Have you ever wondered how digital currencies like Bitcoin and Ethereum actually work? We probably don’t have to tell you that the cryptocurrency market saw an astronomical rise (and some downturns) in the past few years. We now have more than 22,000 different cryptocurrencies, and the crypto market cap surpassed the $2.55 trillion in June of 2024.
Cryptocurrencies offer a decentralized alternative to traditional finance, and if you don’t fully understand what that means, don’t worry, you’re not the only one. Probably the most important aspect of crypto currencies is that they offer secure, peer-to-peer transactions without intermediaries.
How Cryptocurrency Actually Works
We can tell you that cryptocurrency works through a decentralized system known as “blockchain”, and that it ensures security and transparency, but this may not explain much. You can imagine a public notebook, and everyone has access to it. Each transaction is recorded in this notebook (a public ledger).
But this then means that anyone can also alter what’s written in the notebook, right? This is where cryptographic verification comes in. It’s kind of like having multiple people (network nodes) constantly checking the contents of the notebook, and each other’s work.
We’re massively simplifying here, but you get the idea. In theory, it’s a full-proof system. This system eliminates the need for intermediaries, and of course this reduces risk, transaction costs and time.
If we take Bitcoin as an example, Bitcoin transactions are confirmed by miners who solve complex mathematical problems, and this earns them new bitcoins in the process. If this sounds confusing, don’t worry, we’ll cover cryptocurrency creation and valuation in another blog post.
Types of Cryptocurrencies
Cryptocurrencies come in many different shapes, forms and sizes, with Bitcoin being the most famous one. It also has the largest market cap of over $1.33 trillion (as of mid-2024). Many different cryptocurrencies offer some unique features, like Etherium’s support for smart contracts and decentralized applications, Ripple’s real-time international payments, or Litecoin’s faster transaction times.
There’s also a type of cryptocurrencies called “stablecoins”. These are pegged to traditional currencies to reduce volatility, and usually maintain a value around $1. Probably the most important thing to remember at this point is that there are many different types of cryptocurrencies, and they don’t serve the same purpose.
How to Get Started with Cryptocurrency
So, how do you even start with crypto? The first step is usually to set up a digital wallet. Some well known providers are Coinbase and MetaMask, with millions of users worldwide, but there are other options as well.
The next step might be obvious, but – you then need to purchase some cryptocurrency. The easiest way to do it is through crypto exchanges. After that, you simply store your new crypto inside your new wallet. There are also hardware wallets, and we’ll explore those some other time.
Using Cryptocurrency
A lot of people will tell you that crypto is the future and how it will completely replace regular (fiat) currencies, but currently there are three main ways you can use your cryptocurrency – transactions, mining, and staking.
Transactions are the easiest to understand, you just use crypto like regular money to buy stuff. Bitcoin and Ethereum are fast and low cost, with Bitcoin’s average transaction fee around $1.50 (this figure is from the early 2024). Make sure you check if your chosen vendor supports the cryptocurrency you want to use.
Then there’s mining. You’ve probably heard of crypto mining, and no, it doesn’t involve going into mines. Put in simplest of terms, “mining crypto” means you’re actively contributing to the blockchain operation (well, not you, your computer does). Have you ever wondered how your Gmail works in the background, or where’s the physical server that process your request to stream that latest Netflix show? Again, we’re simplifying here, but imagine if your computer provided processing power for someone else to watch that Netflix show, or check their email. Mining crypto is kind of like that.
Validating transactions and adding them to the blockchain requires solving complex mathematical problems, which usually requires specialized hardware (crypto rigs with expensive graphics cards). It also uses a lot of electricity.
Lastly, we have staking. This essentially is keeping some of your cryptocurrencies locked in a wallet to support network operations, and getting some rewards in return. If you simply want to use your crypto to buy things, either online or in physical stores, make sure your chosen vendor accepts crypto, and the right kind of crypto.
