Skip to content
Home » How cryptocurrency works

How cryptocurrency works

Bitcoin and Ethereum may be familiar to you. You might have also heard about how cryptocurrency “investors” can make thousands, even millions of dollars. But what exactly is this? Or, better yet, what is the point in cryptocurrency?
The primary purpose of cryptocurrency, however, is to address the problems with traditional currencies. It does this by placing the power and the responsibility in the hands of currency holders. All cryptocurrency adhere to the three functions and 5 property of money. They all attempt to solve real-world problems.

Let’s look at how cryptocurrency works, and why more people are becoming aware of this new form of money.

A cryptocurrency can be described as a digital money form that is more secure than traditional currency.

The basic idea is that transactions, which are public and irreversible, are mostly unhackable and controlled by the people, make it more difficult for users to access their digital finances.

The use of cryptocurrency offers many benefits. Here are some facts about cryptocurrency, and four reasons why you should be concerned.
1. Cryptocurrency is owned by everyone

Cryptocurrency works similarly to any other national currency, with some fundamental differences.

A governmental body creates and regulates current “fiat currencies”, all of which are now considered debt. Anybody who is a owner of a currency country holds an “IOU”, issued by that country.

Cryptocurrency doesn’t stand for debt. It represents only itself. The value of cryptocurrency is determined by the amount someone is willing trade it for.

It is important that cryptocurrency is decentralized in order to determine its currency value.

A cryptocurrency cannot be owned or controlled by any person. Its value is independent of any country’s political whims, or a central banking’s monetary policy.

Notice: Some people may see cryptocurrency’s lack centralized control as a way of avoiding taxes. Like stocks and bonds, however, cryptocurrency can be considered an asset. If it is exchanged or sold, it will be subject to capital gains taxes in the United States.

A centralized ledger is a single entity that manages transactions records. Cryptocurrencies are vulnerable to manipulation and corruption. Because cryptocurrency is decentralized, it operates on a “distributed leadger”, or a shared transaction database. This ledger is the core of cryptocurrency and is why we should be excited about cryptocurrency. For more details about crypto head on over to My Power Token.
2. Cryptocurrency is almost impossible to forge

Blockchain technology is what enables cryptocurrency to operate. This is the distributed ledger we discussed above. Understanding blockchain technology will enable you to understand the basics of cryptocurrency and how it works.

The “block”, which is made up of chunks encrypted data, is called the “block”. The “chain” refers to the public database in the which the blocks are stored and related sequentially.

Every block on the blockchain has its own unique code. This code distinguishes it from all other blocks. This unique code is known by the hash. Each block of information that is added to a Blockchain is added chronologically. The new block is added immediately after the last one, which has its own unique haveh.

The ledger (or database of blocks) in the chain is distributed simultaneously worldwide among thousands or, in the case of Ethereum and Bitcoin, millions of computers. That’s a quick explanation of cryptocurrency.

Imagine that someone wanted to forge one block of data on the blockchain. In this case, they would need to alter all blocks from a particular point in history forward and update all computers with copies of the Blockchain ledger.

It is theoretically possible but it would require a lot of money and power to accomplish.
3. Cryptocurrency Transactions (Mostly) Are Confidential

Private transactions or payments can be made using traditional currencies, which are issued by the government.

The total amount of fiat currency in circulation is only a fraction of what it contains. This includes paper, metals, cloth, and plastic currencies. Large withdrawals are quickly flagged by central authorities such as financial regulators and governments.

Notice: Monitoring large cash transactions can be a good thing. It ensures currency legitimacy and deters money laundering.

Cryptocurrency has a unique approach. It uses well-designed math for tracking the exchange between two companies or individuals. This happens almost anonymously. Although the transaction ledger is visible to the public, the identities of the parties involved in the exchange of cryptocurrency are kept private. Cryptocurrencies are digitally stored in digital wallets by definition. The wallet’s private key is owned by the owner. The currency can be digitally exchanged using mostly anonymous wallets.

