What Are Cryptocurrencies and How Do They Work?

Cryptocurrencies were first created in 2009, ushering in a new age of decentralized currencies. Over a decade later, most common cryptocurrencies like Bitcoin and Ethereum are in the news constantly.

But for many, there is still significant confusion surrounding what cryptocurrencies actually are and how they work.

Before you start investing in cryptocurrencies, it is important to understand how this type of currency works. Understanding crypto terms and the like will help you better navigate this highly volatile yet potentially rewarding investing territory.

What Are Cryptocurrencies?

In the simplest terms, cryptocurrencies are digital assets based on a large computer network. This network is decentralized, which means cryptocurrencies operate outside of government control.

You can purchase cryptocurrencies via crypto exchanges like Coinbase and make secure payments online with virtual "tokens."

You may hear cryptocurrencies referred to as altcoins as well. Altcoins are simply a type of cryptocurrency other than Bitcoin and are often developed to target a specific niche or industry.

We use Bitcoin as an example here, but the same technology applies to cryptocurrencies in general:

Bitcoin use blockchain technology, which uses a distributed database to store transactions and record them chronologically and publicly. This open ledger prevents people from spending the same digital coin twice and safeguards against fraud or theft from happening because all transactions are public.

No one central authority manages the blockchain. Instead, it is maintained by computers worldwide running open-source software, and there are no centralized points of failure, so they have low risks of being hacked or shut down completely.

This technology allows the creation of digital currencies through coding, or as we know them more commonly, cryptocurrencies.

Most people considered Bitcoin to be the first cryptocurrency. Bitcoin was created in 2009 by an anonymous figure or group using the alias Satoshi Nakamoto. Although some claim to know the identity/identities of the person or people behind the most famous cryptocurrency, no one knows for sure.

Several factors fuel crypto's popularity, including supply and demand and increasing awareness of these currencies in general.

Several high-profile celebs have endorsed or own cryptocurrencies too, including Tesla's Elon Musk and rapper Snoop Dogg.

What Is Crypto Mining?

If you've read enough about cryptocurrencies, you are likely to have heard the term "crypto mining." But what is crypto mining it and how does it work?

Crypto mining is the process of verifying transactions and adding them to a public ledger called a blockchain. Crypto mining is done via advanced computers that solve complex math equations. As miners complete verified transactions, these are added as "blocks" to the blockchain. The reward for mining is the cryptocurrency itself.

The good thing about crypto mining is that you can earn cryptocurrency without having to spend actual money on it. However, crypto mining is costly, time-consuming, and rarely rewarding.

What Are Examples of Cryptocurrencies? How Are They Performing?

Bitcoin may be considered the first cryptocurrency, but it is by no means the only cryptocurrency. There are thousands of cryptocurrencies we could list, but these are 10 of today's cryptocurrencies and their market caps.

Name Market Cap
Bitcoin (BTC) $577,338,301,571
Ethereum (ETH) $213,452,716,981
Tether (USDT) $61,987,790,550
Binance Coin (BNB) $47,884,326,274
Cardano (ADA) $36,228,120,603
USD Coin (USDC) $26,688,446,807
XRP (XRP) $25,895,617,795
Dogecoin (DOGE) $22,736,992,411
Polkadot (DOT) $11,236,462,814
Binance USD (BUSD) $11,182,996,495

Source: CoinMarketCap

The screenshot below gives an example of how these cryptocurrencies are currently performing as of July 2021.

Source: CoinMarketCap

  1. Bitcoin is the most popular digital currency and although it has had a volatile history, it consistently outperforms other cryptocurrencies.
  2. Ethereum is more flexible than Bitcoin because it can be used for smart contracts.
  3. Tether is a form of crypto known as stablecoin. This means it is linked to the U.S. dollar or gold to give it greater stability. These types of digital currencies are favored by investors that want to limit the highs and lows associated with cryptocurrencies.
  4. Binance can be used to trade digital currencies and to cover fees on the Binance platform.
  5. Cardano is a proof-of-stake blockchain platform, which is growing in popularity.

There are plenty more types of cryptocurrencies available now, with thousands of them in existence. They won't all become massively popular or make headlines. However, you will find some unique types of digital currencies that are starting to capture people's imaginations, like:

  1. Dogecoin was created in 2013 by programmer Billy Markus from Portland, Oregon. Dogecoin was essentially created as a joke, but the altcoin started to gain traction.
  2. Primecoin is a cryptocurrency designed to prevent the development of mining farms/pools that have a disproportional amount of control over the blockchain by rewarding those who generate blocks for the network. The more primecoins you find, the more money you get.
  3. Monero is an open-source cryptocurrency that focuses on privacy and decentralization. It can be mined with a CPU or GPU and has a fixed supply of coins. Monero is among the top 20 cryptocurrencies in terms of market capitalization and one of the most popular for developers to work on its protocol.

What Can You Do With Cryptocurrency?

You can spend cryptocurrencies by sending them from one person to another over the Internet. You keep them in a digital wallet, which you can access from anywhere as long as you know your private key.

Aside from investing, you can use cryptocurrencies as a form of payment for goods or services on the internet. Some prefer digital currencies for making online payments as it is quick and easy to purchase items without having to wait for your card to go through or pay high processing fees. Several well-known companies are now accepting crypto, including Overstock.com, Square, and Expedia.

You can also convert crypto to cash through a third-party exchange broker or earn interest on them through yield farming.

Learn More About Crypto With Money Morning Profit Academy

Cryptocurrencies are taking the world by storm, and for good reason, too. These digital currencies provide a new way to transact and interact with each other, and for many of us, cryptocurrencies suit our digital lifestyles.

Consumers like the idea that the government or central banks don't issue cryptocurrencies, and the additional security and transparency that crypto offers is appealing too.

Ready to learn more? Now that you know what cryptocurrencies are and what crypto mining is, join us for our next lesson on how to buy cryptocurrencies.