What is Cryptocurrency, its types and How does it works? 

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Bitcoin and Dogecoin have been in the news for quite a while now. So even if you are not familiar with a lot of digital techs, you should be aware of these two things. But what are they? Why are they called coins and how do they work? Well, despite their differences, both Bitcoin and Dogecoin have a lot of things in common – both of these are cryptocurrencies and both of these rely on Blockchain technology to function. 

But what is a “cryptocurrency”? 

What is a cryptocurrency? 

In simple terms, cryptocurrency is a virtual currency that is secured by cryptography. Cryptography in simple words is a study of securing communication through the use of various means. Now when we go into the depths of what a cryptocurrency is; it is a virtual currency/ money that is secured using cryptography, through the use of blockchain technology.  

Due to this currency being digital in nature, it is not dependent on any form of formal government or central authority. Although a lot of digital currency, i.e, those used in games and such, do have a central hub, cryptocurrencies don’t. Because of this reason, cryptocurrencies like bitcoins are virtually immune to government interference and manipulation.  

Do remember that governments can and have banned as well as controlled the use of cryptocurrencies like Bitcoins and Ethereum in many locations. So while the government cannot manipulate the values directly, they can influence where and how cryptocurrencies are used.  

Types of Cryptocurrencies 

Although every cryptocurrency may seem the same, each one is a different type in itself. They have different functions and uses. For instance, Ethereum is used as a currency for smart contract platforms, Ripple’s cryptocurrency XRP is used by banks to enable transactions in different geographical locations, and Bitcoin is used for online trade. 

Besides this cryptocurrencies can be categorized into two major types – The original and forks.  

Original cryptocurrencies are those that were developed from scratch without relying on the technology of existing cryptocurrencies. The prime examples of this are Etherium, Solana, Litecoin, Cardani, and EOS. Each of these cryptocurrencies has a different function and does not rely on existing cryptocurrencies for anything. 

On the other hand, Forks are basically cryptocurrencies that are modified from existing ones. The prime examples of this are Bitcoin Cash and Bitcoin Gold. Both of these function the same as bitcoin. However, despite these forks being basically the same as original cryptocurrencies, their function varies.  

For instance, Bitcoin Gold is meant to function as virtual gold, meaning that there will only be a limited amount of bitcoin gold available. This makes the investment in Bitcoin Gold the same as investment in actual gold, with their value increasing as time passes by. 

How do Cryptocurrencies function? 

In simple words, cryptocurrencies like Bitcoin work based on a distributed public ledger called Blockchain. These ledgers hold a record of all the transactions and are constantly updated. Due to these ledgers being distributed, one can stay virtually anonymous when trading through the use of cryptocurrencies.  

As for how one can use or gain access to these cryptocurrencies, the simplest method is to buy them. Similar to any other form of virtual currency, you can use real money to invest and buy some cryptocurrency. While buying these virtual currencies, you have to be mindful of their value. Similar to the share market, the real-life values of cryptocurrencies can rise and fall. In this context, you can use cryptocurrencies like shares of large companies as well and trade them in a similar way. It is one of the most efficient ways to earn real-life money – at least if you know what you are doing. 

Another method of getting your hands on cryptocurrencies is through the process called mining. This involves using computers to solve complex mathematical problems. Since this process takes a lot of computing time, it can take a lot of time to mine a single unit of cryptocurrency which doesn’t have much value.  

Theoretically speaking, you can mine 1 block of bitcoin each containing 6.25 units in 10 minutes. However, because there are tons of miners each aiming for the same block of bitcoins, the chance of you obtaining the bitcoin block greatly reduces. You should also consider that among the thousands of miners you are competing against, there will be hundreds of people who have better technology than you.  

The rest of the cryptocurrencies work in a similar way. The miners mine the currencies and they are brought into circulation. Then the mined currency is bought, sold, and used similar to any other form of virtual currency. 

This is the basic gist of how cryptocurrencies work. 

These are the 10 largest trading cryptocurrencies by market capitalization as tracked by CoinMarketCap.

Data Date: Jan 28, 2022. 

Is cryptocurrency legal? 

The simple answer to this is “it depends from country to country”. If you are living in El Salvador, then sure it is a legal form of transaction but only if you are using Bitcoin. If you are in Japan, then this country treats Bitcoin as legal Property. This means that while you can use Bitcoin as a means of legal transaction, your activity will be monitored. Meanwhile, China has completely banned mining and using all forms of cryptocurrency. 

So the question of if you can use cryptocurrencies as a form of transaction legally depends on the rules and regulations of a country you are currently residing in. One thing to remember is that a lot of governments including the Internal Revenue Service (IRS) treat Cryptocurrencies as a financial asset rather than a form of currency.  

In the end, 

A cryptocurrency is just a form of virtual currency that is not controlled by any central power. Along with this, due to the use of blockchain technology, you can have anonymity while using cryptocurrencies. However, although governments cannot control the value or function of these cryptocurrencies they can monitor as well as control their use within their territory.  

You can get your hands on cryptocurrencies by either mining or buying them. While mining is a free way to get your hands on these virtual currencies, it may take a long time before you can mine enough to have a practical use. This is because it takes a lot of computing power to mine one block of these currencies. On the other hand, buying these virtual currencies is easy but they can get quite expensive.  

We hope you found this informative. If you have any suggestions or feedback, let us know in the comments. 

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