What is cryptocurrency and how does it work?

cryptocurrency – meaning and definition

Cryptocurrencies, sometimes referred to as cryptocurrencies or cryptocurrencies, are any form of currency that exists digitally or virtually and uses cryptography to protect transactions. Cryptocurrencies do not have a central issuing or regulatory authority, instead using a decentralized system to record transactions and issue new units.

what is cryptocurrency?

Cryptocurrency is a digital payment system that does not rely on banks to verify transactions. it is a peer-to-peer system that can allow anyone anywhere to send and receive payments. Instead of being physical money transported and exchanged in the real world, cryptocurrency payments exist simply as digital entries to an online database that describes specific transactions. When you transfer cryptocurrency funds, the transactions are recorded in a public ledger. cryptocurrency is stored in digital wallets.

cryptocurrency got its name because it uses encryption to verify transactions. this means that advanced encryption is involved in the storage and transmission of cryptocurrency data between wallets and public ledgers. the purpose of encryption is to provide security and protection.

The first cryptocurrency was bitcoin, which was founded in 2009 and is still the best known today. Much of the interest in cryptocurrencies is trading for profit, with speculators sometimes driving prices through the roof.

how does cryptocurrency work?

Cryptocurrencies run on a distributed public ledger called a blockchain, a record of all transactions updated and maintained by currency holders.

Cryptocurrency units are created through a process called mining, which involves using computing power to solve complicated mathematical problems that generate coins. users can also buy the coins from brokers, then store and spend them using crypto wallets.

If you own cryptocurrency, you don’t own anything tangible. what you have is a key that allows you to move a record or unit of measure from one person to another without a trusted third party.

Although bitcoin has been around since 2009, cryptocurrencies and applications of blockchain technology are still emerging in financial terms and more uses are expected in the future. transactions including bonds, stocks, and other financial assets could eventually be traded using the technology.

examples of cryptocurrencies

There are thousands of cryptocurrencies. some of the better known include:


Founded in 2009, bitcoin was the first cryptocurrency and remains the most frequently traded. The coin was developed by Satoshi Nakamoto, who is believed to be a pseudonym for an individual or group of people whose precise identity is unknown.


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.


This currency is more similar to bitcoin but has moved faster to develop new innovations, including faster payments and processes to enable more transactions.


ripple is a distributed ledger system that was founded in 2012. ripple can be used to track different types of transactions, not just cryptocurrencies. the company that supports it has worked with several banks and financial institutions.

Cryptocurrencies other than bitcoin are collectively known as “altcoins” to distinguish them from the original.

how to buy cryptocurrencies

You may be wondering how to buy cryptocurrencies safely. there are typically three steps involved. these are:

step 1: choose 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:

  • traditional brokers. These are online brokers that offer ways to buy and sell cryptocurrencies, as well as other financial assets such as stocks, bonds, and ETFs. these platforms tend to offer lower trading costs but fewer crypto features.
  • cryptocurrency exchanges. There are many cryptocurrency exchanges to choose from, each offering different cryptocurrencies, wallet storage, interest-bearing account options, and more. many exchanges charge asset-based fees.
  • When comparing different platforms, consider what cryptocurrencies are offered, what fees they charge, their security features, storage and withdrawal options, and any educational resources.

    step 2: fund your account

    once you have chosen your platform, the next step is to fund your account so you can start trading. Most cryptocurrency exchanges allow users to purchase cryptocurrencies using fiat (i.e., government-issued) currencies such as the US dollar, British pound, or Euro using their debit or credit cards, although this varies by platform. .

    Cryptocurrency purchases with credit cards are considered risky and are not supported by some exchanges. some credit card companies also do not allow crypto transactions. this is because cryptocurrencies are highly volatile and it is not advisable to risk going into debt, or potentially paying high credit card transaction fees, for certain assets.

    some platforms will also accept wire and bank transfers. accepted payment methods and the time needed for deposits or withdrawals differ by platform. also, the time it takes for deposits to settle varies depending on the payment method.

