Traditionally, the concept of money has been intrinsically linked to the physical notes and coins in your wallet.
While recent decades have seen a dramatic rise in the use of credit and debit cards instead of cash, cryptocurrency is an altogether new development for the financial world.
As a decentralised form of payment and investment, it’s a complete game changer.
But while this exciting new technology does offer huge potential, it can be somewhat confusing for the uninitiated.
That’s especially true when it comes to the myriad crypto terms that are used to describe the process of acquiring cryptocurrencies, including words and phrases like mining, blockchain and nodes.
If you’d like to learn more about how cryptocurrencies work but aren’t sure where to start, this handy beginner’s guide should point you in the right direction.
The origins of cryptocurrency
One of the first cryptocurrencies in existence – and the one with which many people associate the term to this day – was Bitcoin, which was invented in 2009.
Bitcoins are “mined”, which is a process that creates new transactions in a blockchain.
Blockchains are essentially a decentralised online ledger of the transactions which occur throughout a peer-to-peer (P2P) network.
Because there is no central authority, the responsibility of governing Bitcoin is shared across that network.
Every time a new transaction is added to the blockchain – when someone invests in Bitcoin, for example, or else uses a cryptocurrency to purchase goods and services – the transaction must be verified by the members of the network and a new block is added to the chain. This takes significant computing power and no little amount of energy to achieve.
How investing in cryptocurrency works
Crypto investments work in much the same way as any other investment. Investors aim to buy cryptocurrencies while they are at a low price, then sell them as and when their value goes up. The transaction is normally handled by a cryptocurrency exchange, which will anonymously pair up buyers and sellers and dictate the price of the currency itself. However, other options (such as Bitcoin ATMs and P2P platforms) also exist.
Once an individual has invested in a cryptocurrency, they will then hope that its value rises before they sell again.
However, the highly volatile nature of cryptocurrencies, which are extremely susceptible to any changes in the marketplace, mean that speculating in crypto is a riskier business than most stocks and shares.
How paying with cryptocurrency works
Once you have made a purchase of a cryptocurrency, it is stored in your digital wallet until it comes time to use it.
While cryptocurrency is still a relatively new development and many commercial businesses are wary of accepting it, it’s worth noting that it was recently adopted by Venezuela as an official currency which every retailer must accept, providing they have the technological capabilities to do so.
Even outside of Latin America, cryptocurrencies are steadily receiving more credibility and legitimacy as more governments regulate them and more companies accept them.
For example, tech firms like AT&T and Microsoft accept Bitcoin, as do online marketplaces like Etsy and Shopify.
While the number of household name businesses that accept cryptocurrency as payment is still relatively small, it is growing all the time.
While cryptocurrency might seem like an alien technology to some, it represents a fairer, securer and more transparent way to use money than many fiat currencies.
It’s no surprise, then, that it’s growing in popularity all the time.
