Beginner Introduction to Cryptocurrencies and How They Work

Basics on what cryptocurrencies are

Cryptocurrencies are electronically held units of exchange, also referred to as digital currencies or digital coins.

Cryptocurrencies are generated and created independently using cryptography.

Cryptography is the use of intense private program codes that use high encryption security to handle information.

The first ever cryptocurrency to be created is known as Bitcoin, created in 2009 by presumed Satoshi Nakamoto.

An article written in 2009 about the new technology, Blockchain, and the new cryptocurrency, Bitcoin, happened to bear the name.

Satoshi Nakamoto’s anonymous nature makes it impossible to classify him/her as a single person or a group of individuals. 

Bitcoin is the largest cryptocurrency by market capitalization as compared to other digital coins, it covers roughly more than 50% of the total market share.

The smallest unit of Bitcoin is referred to as “satoshi”.

Other popular cryptocurrencies include;

  • Ethereum 
  • XRP
  • Tether
  • Litecoin
  • Binance Coin
  • EOS
  • Tezos
  • Dash

Cryptocurrencies are stored, backed, and protected in a database referred to as Blockchain Technology.

Overview on how cryptocurrencies work

Cryptocurrencies are self generated through a process known as mining. 

Mining involves use of very powerful computer machines to solve complex mathematical functions.

Cryptocurrencies are used for the same purpose as with fiat money; Such as, for payment of services and goods, for transferring money to friends and family, among other things.

The payment process does not involve going through middlemen such as banks to complete the transactions. 

It is a free and a secure one way system where the payments are directly peer to peer, therefore the system is decentralized.

This makes transaction and related fees cheaper, and more affordable.  

  • Normal transfer of fiat money involves money sent going through a middleman such as a bank or a credit card provider, hence restrictions such as the amount limits, and high transaction fees.
  • Transfer of cryptocurrencies does not involve a middleman (i.e Banks, Credit card providers. etc), transfer of money goes directly from the person sending the payment to the person receiving the payment.

When a transfer is made from one account to another account, the transaction is stored on public ledgers. 

A ledger is a file that holds the information about the transaction. 

These ledgers are then distributed and held by ledger keepers also referred to as miners, who verify and store the transactions through the process of Cryptography and Blockchain technology through the mining process. 

This ensures protection and security, and prevents manipulation of these records.

Once the transactions have been confirmed and stored, they cannot be altered or changed as the blockchain technology makes it impossible.

Cryptocurrencies cannot be physically held. But, they could be exchanged for fiat money such as the Euro (EUR) or United States Dollar (USD).

Crypto price movements and value are market driven and solely fluctuate based on demand and supply. 

Because of their recent gain in popularity, and speculation by investors and traders, Digital Cryptocurrencies tend to be extremely volatile, unlike the traditional financial assets.


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