What Is Cryptocurrency?

Everyone has heard the term “cryptocurrency,” but what does it mean? Cryptocurrency is a form of digital currency that uses cryptography to secure transactions. That means this form of currency is not verified by a financial institution or backed by a government and uses blockchain technology.

How Does It Work?

If you own cryptocurrency, then you don’t own anything tangible. Units of crypto are created through mining, which involves using a computer to solve complicated mathematical problems that generate the “coins.” So, how do you keep track of it? Through blockchains. Blockchains are public ledgers that record all transactions held by currency holders.

Once a user starts a transaction to another user with a specific amount of cryptocurrency, or crypto, then the transaction is initiated and needs to be verified through a process called broadcasting. A network of computers then use algorithms to authenticate the legitimacy of the transaction and record it in a block. Once the transaction is completed, it is permanently added to the existing blockchain.

Crypto Types

Since the first cryptocurrency in 2009, there have been more and more decentralized, digital currencies that have been founded with unique characteristics. The top ones are:

  • Bitcoin – This was the first crypto and still the most commonly traded one. The main difference between Bitcoin and others is that the currency is limited to help curb any future inflation.
  • Utility tokens – Within a specific blockchain, the crypto is used for specific tasks, like paying gas fees.
  • Memecoins – Functional like Bitcoin and other cryptocurrencies, Memecoins have more fun beginnings, like Dogecoin. Dogecoin was inspired by a meme featuring a Shib Inu. The fan base is still “bought” into the currency and exchange it.
  • NFTs (Non-fungible Tokens) – Or non-fungible tokens. With this crypto, you receive a tangible piece of art or something similar to represent your funds, either in digital or physical form. These are usually limited and rely on rarity and demand to determine their value.

Is It A Safe Investment?

While crypto usually has lower fees and faster transactions than traditional financial institutions or stock trading, there are still risks, such as:

  • Once a transaction has been made, it cannot be undone. With traditional financial institutions, if you make a mistake, you can sometimes reverse or cancel the payment.
  • Big-time influencers can greatly manipulate the market and there are no regulations to prevent this. An influencer can encourage their followers to buy crypto one day, then turn around and sell their share of the crypto. This makes the crypto you just bought lose its value significantly.
  • Like previously said, there are minimal regulations. Many investors of crypto have lost major money with no insurance to get it back. Government-backed currency like the U.S. dollar is often protected through financial institutions via the FDIC or NCUA.

Cryptocurrency is a volatile, constantly changing market. While it might be part of the future wave of currency, there is still plenty that needs to be worked out. You can get ahead by learning more about the ins and outs of this digital currency.