Another important note: While cryptocurrency is intended to remain anonymous, sophisticated forensics can reveal the identities of wallet holder. Monero and other crypto projects are resistant to identity discovery.

4. Cryptocurrency Security Gains in Value and Time

As we discussed previously, hacking and manipulation would require enormous amounts of power and money. It would be essentially a pointless undertaking. To be more specific, hackers would need to have control of over half the computers in the “consensus” network.

The consensus network is simply a collection of computers that receive copies the blockchain or distributed ledger. Cryptocurrencies like Ethereum and Bitcoin are more established than ever, so hacking is nearly impossible.

As the cryptocurrency network was small in its early days, it was easier for the majority to control the currency.

This is a crucial fact for users and investors of newer cryptocurrencies, whose networks aren’t growing to a significant extent. Hackers can easily hack smaller networks.

One example of this was Bitcoin’s early days, when a group called BitFury gathered together large numbers of computers to “mine” the cryptocurrency.

What is cryptocurrency mining?

Mining is the process through which cryptocurrency transactions are validated and blocks are assigned their hashes. It takes a lot computing power. Users who lend their computers to the network of cryptocurrency validators get rewards (through transaction fee) in the cryptocurrency that they’re supporting.

BitFury started a verification network (or mining pool) that became very lucrative as Bitcoin’s value increased. In 2014, they reached 50 percent of the total network’s strength.

Although they did not intend to hack or manipulate the blockchain, they decided that it was important to limit their influence over the Bitcoin network. The pool owners pledged to not exceed forty percent of the overall network strength. Because currency holders might be threatened by a 51% attack, they did this to preserve Bitcoin’s value.

BitFury’s profits could have been adversely affected if Bitcoin fell in value. Another type of blockchain security is the ability to strike the right balance between network power and potential profit. Too much network strength can cause currency stability and loss of profit.

What’s the Point of Crypto’s?

Imagine you need to send money to someone online. There are many possible ways that this transaction could go wrong. Including:

An error in the computer system or machines can cause financial institution or bank failures.
Hacking can cause your account to be compromised. This could lead to identity theft, denial of service or even denial of service.
You, your friend’s or their account may have reached the limit.

These scenarios are possible because there is one central point of failure: the financial institution.

This is why cryptocurrency was invented as the future currency.

Consider the following scenario. Imagine two people using a Bitcoin application or another cryptocurrency. You will be asked if you are certain you want to send Bitcoins. Accept the offer and the transaction is immediately processed.

The system verifies user identity and checks that you have enough funds to process the transaction. After authentication, the payment is sent to your friend’s bank account. Because it is direct, there are no technical glitches or steps associated with banks. It’s much more seamless.

The purpose of cryptocurrency is to replace traditional banking. There are no limitations on the amount of bitcoin you can transfer. Accounts are nearly impossible to hack as you aren’t using any financial institution and there isn’t a single point of failure.

Additionally, international crypto transactions can be done faster than traditional wire transfers which have been around since 1872. While wire transfers can take up to a few hours, or even days, crypto transactions take just minutes, if anything, seconds.
What is the Problem that Cryptocurrency Solves?

Western Union and other international money transfer organizations can be complicated, bureaucratic, and slow. It is simple and quick to do the same with bitcoin once you’re familiar with the process.

Another reason why cryptocurrency has such value is that it is a one to one affair. It is done through a peer-to–peer network structure, which cuts out the middleman and significantly reduces transaction costs.

Fiat currencies come with many restrictions and risks. Banks and other similar institutions are at risk of economic boom and bust cycles. These cases can lead to bank collapses in certain situations, as has been the case in the past.

However, crypto is completely autonomous and its value is not tied to government policies. Crypto owners have complete control over their money.

The strong encryption employed in the blockchain network provides a strong defense against fraud and account manipulation.

Bitcoin’s average annual value increases by 200% each year as an investment. That is unparalleled. It’s not stocks, real property, or gold.