How Does Cryptocurrency Work?

How Does Cryptocurrency Work?

Everyone is talking about cryptocurrency these days. If you’re really curious and want to get a bigger picture, you’ve come to the right place.

What is cryptocurrency?

Cryptocurrency can also be thought of as a type of digital money. Just like physical money, it can be used to facilitate trade. However, instead of having a physical entity you can hold in your hand, a digital currency only exists online.

When a transaction happens, it is recorded on a blockchain. This is a type of digital ledger that is publicly available. The ledger and all transactions are kept secure through encryption. The particular algorithm used is a type of cryptography, which is why the digital currency is called cryptocurrency.

Cryptocurrency is decentralized. That means it is not under the control of any governmental authority. Instead, private entities such as the actual users of the technology control it, along with the computer programs they use. Since cryptocurrency is hosted by computers that are scattered around the world, it is considered to be distributed. There is no central control point, which makes cryptocurrency hard for anyone to control.

Cryptocurrency is often traded on exchanges that operate in ways that are similar to the way stock exchanges work. While Bitcoin is considered the main cryptocurrency and is often referred to as digital gold, there are alternatives, referred to as “altcoins”. Many of these serve useful purposes.

Details on how it works

So, how does this technology work?

Just like you might store physical money in a wallet, you will need a place to store your cryptocurrency. If you use an exchange, they will often hold your cryptocurrency for you. Otherwise, you will need your own “cryptocurrency wallet”. A trusted software can be used to manage transactions between wallets.

While all transactions are encrypted, they are later queued up via the cryptocurrency’s network so that they are added to a public ledger. Thus there are verifiable records kept for transactions. While the transactions occur between accounts with public addresses, private keys or passwords are used to keep the actual transactions secure.

User privacy is also maintained. While the amounts transferred are recorded in a public manner, the identity of the ones who made the transfer is also encrypted.

Why is it called blockchain?

Because many transactions can be added to a ledge at a time, these transactions are referred to as blocks of transactions. Since there is a chain of blocks waiting to be processed, it is called a blockchain.

The blockchain itself acts as a decentralized ledger that keeps track of not only transactions but also balances. Every time a new transaction is made, every host of that particular cryptocurrency gets sent a copy. This obviously enhances security since there are duplicates created.

An algorithm that relies on consensus verifies that the data is accurate. Tampering with the blockchain is difficult, thanks to hashes. These are one-way codes that connect each new block to the last one.

All of these security features ensure that cryptocurrencies are well protected.

So, how does one trade in cryptocurrency? If you would like to buy cryptocurrency, check out SoFi Invest. It provides a convenient and easy-to-use platform that you can use to make your transactions, as well as plenty of information that will help you learn more about this exciting space.


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