Cryptocurrency, Explained: A Guide for Beginners
Cryptocurrencies let you buy goods and services, use apps and games or trade them for profit. Here's more about what cryptocurrency is and how it works.
What is cryptocurrency? Cryptocurrency (or “crypto”) is a digital currency used as an alternative payment method or as an investment. Cryptocurrencies get their name from the cryptographic techniques that enable people to buy, sell or trade them securely without the need for a controlling authority, such as a government or financial institutions. For example, Bitcoin was developed primarily to be a form of payment that isn't controlled or distributed by a central bank.
Why do people invest in cryptocurrencies? People invest in cryptocurrencies for the same reason anyone invests in anything. They hope its value will rise, netting them a profit. If demand for Bitcoin grows, for example, the interplay of supply and demand could push up its value. If people began using Bitcoin for payments on a huge scale, demand for Bitcoin would go up, and in turn, its price in dollars would increase. So, if you'd purchased one Bitcoin before that increase in demand, you could theoretically sell that one Bitcoin for more U.S. dollars than you bought it for, making a profit. The same principles apply to Ethereum. Ether is the cryptocurrency of the Ethereum blockchain (learn more about blockchains here), which is where developers can build financial apps without the need for a third-party financial institution. Developers must use Ether to build and run applications on Ethereum, so theoretically, the more that is built on the Ethereum blockchain, the higher the demand for Ether. However, it's important to note that to some, cryptocurrencies aren't investments at all. Bitcoin enthusiasts, for example, hail it as a much-improved monetary system over our current one and would prefer we spend and accept it as everyday payment.
How does cryptocurrency work? Cryptocurrencies are supported by a technology known as blockchain, which maintains a tamper-resistant record of transactions and keeps track of who owns what. The use of blockchains addressed a problem faced by previous efforts to create purely digital currencies: preventing people from making copies of their holdings and attempting to spend it twice [1] . Individual units of cryptocurrencies can be referred to as coins or tokens, depending on how they are used. Some are intended to be units of exchange for goods and services, others are stores of value, and some can be used to participate in specific software programs such as games and financial products.
How are cryptocurrencies created? One common way cryptocurrencies are created is through a process known as mining, which is used by Bitcoin. Bitcoin mining can be an energy-intensive process in which computers solve complex puzzles in order to verify the authenticity of transactions on the network. As a reward, the owners of those computers can receive newly created cryptocurrency. Other cryptocurrencies use different methods to create and distribute tokens, and many have a significantly lighter environmental impact.
