How Cryptocurrencies Like Bitcoin Work

Cryptocurrencies are nothing but digital assets that are secured by the usage of cryptography.

Well known cryptocurrencies are Bitcoin and Ethereum, both of which make extensive use of cryptography to secure wallets, secure transactions and to validate transactions.

There are two ways by which one can ‘make money’ using cryptocurrencies:

Mining: One may mine a specific cryptocurrency to solve mathematical problems and receive rewards through the network. Mining is a process by which a miner validates a transaction and records it into the Blockchain. Fees are paid by the sender of each transaction to have their transaction recorded within the Blockchain.

Investing: As is with any stock, cryptocurrencies are no different. Cryptocurrencies are subject to change in value based on supply and demand. Investing in cryptocurrencies bears almost the same risk as stock markets, given the fact that cryptocurrencies aren’t insured and would be subject to fluctuations. Predefined supply algorithms usually play an important role in these fluctuations (Bitcoin’s four-year halving).

Each token issued within the network is immutable and can be backtracked, which makes counterfeiting impossible. The main reason a cryptocurrency gets so much credit is because of the technology behind it, which is the Blockchain.

A Blockchain is nothing but a series of compiled blocks each bearing a connection to the previous block, leading all the way up to genesis block. This allows you to backtrack through each and every transaction that occurred from day 1.

The sender pays to have the transaction recorded within the blockchain. Without the transaction being recorded, no proof of transaction exists, and without proof, the transaction effectively didn’t happen.

Transactions are recorded after a miner has validated it and the remaining miners are allowed to check the validity of this record without having to mine it themselves, which makes it extremely easy to check if the transaction indeed is true and did happen.

Once the transaction is recorded in the block and this block is added to the Blockchain, this transaction is immutable as well, since each and every person mining has a copy of this block attached to the Blockchain and the slightest change would mean that everyone’s copy of the transaction would have to be overwritten requiring an immense amount of computing power that is inaccessible to a common man.

This sense of immutability provided by the Blockchain is what makes cryptocurrencies unique and valuable.


Cryptocurrency – Wikipedia



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