Investing in Cryptocurrency
Investing in crypto works similarly to investing in other digital assets. It requires market analysis, risk management and diversification. As of this year, the total market cap for crypto exceeds $2.55 trillion. Of that, over half is Bitcoin and Ethereum.
There are many different tools you can use to perform market analysis on your own, and we won’t go into much detail here. What you should be aware of is that cryptocurrencies are known for their volatility. That’s just a fancy term for “their value can change drastically, and fast”.
Take Bitcoin as an example. Its value shifted between $16,000 in November 2022 and $71,000 in March of 2024 (more than quadruple). And we’re not saying it only grew in that period either. March 2021 – $60k. July 2021 – 31k. November 2021 – 65k. You get the idea.
We’re not going to give you any trading advice (obviously), but we’ll just say – stay cautious. Most of the cryptocurrencies were not created as an investment instrument.
The Legal Aspect of Crypto
This varies greatly from country to country, and significantly impacts how digital assets are used and traded. The US treats cryptocurrencies as property (subjugating them to capital gains tax). The EU’s Markets in Crypto-Assets (MiCA) regulation aims to provide a unified framework for digital assets across member states.
Some countries (like China) have imposed serious bans on crypto trading and mining. On the other side of the spectrum we have nations like El Salvador that went as far as adopting Bitcoin as legal tender.
The best you can do is look up local regulation, based on where you live (or mine/trade). There are many local communities of crypto enthusiasts and they’re usually just a few clicks away.
Cryptocurrencies of Tomorrow
Nobody knows for sure what will happen with cryptocurrencies (legally, technologically). It seems like we’re heading in the direction of integration into mainstream financial systems.
There are many predictions about the blockchain market, and some say it will reach $39.7 billion by 2025. At the moment, a lot of (if not most) major banks and financial institutions are at least looking into blockchain implementation.
Just don’t forget that this is still an emerging market and there may be shifts in regulation (and technology). We’re still some time away from widespread adoption.
Wrapping Up
No one really knows what the future holds for cryptocurrencies exactly. On one hand it looks like a very promising technology with many different possible applications, but on the other, we’d advise caution.
We didn’t even touch on the many crypto scams and scandals, of which there are many. Whether you decide to jump into the world of crypto, or give it yet some time to evolve and develop, it looks like blockchain and crypto are here to stay.
As a bonus, we’ve included a short FAQ section that will (hopefully) answer your questions in a simple and straightforward way.
FAQs
What is a cryptocurrency?
Cryptocurrency is a digital or virtual currency that uses cryptography for security and operates on decentralized networks based on blockchain technology.
How do I buy cryptocurrency?
You can buy cryptocurrency through online exchanges, which allow you to trade traditional currency for digital assets.
Is cryptocurrency legal?
The legality of cryptocurrency varies by country. Some nations, like the United States, regulate it as property, while others, like China, have banned its use. Always check local regulations.
What is a blockchain?
A blockchain is a distributed ledger that records all transactions across a network of computers, ensuring transparency and security without a central authority.
How do I store my cryptocurrency securely?
Use digital wallets for secure storage. These wallets keep your private keys offline, protecting them from online threats.
What are the risks of investing in cryptocurrency?
Cryptocurrency investments are highly volatile and can result in significant gains or losses. Risks include market volatility, regulatory changes, and cybersecurity threats.
Can I use cryptocurrency for everyday purchases?
Yes, some businesses accept cryptocurrencies like Bitcoin and Ethereum for payments. However, acceptance varies, so always check if your preferred vendor supports it.
What is mining in cryptocurrency?
Mining is the process of validating transactions and adding them to the blockchain by solving complex mathematical problems, which in turn rewards miners with new cryptocurrency.
What is staking?
Staking involves holding and locking up a certain amount of cryptocurrency to support the operations of a blockchain network, earning rewards in the process.
What is the difference between Bitcoin and Ethereum?
Bitcoin is primarily a digital currency used for transactions, while Ethereum is a platform that allows developers to create decentralized applications and smart contracts in addition to its cryptocurrency, Ether.