What is cryptocurrency?

What is cryptocurrency?

In finance, currency refers to money in any form, whether in physical (paper) or non-physical (digital) format, that can be exchanged for goods and services and other currencies. Cryptocurrency also refers to digital currency, but unlike fiat currency (which a government declares to be legal tender), cryptocurrency has no physical form and only exists in the digital realm. This article explains how cryptocurrency works to help you understand it better.

What is cryptocurrency?

The first cryptocurrency (Bitcoin) was launched in 2009, and it took a while for it to get its momentum. So, what is a cryptocurrency, and how does it work? To answer these questions, we need to look at traditional currencies. 

We can understand how cryptocurrency differs from them and why it's such an interesting phenomenon. Let's start by taking a look at money in general. What is money? Cash has traditionally been defined as fulfilling three main functions: medium of exchange, a unit of account, and store of value. 

Let's look at each one of these individually. First of all, people use money as a medium of exchange to buy goods or services they want or need without having to barter directly with another person who wants or needs something else entirely. 

An excellent example of how money facilitates trade is when you go to Starbucks and pay for your coffee using cash (or a credit card). To get that cup of coffee, you gave up nothing in return—you just had to give them some money and then walk away with your drink. 

This might seem obvious, but it's an important point: money doesn't have to be valuable; it only has value because we agree it does. The dollar bills in your wallet aren't worth anything intrinsically; their value comes from our collective agreement that they are worth something and will be accepted by others as payment for goods or services.

The second function of money is as a unit of account. To understand what a unit of account is, let's look at an example. You want to buy a pack of gum from your local convenience store for $1.50, but you only have two $5 bills and no change. You could give them one bill and ask them to keep some change as you go on your way, but that would be inconvenient for both parties—not to mention it would be problematic if they didn't have any gum left!

How Does Crypto Work?

Crypto works on - what's called a blockchain—an encrypted, digital ledger of transactions. Each time someone sends an investment of money, buys a good or service, or makes another transaction, that information goes onto their block in a chain. 

It can't be changed once it's there and confirmed by other users (including your crypto exchange). Because it's so difficult to hack, you don't have to worry about identity theft from cryptocurrency exchanges; once you confirm ownership of your account, you can rest easy knowing no one else will be able to access your funds. 

This also means that cryptocurrency values are much more stable than those of other currencies: they won't fluctuate based on global events or economic downturns. <This part should talk about why to choose crypto: If you're an investor looking for a new way to diversify your portfolio, a small business owner interested in finding a better way to accept payments online, or someone who wants their money protected from inflation and currency fluctuations, cryptocurrency might be right for you.

The Future of Crypto

Before you dismiss cryptocurrency as a fad, please look at what it's all about. How does cryptocurrency work? Who invented it and why? Let's find out! In recent years, the digital currency has taken off in popularity with users across the globe. 

But before we go into how cryptocurrency works, let's quickly review how fiat currency works. In simple terms, fiat currency is money that has value because of government regulation or the law (like US dollars). However, unlike US dollars, there are no physical notes or coins involved in crypto transactions; instead, they exist only digitally – hence crypto-currency.


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