What are cryptocurrencies and how do they work?

Cryptocurrency, also called cryptocurrency or cryptocurrency, is a form of digital or virtual currency that uses cryptography to secure transactions. Instead of having a central issuer or regulatory body, cryptocurrencies use a decentralized system to record transactions and issue new units.

Cryptocurrency - what is it?

Cryptocurrency is a digital payment system that does not rely on banks to verify transactions. It is a peer-to-peer system that allows anyone to send and receive payments anywhere. Unlike physical money that circulates and is exchanged in the real world, cryptocurrency payments exist only in the form of digital currencies in an online database from which certain transactions are made. When transferring funds in cryptocurrency, transactions are registered in a public ledger. Cryptocurrency is stored in digital wallets, and we talked about crypto trading strategies in another article.

Cryptocurrency is so called because it uses cryptography to verify transactions. This means that an advanced encryption system is used to store and transfer cryptocurrency data between wallets and public ledgers. The purpose of encryption is to ensure safety and security.

How do cryptocurrencies work?

Cryptocurrencies use a distributed public ledger called the blockchain, an up-to-date record of all transactions held by currency holders.

Cryptocurrency units are created through a process called mining, which uses computer processing to solve complex mathematical problems from which coins are generated. Users can also buy currency from brokers and then store and spend it using crypto wallets.

If you own cryptocurrency, you own nothing tangible. You only have one key that allows you to move a record or unit of measurement from one person to another without relying on a third party. Read more about cryptocurrency trading signals in this guide.

What are cryptocurrencies?

Having seen how cryptocurrencies work, let's see which of them are the most famous:

Bitcoins:

Founded in 2009, Bitcoin was the first cryptocurrency and is still the most traded. The currency was developed by Satoshi Nakamoto, presumably the pseudonym of a person or group of people whose identity remains unknown.

Ethereum:

Developed in 2015, Ethereum is a blockchain platform with its own cryptocurrency called Ether (ETH) or Ethereum. It is the most popular cryptocurrency after Bitcoin.

Litecoin:

This currency is most similar to Bitcoin, but has evolved faster to allow faster payments and processes along with more transactions.

Ripple:

Ripple is a distributed ledger system founded in 2012. Ripple can be used to track many different types of transactions, not just in cryptocurrency. The company behind its creation cooperated with various banks and financial institutions.

Non-bitcoin cryptocurrencies are collectively known as "altcoins" to distinguish them from the originals.

How to buy cryptocurrency

You might be wondering how to buy cryptocurrency safely. There are usually three steps. In particular:

Step 1: Choosing a platform

The first step is to decide which platform to use. In general, you can choose between a traditional broker or a dedicated cryptocurrency exchange platform:

Traditional brokers. These are online brokers that offer different ways to buy and sell cryptocurrencies, as well as other financial assets such as stocks, bonds, ETFs. While they offer lower trading costs, these platforms also offer fewer features.
Cryptocurrency trading platforms. There are many cryptocurrency exchange platforms. Each one offers different options for cryptocurrencies, wallets, interest accounts and more. Many exchange platforms have asset-based fees.
When comparing different platforms, consider what cryptocurrencies are offered, what fees are charged, security requirements, storage and withdrawal options, and any educational resources.

Step 2: Top up your account

Once you have chosen your platform, the next step is to fund your account so you can start trading. Most cryptocurrency exchange platforms allow users to make purchases using fiat money (such as government-issued money) such as US dollars, pounds sterling or euros using credit or debit cards, although this option varies by platform.

Buying cryptocurrency with a credit card is considered risky and is not supported by some exchange platforms. Even some credit card companies do not allow cryptocurrency transactions. This is because cryptocurrencies are highly volatile and it is not advisable to risk debt (or pay high credit card transaction fees) for certain assets.