there’s a lot of stuff happening, with every single transaction! So, then - let’s figure out how cryptocurrencies ACTUALLY work!

In this section, we’re going to dive deep into the question of how does cryptocurrency work. Specifically, we’ll explore what makes cryptocurrencies unique, what happens during a transaction, and why these questions are something you should even care about, in the first place.

So, let’s get to it!

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What Makes Cryptocurrencies Unique?

In order to really get a grasp on what is cryptocurrency and how does it work, you need to first understand the underlying technology that crypto is built upon - blockchains. This is, evidently, something that I’ve explored thoroughly in a separate section. If you still haven’t read it, do so - it will help you get a better understanding of what we’re talking about today!

That being said, for the context of this section, we’ll focus on one of the key functions of blockchain technology - automated and immutable bookkeeping.

You see, a blockchain is simply a huge digital database. You can think about it as multiple boxes, being connected by a single chronological chain. Each box holds information about the transactions that you perform, and the chain helps with keeping everything organized and, well… Chronological!

This is the very first thing that makes cryptocurrencies unique - the fact that each cryptocurrency is based on a blockchain, and that all transactions that involve cryptocurrencies are recorded on the said blockchain, too. For a visual example, you can imagine it as a bank - every money transfer and credit card transaction that you make is recorded by your bank!

Now, admittedly, cryptocurrencies and crypto transactions are widely considered to be an improvement over traditional banking institutions, and default money transferring methods. One of the biggest reasons why that’s the case is just that - transparent and immutable bookkeeping.

Traditional banks can run into a wide array of troubles, when it comes to managing the personal information of their customers. Data breaches, power outages, and good, old-fashioned human error are just a few things that can go wrong! With blockchains generally being completely transparent and decentralized, all of these aforementioned issues are, admittedly, non-threatening.

Then, there’s the anonymity aspect, too. With your traditional banking institutions, anonymity is out of the question - you have to identify yourself, be transparent about where your money is coming from, who you’re sending your money to, and so on. So, if you have a friend named Tim, and want to send him some money, you’ll need to tell the bank WHY you’re sending your money to Tim, as well as make sure that Tim isn’t a suspicious individual who would be involved in some shady business.

Now, sure, that’s an exaggeration, but you get the idea - with traditional banks, everything is pretty strict, in this regard. With crypto, though, it’s somewhat the opposite - the same blockchain technology behind cryptocurrencies aims to preserve your anonymity!

Specifically, this is done with the help of cryptocurrency wallets. Each wallet has a unique code associated with it - it’s called a “public wallet address”. When you transact with crypto, while all of the information is stored on the blockchain and is public for everyone to see, all that anyone will see is your wallet address sending an X amount of cryptocurrency to Tim’s wallet address.

In other words, no one will know that it’s YOU sending the crypto to TIM.

One last point that I’d like to stress, when it comes to cryptocurrencies and how they work, is the fact that there are multiple different crypto projects, as well as blockchains out there. Each of these crypto projects have their own, special functions, and many of them have very unique working models, too.

That is to say - in this section, we’re focusing on the general aspects of how does crypto work, from the perspective of cryptocurrency transactions.

That’s the general gist of things, as far as the unique features of crypto technology are concerned. As you might expect, there’s a lot more to cover, in this regard, but as I’ve mentioned earlier, it’s something for a different section, altogether. So, if you’re not familiar with any of the concepts that we’ve discussed, up to this point in the section, check out other sections on our Crypto 101 Handbook - it covers each and every single of those topics, in-depth!

What Happens During a Crypto Transaction?

Now that you’re familiar with the unique features of cryptocurrencies, in general, it’s time to check out how does crypto work, transaction-wise - specifically, what happens when you perform a cryptocurrency transaction. For consistency’s sake, let’s stick to the same example I gave earlier - you sending some crypto to Tim.

Also, let’s say that you’ve decided to send Bitcoin to Tim - evidently, this would work the same with most other cryptocurrencies out there, but Bitcoin is probably still the simplest example.

So, in order to perform this transaction, you will need to have a cryptocurrency wallet, with BTC inside of it. Most wallets work the same - you enter the receiver wallet address, the amount of crypto that you’d like to send, and pass a few confirmations.

Now, as soon as you send that BTC, your transaction will be submitted to the network. In the case of Bitcoin, it will need to be verified, in order to be confirmed. This is the core security measure that’s employed by blockchain technology - it’s called a “consensus algorithm”, and it helps keep the cryptocurrency network secure and fraud-resistant.

It’s a really intimidating-sounding term, but what it boils down to is a method of how the blockchain confirms the validity of a transaction. Different blockchains use different methods, and with Bitcoin, the consensus algorithm is called “Proof-of-Work”.

Have you ever heard the term “cryptocurrency miner”? Well, this is what Proof-of-Work refers to - miners are people who employ their computers (or other special devices) to earn cryptocurrency for them! Miners earn crypto for confirming transactions happening on the blockchain - such as your transaction, where you send Tim your Bitcoin.

As you might imagine, this is an entire, huge topic, in of its own! For now, though, just keep in mind what I said earlier - when you perform the transaction, it’s placed in a queue, on the blockchain, and awaits confirmation. Now, if your transaction is legitimate, it will receive all of the required confirmations, and the Bitcoin that you’ve sent will reach Tim’s wallet in no time.

On the flip side, if you decide to “trick the system”, and try to perform some sort of a hacker-like faulty transaction, it will get denied, pretty fast - that’s the magic of consensus algorithms and blockchain security!

You should be aware of this entire process if you’re looking at how does investing in cryptocurrency work, as well. As you purchase crypto, or perform any other transactions, many of those processes will be happening in the background!

All of that being said, that’s essentially how crypto transactions work! Mind you, as we’ve established earlier, each cryptocurrency is going to have this process look a bit different from the other. Especially nowadays, with so many new blockchain projects constantly springing up, all around. The premise, though, will remain the same, either way!

Why Should You Know How Cryptocurrencies Work?

So, then - now that you have a general idea of how cryptocurrencies work, it’s also worth addressing the “why” - specifically, why it’s important to know this, in the first place!

Naturally, since you’re reading this, you do probably already have some reasons of your own. However, the point that I want to emphasize is that EVERYONE should learn about crypto - how it works, what happens during transactions, and so on.

The biggest reason for why that’s the case is pretty simple, actually - with crypto becoming as popular as it is, it’s being integrated into our everyday lives! While the integrations are still very slow, I urge you to think about it - the simplest example would be major payment gateways, such as PayPal and Visa starting to accept and perform cryptocurrency transfers.

Following that, if you understand how cryptocurrencies work, you will also have a much better chance of protecting yourself from potential scams and hacking attempts. No malicious individual or organization will be able to come in and trick you, since you will already understand the differences between a normal cryptocurrency transaction, and some shady dealing happening in the background.

Lastly, learning about how cryptocurrencies work is also one of the very first steps that you can take when it comes to studying the crypto world, as a whole! Cryptocurrencies, and the blockchain technology behind them, are some of the core, essential elements that make up the entire industry.

This is very true if you want to look into how does the crypto market work, or even how does investing in cryptocurrency work, as well! When you understand the technology behind crypto, and what happens during transactions, you’ll be much better-equipped to start your investment journey!

All that you need to do in order to understand the importance of crypto tech is take a look at DeFi, or decentralized finance. It’s a new-and-emerging form of finance, and one that already houses some huge investors, and incredible amounts of money. Well, no matter if it’s a cryptocurrency lending platform, a gambling game based on blockchain technology, or some sort of a wallet project, everything essentially boils down to the very fundamentals of how cryptocurrencies work!

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