What are Cryptocurrencies and how they work

Bitcoin, Ether and Dogecoin. These are some cryptocurrencies that have become popular in recent years and that have made many people, companies and even countries rethink their relationship with the economy. However, there is still a lot of confusion about what cryptocurrencies are, how to use them and other more technical details.

After all, how does a currency that only exists in the virtual world work? How to know its value? How to get this money, where to store it and where to spend it? In fact, all of this is still a bit complex, as ways of using cryptocurrencies are still being discovered. In addition, their values ​​fluctuate a lot, making them a very high risk investment.

What is Cryptocurrency?

Although it is the best known, Bitcoin is not the only cryptocurrency available.Although it is the best known, Bitcoin is not the only cryptocurrency available.Source:  Unsplash

The first thing to know about cryptocurrencies is that they are a kind of virtual money. This means that it exists only as codes and does not have a real-world representation.

For example, when you receive your salary, it is possible to make payments or transfer to other accounts over the internet. It is possible for you to spend months or even years without ever withdrawing your money, working with her only virtually. However, it has a physical representation — banknotes or coins — meaning you can “take it” from the digital environment to the real environment.

With cryptocurrencies this is not possible. All financial transactions are done through digital wallets — recently, Signal began testing payments with cryptocurrencies, using a specific wallet for this purpose. You can also exchange them for physical money, and the process is very similar to a currency exchange, but this is also done digitally.

In short, cryptocurrencies are “codes”, a very specific sequence of information, which needs to be digitally validated and which only exists in the virtual world. They have a value, which tends to fluctuate a lot, and can only be exchanged within the same system that serves to validate them, the blockchains.

How is a cryptocurrency born?

Cryptocurrency mining processes are often more expensive than their unit values.Cryptocurrency mining processes are often more expensive than their unit values.Source:  Unsplash

This is where everything starts to get a little more complicated. Generally speaking, cryptocurrencies are not tied to any government or private bank — although there are some exceptions. This means that there is no official body that attaches value to them, nor is it responsible for creating new cryptocurrencies.

What happens is that as they are the result of a series of codes and extremely complex mathematical operations, they need to be generated in computers. Anyone can do this, as long as they have the conditions. Mining cryptocurrencies requires a huge amount of computer processing, therefore the expense to generate a unit (whether Bitcoin, Ether or any other) generally exceeds the unit value of the cryptocurrency itself.

The process basically starts with the computer doing the mining, that is, doing all the necessary operations to generate a cryptocurrency. After that, within a decentralized platform (not linked to a bank or government), this cryptocurrency will need to be validated by other users, so that its existence can be confirmed. This validation also requires processing, however it can be shared among multiple users.

Advantages and disadvantages

It is not uncommon to see a cryptocurrency devaluate a lot overnight.It is not uncommon to see a cryptocurrency devaluate a lot overnight.Source:  Unsplash

Before thinking about investing in cryptocurrencies, it is important to take some precautions, including knowing the specific details of each digital currency you have. Sudden and unpredictable devaluations are not rare. As they are not controlled by a bank or a government, it is always difficult to know what can cause their values ​​to rise or fall.

Another important feature is that they can be very secure, but if you lose your wallet code, it may be impossible to retrieve it. Because it’s digital, the place where you keep that money also exists as a code within a system. If you lose the access key, there is no way to get a duplicate.

Also, they are often secret. Owner data may be kept confidential. This may sound suspicious, but thanks to the way transactions are carried out, it is possible to track movements between wallets. Only the data of the owners of these wallets are preserved.

The most recommended for those who want to start using these digital currencies, is to look for specialized sites that work with cryptocurrencies. Through them you can buy a specific amount (or fractions of a value) without running the risk of losing more money than you plan.

You also won’t have to worry about validating or mining a cryptocurrency. In addition, the entire operation of this type of site is done in a similar way to a digital bank account. After that you can perform specific moves for that cryptocurrency you acquired.

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