    An important factor to consider is fees. these include possible deposit and withdrawal transaction fees plus trading fees. fees will vary by payment method and platform, which is something to research early on.

    step 3: place an order

    You can place an order through the web or mobile platform of your broker or exchange. If you plan to buy cryptocurrency, you can do so by selecting “buy”, choosing the type of order, entering the amount of cryptocurrency you wish to buy and confirming the order. the same process applies to “sell” orders.

    There are also other ways to invest in cryptocurrencies. These include payment services such as paypal, cash app and venmo, which allow users to buy, sell or hold cryptocurrencies. In addition, there are the following investment vehicles:

    • bitcoin trusts: You can buy shares of bitcoin trusts with a regular brokerage account. These vehicles provide retail investors with exposure to cryptocurrencies through the stock market.
    • Bitcoin Mutual Funds: There are bitcoin ETFs and bitcoin mutual funds to choose from.
    • Blockchain Stocks or ETFs: You can also indirectly invest in cryptocurrencies through blockchain companies that specialize in the technology behind cryptocurrencies and cryptocurrency transactions. alternatively, you can buy stocks or etfs from companies that use blockchain technology.
    • The best option for you will depend on your investment objectives and risk appetite.

      how to store cryptocurrencies

      once you have purchased the cryptocurrency, you must store it securely to protect it from hacking or theft. Cryptocurrencies are typically stored in crypto wallets, which are physical devices or online software used to store the private keys of your cryptocurrencies securely. Some exchanges provide wallet services, making it easy for you to store directly through the platform. however, not all exchanges or brokers automatically provide you with wallet services.

      There are different wallet providers to choose from. the terms “hot wallet” and “cold wallet” are used:

      • Hot wallet storage: “Hot wallet” refers to cryptographic storage that uses online software to protect the private keys of your assets.
      • Cold wallet storage: Unlike active wallets, cold wallets (also known as hardware wallets) rely on offline electronic devices to securely store your private keys.
      • In general, cold wallets tend to charge fees, while hot wallets do not.

        what can you buy with cryptocurrencies?

        When it was first launched, bitcoin was intended to be a medium for everyday transactions, making it possible to buy everything from a cup of coffee to a computer or even expensive items like real estate. that hasn’t quite materialized, and while the number of institutions accepting cryptocurrencies is growing, large transactions involving them are rare. still, it is possible to buy a wide variety of products from e-commerce websites using crypto. here are some examples:

        technology and e-commerce sites:

        Several companies that sell technology products accept cryptocurrencies on their websites, including newegg.com, at&t, and microsoft. overstock, an e-commerce platform, was one of the first sites to accept bitcoin. shopify, rakuten and home depot also accept it.

        luxury items:

        Some luxury retailers accept cryptocurrency as a form of payment. For example, online luxury retailer Bitdials offers Rolex, Patek Philippe, and other high-end timepieces in exchange for Bitcoin.


        Some car dealerships, from mass-market brands to high-end luxury dealerships, already accept cryptocurrency as a form of payment.


        In April 2021, Swiss insurer axa announced that it had started accepting bitcoin as a form of payment for all of its lines of insurance except life insurance (due to regulatory issues). Premier Shield Insurance, which sells auto and home insurance policies in the United States, also accepts bitcoin for premium payments.

        If you want to spend crypto at a retailer that doesn’t accept it directly, you can use a crypto debit card, such as bitpay in the US.

        cryptocurrency fraud and cryptocurrency scams

        Unfortunately, cryptocurrency-related crime is on the rise. Cryptocurrency scams include:

        Fake Websites: Fake sites featuring fake testimonials and crypto jargon that promise massive, guaranteed profits, as long as you keep investing.

        Virtual Ponzi Schemes: Cryptocurrency criminals promote non-existent opportunities to invest in digital currencies and create the illusion of huge profits by paying old investors with new investors’ money. one scam operation, the bitclub network, raised more than $700 million before its perpetrators were charged in December 2019.

