How does cryptocurrency work? A beginner’s guide

Everyone is talking about crypto. But a 2021 Pew Research survey found that only 16% of Americans invest, shop or spend anything. Partly because many people don’t understand how cryptocurrency works.

Yeah, that sounds like me. What is cryptocurrency?

It is digital money built on cryptography (hint: sending secure, encrypted messages). And transactions are recorded on a digital ledger. Aka a database called blockchain. Which makes it almost impossible to counterfeit or double use.

I am following. So how does cryptocurrency work?

Cryptocurrencies are created through a mining process. Let’s have a look Bitcoin, for example. For a Bitcoin to be created, it must be mined. Hint: Mining occurs as a result of specialized computer networks solving a mathematical puzzle. Once the puzzle is solved, the winner receives a newly minted coin – in this case, a Bitcoin. But mining equipment can cost thousands of dollars. Those who want to get into crypto without mining can buy cryptocurrencies through one crypto exchange (Think: Coinbase, Gemini and Binance).

PS: Most crypto mining is not environmentally friendly. Because it takes a lot of power to run the competing computer networks.

How does cryptocurrency gain value?

Our money has value because it is issued by a centralized authority and used in our economy. Cryptocurrency is decentralized (also not backed by any authority) and is not widely used in the same way. Instead, value comes from scarcity and high demand. A bit like gold and other precious metals. And it gains value when demand increases.

Have it. Now, how do you use crypto?

First, you need a digital wallet to store crypto. Then you are ready to make your purchases. Hint: Big companies like Microsoft and Overstock.com accept crypto payments. So do some service providers, such as AT&T, Dish Network and Twitch.

Is cryptocurrency safe?

The Fed is working on ways to regulate it. Because fraud. Last year alone, fraudsters stole over $14 billion worth of crypto. But you can help keep your digital money safe by pick and manage your wallet with care.

theSkimm

If you don’t understand cryptocurrency, you’re not alone. But it could be the future of money, so it’s worth learning about now. And you don’t have to be a tech genius to figure out how to buy, use and store it.