What Is Cryptocurrency? Here’s What You Need To Know
Ever since the inception of Bitcoin back in 2009, cryptocurrency has captured the attention of many economists, investors, skeptics, and users around the world. What started out as a way to counter the 2008 financial crisis, has evolved into something much bigger and sparked the revolutionary creation of all the different blockchain technology and crypto tokens that we know today.
Cryptocurrency, as an industry, is quickly becoming an alternative medium to store value, make payments on supported platforms, and a revolution in the way monetary transactions work globally.
So, we’ll take you through how cryptocurrencies work, the underlying blockchain technology that brings them to life, as well as how to store cryptocurrencies.
What is cryptocurrency?
Cryptocurrency, or crypto, is a digital currency that allows users to make payments and exchange value without the need of an intermediary, such as a bank or other financial institutions.
As its name implies, cryptocurrency uses cryptography as a way to secure the information and transaction data that is executed on its native transaction ledger, also known as the blockchain. In addition, most cryptocurrencies are decentralised, meaning they are not accessible by any governing body or entity.
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How do cryptocurrencies work?
Cryptocurrencies can do more than just store value and conduct transactions. In addition to being a medium of exchange, cryptocurrencies are also used to deploy and execute decentralised applications and facilitate smart contracts that run on special blockchain networks, such as Ethereum and Cardano.
Unlike traditional fiat currency such as the Australian Dollar (AUD), cryptocurrencies do not have a physical form. The denomination of a cryptocurrency such as Bitcoin (BTC) or Ethereum (ETH), exist virtually as digital tokens, with immutable proof of ownership and individuals being the sole custodians.
What is a blockchain?
A blockchain is an immutable, distributed ledger that keeps a record of all transactions that happen on the network. In Bitcoin’s case, this ledger is what verifies and validates all crypto transactions that are confirmed through a process called ‘mining’.
Building on that understanding, each mined block contains a unique signature from the previous block which creates an unbreakable sequence or chain of blocks – hence the term blockchain.
The data that is stored inside of a block depends on the type of blockchain. For example, in Bitcoin’s blockchain, every block contains the details about the transaction which is composed of three things: the sender, receiver and amount of coins. The block also contains information about the previous block, to enforce the chronological order of the blockchain.
Cryptocurrency Wallets
Now that you have a fundamental understanding of how cryptocurrencies work. How do you actually own and store cryptocurrency Just as you would store your fiat (AUD) money in the bank, cryptocurrencies are stored in digital wallets. Crypto wallets essentially function the same way as a traditional wallet to keep your assets safe – however, they are slightly different in that you will be the sole custodian of the crypto, which you can only access using your private key (the crypto version of a P.I.N). Keeping your key safe is extremely important, as without it, you cannot access your cryptocurrency.
Wallets can be categorized into two different types: hot wallets and cold wallets.
Hot wallets
Crypto wallets that are connected to the internet are known as hot wallets. These wallets take the form of software or applications that run on your desktop, tablet or mobile device. Some of them even support cross-platform compatibility, allowing for easy accessibility to manage your digital crypto assets on the go.
Hot wallets are often considered to be the preferred option for newcomers in the crypto space simply because of the ease of use, accessibility, and features that they offer. Some notable examples for hot wallets include the Exodus Crypto Wallet, Coinomi, and Jaxx.
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Cold wallets
At the other end of the spectrum there are cold wallets, which are the opposite of the former and are not connected to the internet. Cold wallets take the form of small physical devices akin to a USB drive, and are purpose-built to facilitate the verification of transactions before they are processed.
Cold wallets are considered to be the safest and most secure storage option to store your crypto assets. They offer users complete control over their private keys and provide an offline environment where users can manually validate a transaction before they occur. The drawback is that they do not offer the same accessibility as hot wallets and generally cost a premium. However, for investors planning to trade in high-volumes or long-term storage, cold wallets are hard to beat.
The two most notable manufacturers of cold wallets are Trezor with their Model T and Model One, and Ledger with their Nano S and Nano X.
Buying crypto from an exchange
The beauty in cryptocurrency lies in its accessibility, privacy and security. Buying crypto is arguably easier than opening an account in a bank, all you need is a crypto wallet – which you can purchase or download for free and a platform where you can buy, sell, and exchange cryptocurrencies.
Cryptocurrency exchanges make the process safe and easy for anyone wanting to get into crypto. These crypto exchanges are secure platforms where you can choose to buy, sell, and exchange different assets, and coins in exchange for your fiat currency.
Different exchanges offer different types of services and features, along with varying degrees of fees to consider. However, their fundamental role remains the same in that they serve as a brokerage for you to conduct crypto transactions and have them sent to your crypto wallet.
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The future of crypto
The advent of cryptocurrencies and blockchain technology is paving the way for exciting new developments in decentralized financial services (also known as DeFi).
While Bitcoin remains one of the highest globally valued crypto assets, there are many others out there that offer all sorts of functionality in addition to a store of value. It looks as though cryptocurrencies may be here to stay, and could potentially become the future of payment systems.
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This article was reviewed by our Content Producer Isabella Shoard before it was updated, as part of our fact-checking process.