Swyftx has become the talk of the town again with both Bitcoin and leading altcoins such as Ethereum and Ripple rising the charts again. It has attracted the attention of people worldwide again and piqued their interest in learning about cryptocurrencies.

It has become a hot topic on social media, media channels, online forums, and their likes. Yet, many people are still clueless about what cryptocurrency is and how it works.

Cryptocurrencies have shed their initial identity of being a payment mechanism for underground dealings. It has come a long way today in terms of both popularity and technology. We will explore what is cryptocurrency and how it works in this article.

What is Cryptocurrency? - A Simple Explanation

Cryptocurrencies are a kind of a digital asset, powered by an encryption technique known as cryptography. A user holding cryptocurrency can use it to purchase goods and services. So, is it a digital equivalent of fiat currency such as the US dollar and Euro? No! It's because the cryptocurrencies are not issued by any central government authority and hence, they aren't considered legal tender. It means that you won't be able to redeem cryptocurrency for a commodity or asset like gold with the government. It may change soon as many central banks around the world are researching CBDC, known as Central Bank Digital Currencies.

Regardless of the growing popularity of cryptocurrencies, it has still not replaced or equaled fiat currencies. Cryptocurrency is still in the early adoption phase. The reason behind this is that most of the cryptocurrency holders view it as an investment vehicle rather than as an alternative to the government-backed fiat currencies. With further growth, we will see mainstream adoption of cryptocurrencies as institutional investors are starting to invest in cryptocurrencies. It will likely change how the majority views cryptocurrencies and this will lead to further adoption.

Types of Cryptocurrency

According to a recent study, the global market of cryptocurrency consists of more than 6,900 varieties. Its total market capitalization is more than US$324 billion. As expected, not each of these cryptocurrencies is equally well-known.

Bitcoin is undoubtedly the most well-known cryptocurrency in the world. It is often referred to as the original cryptocurrency. Like other cryptocurrencies, it also leverages blockchain technology to facilitate secure, transparent, and decentralized peer-to-peer transactions. Apart from Bitcoin, the other cryptocurrencies that have gained much momentum in the recent past include the likes of Litecoin, Ethereum, Ripple, etc.

The dollar value of any cryptocurrency depends on its demand in the market. As the most popular and the most widely used cryptocurrency, the value of one Bitcoin equals more than 18,500 US dollars. But, the price of Bitcoin is in no way indicative or representative of the overall market.

How Does Cryptocurrency Work?

For the newly initiated, cryptocurrency is the equivalent of Paypal or a Debit card except for the fact that the numbers on the screens are for a particular currency as their unit instead of dollars. To start dealing in cryptocurrency, all one needs is to open an account in a crypto wallet. These wallets have step-by-step instructions guiding the users to set them up. Once set up, the users can buy, sell, send, receive, and store various cryptocurrencies such as Bitcoin, Bitcoin Cash, Ether, and Litecoin. A new user does not require an in-depth understanding of cryptocurrency to use it for trade and transactions. Still, if any user is keen to understand the way cryptocurrency functions, here is what it is:

Cryptocurrency is a digital currency where transactions do not need an intermediary. In traditional finance, when paying through a credit card, the transaction needs the approval of the bank. Cryptocurrency is decentralized and peer-to-peer transactions do not need an intermediary here. All transactions get recorded on a publicly available distributed ledger for everyone to see. However, these records are immutable in the sense that no one can make any change or alterations to them.

To transfer funds from one user to another, both the participants need to have their crypto wallets. These wallets are nothing but software that interacts with the blockchain to facilitate the transaction. Much like bank account numbers, the sender needs to know the recipient’s wallet address. To authorize the transaction, the sender also needs to know the private key to his wallet. A private key of a crypto wallet is, therefore, similar to the bank account password.

All these transactions that happen on a blockchain are authorized or validated by miners. Miners are mostly rewarded by the crypto platform. In exchange for solving cryptographic puzzles via software to add transactions to the ledger, miners get the native coins of that platform as a reward.

The usage of a cryptocurrency is almost the same as that of a fiat currency. One can trade cryptocurrencies for other cryptocurrencies, for goods and services, and even for traditional currencies such as dollars.

Finally, cryptocurrencies do have tax implications. In basic terms, one needs to pay taxes on any sort of capital gains.

To learn more about cryptocurrency, it’s recommended to get enlisted in an exchange and do real transactions and trade to better understand the nuances of it.