What is Cryptocurrency? How it works

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Have you wondered what is cryptocurrency? While cryptocurrency seems like a new, payment method for many of us, the concept of cryptocurrency actually dates back to the late 1980s. However, it wasn’t until October 2008 when an entity known as Satoshu Nakamoto published a white paper called Bitcoin- A Peer to Peer Electronic Cash System that the idea of cryptocurrencies really took off.

Satoshu Nakamoto, who still remains a mystery, mined the first block on the Bitcoin network on January 3rd 2009. Originally, the bitcoin was worth less than a penny but over time we have seen the bitcoin value surge and, in its success, paving the wave for several other types of decentralized digital currencies. These cryptocurrencies, as they are called, are now one of the hottest topics in the finance and investment industry. So, what is cryptocurrency? What is cryptocurrency mining? And how does it all work? Read on to learn more.

What is Cryptocurrency?

Cryptocurrency, sometimes referred to as just crypto for short, is a digital currency. It’s been compared to Super Mario Coins and arcade tokens but at the end of the day, it is in fact an actual payment method that can be used to purchase products and services. There are several types of cryptocurrencies that I will discuss in more detail later on in this article.

Cryptocurrency is run on a technology called blockchain. Blockchain is used in many industries including real estate, retail, and food supply chains. It’s a publicly available decentralized ledger. Which basically means it’s a big public database that records transactions, is maintained by those who use the network, and can’t be tampered with. The big appeal behind blockchain is the security.

Investors and finance experts have a lot of mixed feelings about cryptocurrency. Some people love it, swear by it, and are absolutely convinced that it will succeed and dominate. Other’s believe it’s a fad, just a phase and won’t stick around long term. Whatever your opinion, the fact is that some people have made millions from cryptocurrency. But many people have also lost quite a bit of money while using it as well. Here are 7 things you need to know about cryptocurrency before you jump on board.

What is Cryptocurrency Mining?

If you are familiar at all with cryptocurrency you have no doubt heard of mining. So what exactly is cryptocurrency mining? Essentially, it’s how you find cryptocurrency without actually having to buy it. But mining cryptocurrency doesn’t involve a pickaxe and a dark tunnel. You mine cryptocurrency from your computer.

Now, your everyday laptop is not going to be able to find you piles of cryptocurrencies. These so-called miners use high end super powerful computers that can solve highly complex algorithmic puzzles. It takes an immense amount of power and electricity to be able to mine, to the point where several influential people, including Elon Musk, have spoken out about how terrible it is for the environment.

If the requirement for super-powered computers and the environmental risks aren’t enough to deter you from becoming a crypto miner, you should also take note that bitcoin, which is the most popular type of cryptocurrency, has pretty much been all been mined. There are only 21 million bitcoins and, as of February 2021, only a little over 2 million remained to be found.

How Do You Use Cryptocurrency?

If you aren’t up for mining, you can buy cryptocurrency. Bitcoin, for example, can be bought with traditional currencies (i.e. Canadian or US dollar). However, other types will require you to pay for them with bitcoins or another type of cryptocurrency.

In order to purchase these cryptocurrencies, you need a ‘wallet’. This wallet is a crypto exchange that will hold your cryptocurrency online. Once you have cryptocurrency in your wallet, you can use it to make a purchase anywhere that will accept the type of cryptocurrency you have. While more and more businesses are starting to accept cryptocurrencies, they do have a history of being used for purchases on the ‘dark web’ since they are anonymous. You can also trade cryptocurrencies but remember to be mindful of how cryptocurrency is taxed in Canada. The Canada Revenue Agency takes cryptocurrencies seriously, don’t think you can cheat them out of your fair of taxes.

As cryptocurrency continues to gain popularity we will no doubt see more ways and methods to use cryptocurrency in day-to-day life. Already there are cryptocurrency credit cards available including the Crypto.com Visa card.

Popular Types of Cryptocurrency

There are many popular types of cryptocurrency, but you need to be careful about which ones you invest in. Many new cryptocurrencies are appearing to try and get novice investors to invest. With so many unknowns still, it’s not that hard to manipulate the price of crypto. When that happens, the original owners sell, leaving new investors with something worthless. That’s known as pump and dump schemes.

If you’re going to invest in cryptocurrency for the first time, you may want to stick to the more popular options.

Bitcoin

When you think of cryptocurrency the first thing that comes to mind is probably Bitcoin. Bitcoin is considered to be the original and most well-known cryptocurrency out there. Bitcoin has been circulating since 2009 but gained most of its popularity after 2017. One of the main attributes of bitcoin is that there is a limit on it; the bitcoin supply is capped at 21 million coins. This is beneficial in that it provides value. However, it also can limit bitcoin’s potential as a currency. That being said, it’s still the most popular cryptocurrency on the market.

Dogecoin

Dogecoin first appeared in 2013 as a joke but in recent years has recently become a cryptocurrency worth keeping an eye on. Dogecoin does not have a hard cap like bitcoin, however, there is an annual limit of 5 billion tokens in the market. There are several celebrity endorsements of Dogecoin, however, it’s also proven to be incredibly volatile (more so than other cryptos) which have left many skeptics convinced that the doge bubble may soon burst.

Ethereum

Ethereum is considered second to bitcoin when it comes to cryptocurrencies. The two are very similar, however, whereas bitcoin’s origins are shrouded in mystery, Ethereum is very face-forward and, while still decentralized, does have actual human faces behind it. While this cryptocurrency is most currently referred to as Ethereum, that’s actually the name of the platform. The tokens themselves are called ether.

These are just the three main types of cryptocurrency that are currently the most popular. There are other cryptocurrencies out there and, no doubt, more will enter the market in time.

Final thoughts

Now that you know what is cryptocurrency, you’re probably wondering if you should invest in it. While seeing the recent gains will make you think it’s a can’t miss investment product, the values can go up and down quickly. To be realistic, investing in crypto is similar to gambling. If you want to dedicate a small portion of your portfolio to it, go ahead. However, be aware that you could lose all your money.

What is Cryptocurrency? How it works

About Hannah Logan

Hannah Logan is a freelance writer based in Ottawa, Canada. She specializes in finance and travel writing and has bylines at Fodor's Travel, O Magazine, and more. She also runs two travel blogs, Eat Sleep Breathe Travel and Ireland Stole My Heart. You can find her on Instagram and Twitter @hannahlogan21.

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