        “Celebrity” tips: Online scammers pose as billionaires or household names who promise to multiply your investment in a virtual currency, but instead steal what you send. they can also use messaging apps or chat rooms to start rumors that a famous businessman is endorsing a specific cryptocurrency. once they have encouraged investors to buy and raised the price, the scammers sell their stake and the value of the coin declines.

        Romance Scams: The FBI warns of a trend in online dating scams, where scammers persuade people they meet on dating apps or social media to invest or trade virtual currency . The FBI’s Internet Crime Complaint Center filed more than 1,800 reports of crypto-focused romance scams in the first seven months of 2021, with losses reaching $133 million.

        Otherwise, scammers can pose as legitimate virtual currency merchants or set up fake exchanges to trick people into giving them money. Another crypto scam involves fraudulent sales pitches for cryptocurrency individual retirement accounts. then there is direct cryptocurrency hacking, where criminals break into digital wallets where people store their virtual currency in order to steal it.

        Are cryptocurrencies safe?

        Cryptocurrencies are generally built using blockchain technology. Blockchain describes the way transactions are recorded in “blocks” and are time-stamped. it is quite a complex technical process, but the result is a digital ledger of cryptocurrency transactions that is difficult for hackers to manipulate.

        In addition, transactions require a two-factor authentication process. for example, you may be required to enter a username and password to initiate a transaction. then you may need to enter an authentication code texted to your personal cell phone.

        While values ​​exist, that doesn’t mean cryptocurrencies can’t be hacked. Several high-value hacks have cost crypto startups dearly. hackers accessed coincheck to the tune of $534 million and bitgrail to the tune of $195 million, making them two of the biggest cryptocurrency hacks of 2018.

        Unlike government-backed money, the value of virtual currencies depends entirely on supply and demand. this can create wild swings that result in significant gains for investors or large losses. and cryptocurrency investments are subject to far less regulatory protection than traditional financial products like stocks, bonds, and mutual funds.

        four tips to invest in cryptocurrencies safely

        According to consumer reports, all investments carry risk, but some experts consider cryptocurrencies to be one of the riskiest investment options out there. If you plan to invest in cryptocurrencies, these tips can help you make informed decisions.

        research exchanges:

        Before you invest, educate yourself on cryptocurrency exchanges. it is estimated that there are more than 500 exchanges to choose from. do your research, read reviews and talk to more experienced investors before moving forward.

        know how to store your digital currency:

        If you buy crypto, you have to store it. you can keep it on an exchange or in a digital wallet. Although there are different types of wallets, each one has its benefits, technical requirements and security. As with exchanges, you should research your storage options before investing.

        diversify your investments:

        Diversification is key to any good investment strategy, and this is true when investing in cryptocurrencies. don’t put all your money in bitcoin, for example, just because that’s the name you know. there are thousands of options, and it’s best to spread your investment across multiple currencies.

        prepare for volatility:

        The cryptocurrency market is very volatile, so be prepared for ups and downs. you will see drastic changes in prices. If your investment portfolio or mental well-being can’t handle that, cryptocurrencies may not be a good choice for you.

        Cryptocurrencies are all the rage right now, but remember that they are still in their relative infancy and are considered highly speculative. Investing in something new comes with challenges, so be prepared. if you plan to participate, do your research and invest conservatively to start.

        One of the best ways to stay safe online is to use a comprehensive antivirus. kaspersky internet security defends you from malware infections, spyware, data theft, and protects your online payments with bank-grade encryption.

        related articles:

        • what is cryptojacking and how does it work?
        • what is bitcoin?
        • four common cryptocurrency scams
        • fraudulent websites and how to avoid them
        • How secure are electronic money transfers?
Content Creator Zaid Butt joined Silsala-e-Azeemia in 2004 as student of spirituality. Mr. Zahid Butt is an IT professional, his expertise include “Web/Graphic Designer, GUI, Visualizer and Web Developer” PH: +92-3217244554

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