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What are Cryptocurrencies and How Do They Work?

by keeptrackit
What are cryptocurrencies and how do they work?

A cryptocurrency is a digital asset that uses a cryptographic encryption to guarantee its ownership and ensure the integrity of transactions, and control the creation of additional units, that is, prevent someone from making copies as we would, for example, with a photo. These coins do not exist in physical form: they are stored in a digital wallet.

How do cryptocurrencies work?

Cryptocurrencies have several differentiating characteristics compared to traditional systems: they are not regulated or controlled by any institution and they do not require intermediaries in transactions. A decentralized database, blockchain or shared accounting record is used to control these transactions.

Following regulation, cryptocurrencies are not considered a means of payment, they do not have the backing of a central bank or other public authorities and they are not covered by customer protection mechanisms such as the Deposit Guarantee Fund or the Fund Investor Guarantee.

Regarding the operation of these digital currencies, it is very important to remember that once the transaction with cryptocurrencies is carried out, that is, when the digital asset is bought or sold, it is not possible to cancel the operation because the blockchain is a record that does not allow deleting data. To “reverse” a transaction it is necessary to execute the opposite.

Since these coins are not physically available, you have to resort to a cryptocurrency digital wallet service, which is not regulated to store them. 

How many types of digital wallets are there?

A digital purse or wallet is actually a software or application where it is possible to store, send and receive cryptocurrencies. The truth is that unlike a physical money purse, what is really stored in wallets or digital purses are the keys that give us ownership and right over cryptocurrencies, and allow us to operate with them. In other words, it is enough to know the keys to be able to transfer the cryptocurrencies, and the loss or theft of the keys can mean the loss of the cryptocurrencies, without the possibility of recovering them.

There are two types of purses: there are hot and cold ones. The difference between the two is that the former are connected to the internet, and the latter are not. Thus, within the hot wallets we find web wallets, mobile wallets and desktop wallets, the latter only if the computer is connected to the internet. On the contrary, within cold wallets there are hardware wallets and paper wallets, which is simply the printing of the private key on paper. 

These custodial services are not regulated or supervised.

How is the value of a cryptocurrency determined?

The value of cryptocurrencies varies depending on supply, demand, and user engagement. This value is formed in the absence of effective mechanisms that prevent its manipulation, such as those present in regulated securities markets. In many cases, prices are also formed without public information to support them. 

Cryptocurrencies use blockchain

Cryptocurrencies work through the shared ledger or blockchain . This technology provides them with a high security system with the capacity to prevent, for example, that the same digital asset can be transferred twice or that it is falsified. Blockchain technology works like a large ledger where huge amounts of information can be recorded and stored. All of it is shared on the network and protected in such a way that all the data it houses cannot be altered or deleted.  

What does it mean to mine cryptocurrencies?

This concept refers to the process necessary to validate the operations carried out through this type of digital assets. For example, if we take the practical case of a bitcoin currency: its mining would be based on the validation and recording of transactions in the blockchain registry . 

In short, mining cryptocurrencies means successfully solving the mathematical problems that arise. The miners who have carried it out obtain cryptocurrencies in exchange.

How many types of cryptocurrencies are there?

To create cryptocurrencies, it is crucial to have knowledge of cryptography, or at least know how to program, in that case, to be able to clone code from another cryptocurrency, and thus be able to create it. Currently, there are thousands of cryptocurrencies, among which we find, for example, bitcoin or ether.

What is a bitcoin?

Bitcoin is the name that the first cryptocurrency received. It dates from 2009 and was born by the hand of a person or group of people who called themselves Satoshi Nakamoto, who managed to create bitcoin under blockchain technology , which they themselves invented. Like the rest of cryptocurrencies, there is no type of regulation for it. 

How can you buy bitcoins?

We can get bitcoins by buying or exchanging the currency itself on specialized portals. It is important to bear in mind that bitcoins -or any other cryptocurrency- are complex instruments, which may not be suitable for people without sufficient knowledge, and whose price carries a high speculative component that can even mean the total loss of the money paid to buy cryptocurrencies.

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