Some people are making millions of cryptocurrency. Others are just confused. What is cryptocurrency? And how does cryptocurrency work?

These are perfectly natural questions to ask. After all, the vast majority of the world uses currency issued by sovereign nations. Anything else is a departure from that — and one that demands an explanation.

So, here’s a look at cryptocurrency works, as well as other helpful information.

Before we get started, here’s one important note: Crytocurrency refers to a category of currencies. For example, Bitcoin is a crytocurrency. Ethereum is a cryptocurrency, too. There are more than 1,000 different cryptocurrencies. So, when I use the term “crytocurrency,” I’m referring to a huge category that includes well-known members like Bitcoin.


What is Cryptocurrency?

Cryptocurrencies are virtual currencies that are used between peers. They don’t exist physically. You can’t hold a Bitcoin or other cryptocurrency the way you can an American dollar or quarter.

The concept of cryptocurrency has been around for many years. The idea was that crytocurrency could be used to make the use and transfer of currency more efficient. Today, banks charge fees for accounts and other services. It’s also hard to make purchases outside of your country because of fluctuating exchange rates — and because credit companies and banks often charge fees for foreign purchases.

Cryptocurrency uses what’s called “blockchain” technology to improve on some of the disadvantages of traditional currency.


What is Blockchain Technology?

Blockchain is where each use of crytocurrency is recorded, which helps maintain order in the crytocurrency world while also ensuring no crytocurrency is used more than once.

Blockchain works like an encrypted virtual ledger. Transaction times are much faster with blockchain than with banks. The virtual ledgers are stored on servers around the world, so there’s no central bank or institution. And, finally, there are no third-party fees assocated with blockchain.

Who verifies transactions? This is where it gets a little crazy. Cryptocurrency miners are the ones who do the verification. They essentially solve incredibly complicated math problems in order to decrypt crytocurrency for verification. Why would they do this? Because they are paid crytocurrency for their effort — if they successfully verify.


Why is Cryptocurrency so Expensive?

You may have seen a lot about cryptocurrency in the news lately — especially Bitcoin. And that’s because the exchange rate between U.S. dollars and Bitcoin went a little crazy in late 2017 and early 2019.

In March 2017, the price of one Bitcoin hovered around $1,000. It skyrocketed late in the year, peaking around $20,000 in December 2017. It has since dipped back down to about $8,000 as of March 2018.

But why did Bitcoin go up by so much? That’s a tough question with no single answer. But, the simplest reasoning is this: The more legitimacy that crytocurrencies obtain, the more expensive they will become. For example, the more stores that accept them, the more governments recognize them, the more businesses that adopt blockchain technology, the more legitimate (and expensive) cryptocurrencies become.


Final Thoughts on How Cryptocurrency Works

Keep in mind that cryptocurrencies are highly volatile. That’s not unusual in a high-risk, high-reward environment, and cryptocurrency is definitely high-risk, high-reward.

Governments could ban cryptocurrency altogether. Or, cryptocurrency could become the chief means of buying and selling around the globe. You don’t know which way it’s going to go, which is why you see these sudden rises and sharp falls in the market.

Do you have experience with buying and selling cryptocurrency? Let us know about it in the comments below, or send us a message directly using our contact form.