How does Cryptocurrency work?

Cryptocurrency has taken the world by storm in the last few years. People are talking about Bitcoin, Ether and other coins more than ever before, and it doesn’t seem to be stopping or even slowing down. It seems clear that crypto is here to stay.

However, many people don’t truly understand how it works. They seem to think that it’s just another asset or stock that appreciates value over time, but this isn’t the case, or at least it’s not the intended purpose of most coins like Bitcoin. Let’s take a look into how Cryptocurrency works.

Basically, cryptocurrencies were, as the name implies, originally meant to simply be currencies — something people use to exchange goods and services. People hold their coins in something called ledgers, which are completely virtual — cryptocurrencies don’t exist physically, they are entirely digital. They are stored in a way that has strong cryptography, which means that it’s extremely difficult to hack.

Most cryptos are decentralized. This means that they are not issued or regulated by any bank, goverment or other entity of any kind. The validity of coins is provided by something called a blockchain, which is a technical name for an ever-growing list of computer records linked through cryptography. Basically, it’s an open book where transactions can be recorded with a timestamp and with no way to alter the data.

So, if the coins just come from a collection of computer records, what does “mining” mean? Crypto miners are simply verifying peer-to-peer transactions done by other holders of the coin, a task which requires a lot of computing power. In exchange for their processing power, they are given new coins validated by the blockchain.

Hopefully you didn’t get too bored by the technical explanations. If you want to invest in cryptocurrencies, it’s a good idea to have a general understanding of how they work on a basic level. You shouldn’t be expected to understand everything at the same level of a computer scientist, though.

For many people, cryptos are a way of cutting out a corrupt middleman. Goverments and banks heavily control the way people trade with eachother, and cryptos provide a way of securely and (pseudo)-anonymously exchange goods and services with other people.

Nowadays, there are also new cryptos emerging called Stablecoins, which aim to fulfill the original purpose of Cryptocurrency by lowering the intense volatility of the mainstream coins.

Originally published at on January 25, 2021.




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