We all have heard about the potential of crypto trading, right? But the truth is that the majority of people still lack a clear understanding of how cryptocurrency works.
If you want to invest in crypto trading, don’t do it unless you thoroughly grasp how cryptocurrency actually functions.
Let’s thoroughly discuss what cryptocurrency is and how it works. So, you can get all the insights you need to make an informed decision for a profitable trading career.
What is Cryptocurrency?
Cryptocurrency is basically a digital currency which is secured by cryptography. It is decentralized and operates independently of traditional banking systems. Yes—it is not controlled by any government or institution. It solely relies on blockchain technology for transactions.
You must have heard of Bitcoin. That’s none other than cryptocurrency.
People choose cryptocurrency for various purposes including payments, investments, and international transfers. It has the potential to revolutionize finance in the digital age, but…
It also carries risks like price volatility and fraud.
What are the Major Types of Cryptocurrency?
Major cryptocurrencies include Bitcoin (BTC), Ethereum (ETH), Tether (USDT), XRP, Binance Coin (BNB), USD Coin (USDC), Cardano (ADA), Solana (SOL), Dogecoin (DOGE), Tron (TRX), and Polygon (MATIC).
Let’s get quick insights into some of the major types of cryptocurrency:
Bitcoin (BTC)
Bitcoin is the pioneer of cryptocurrencies. It emerged in 2009 as a decentralized digital currency aiming to revolutionize traditional financial systems. The majority of resources believe that the pseudonymous Satoshi Nakamoto created BTC. Its primary purpose was to enable peer-to-peer transactions without the need for intermediaries like banks or governments.
You should know that the Bitcoin transactions are recorded on a public ledger known as the blockchain. All the coins are generated through a process called mining.
Now, if you are wondering about Bitcoin’s price then, note that it keeps fluctuating. In 2024, the average price of Bitcoin stands at around $95,392.30. This marks a significant increase of 124.32% from its value one year ago, which was $42,524.73.
Ethereum (ETH)
Ethereum was introduced in 2015 by Vitalik Buterin and others. It expanded the possibilities of blockchain technology beyond currency transactions. Basically—it serves as a decentralized platform for developers to build and deploy smart contracts and decentralized applications (DApps).
Ether (ETH) is the native cryptocurrency of the Ethereum network, which is used to fuel transactions and execute smart contracts.
It is worth noting that Ethereum (ETH) is currently priced at approximately $3,363.32 with a market cap of $405.5B. A year ago, its value merely stood at $2,231.10.
Tether (USDT)
Tether (USDT) is a stablecoin, which was launched in 2014. It maintains a 1:1 ratio with the dollar. This stability appeals to traders who want to minimize volatility in their cryptocurrency transactions.
It is worth noting that on July 22, 2023, Tether held the position of the third-largest cryptocurrency by market capitalization. In fact, its market cap stood at $83.8 billion with each token valued at $1.00. Its token value is still the same in 2024.
Ripple (XRP)
Ripple is a digital payment protocol and cryptocurrency. It was designed to streamline cross-border payments for financial institutions in 2012. It’s interesting that Ripple focuses on facilitating fast and low-cost international money transfers.
Basically, it operates on a consensus ledger, which does not rely on mining. Instead, it utilizes a network of validating servers to confirm transactions quickly and efficiently.
You should know that the price of Ripple (XRP) stands at $2.17 in 2024. It is expected to fluctuate, so keep a check on the XRP pricing chart.
Litecoin (LTC)
Litecoin is often referred to as the “silver” to Bitcoin’s “gold.” It was created in 2011 to address some of the limitations of Bitcoin. Yes—it intended to offer faster transaction confirmation times and a different hashing algorithm (Scrypt).
It’s interesting that Litecoin operates on a decentralized network similar to Bitcoin. Its transactions are recorded on a public ledger and validated by miners.
Anyhow, its lower transaction fees and quicker block generation time have positioned it as a popular alternative for everyday transactions and micropayments.
Currently, in 2024, LTC is priced at $104.15. Since its value is volatile, we suggest you keep a check on its pricing.
How Does Cryptocurrency Work?
Now, comes the main point in question. You should know that cryptocurrency, like Bitcoin, operates on a decentralized network called blockchain. See here’s how it works:
- First of all, new units of cryptocurrency are made through a process called mining. Think of it like solving puzzles using super powerful computers. This process verifies and adds transactions to the blockchain.
- When you want to make a transaction, you create a digital signature using your private key. This signature is like your seal of approval, and you send it out to the network.
- Miners then check if your transaction is legit. They make sure you have enough funds and that you are not trying to spend the same money twice.
- Valid crypto transactions get bundled together into blocks. Each block has info about the previous one, which forms a chain. This is exactly why it is called blockchain.
- Once a transaction is in a block and added to the chain, you can consider it confirmed. Each new block that you add makes the transaction even more secure and permanent.
Keep in mind that all miners compete to solve the next block’s puzzle. Whoever cracks it first gets to add the block to the chain and earns some new cryptocurrency as a reward. Let’s say you succeed. Once your block is added, everyone in the network checks and agrees on the new block. This way, all traders have the same info. Thus, nobody can cheat the system.
It is worth noting that the blockchain acts like a big, shared public ledger that records all transactions. It’s spread out across lots of computers, which makes it thoroughly secure.
Remember that you keep your cryptocurrency in a digital wallet. It’s got a public address, like your mailbox. This is exactly where other traders can send you money. You need to use your private key to access and spend your funds. No banks or middlemen are required if you want to send the money directly to someone else. It’s quick, cheap, and works anywhere in the world.
How to Get Started With Cryptocurrency?
It is suggested to thoroughly understand the use and impact of cryptocurrency before getting started. Now if you have grasped it all and are ready to invest, here’s what you need to do:
- Sign up for a reputable cryptocurrency exchange like Coinbase or Binance. It is better to consider using exchanges with a strong reputation for security and user support.
- Carefully deposit funds into your exchange account from your bank account or credit card. It is better to leverage a secure payment method with two-factor authentication enabled.
- It is suggested to start with small investments. In fact, you should consider diversifying your holdings across different cryptocurrencies and asset classes.
- While you cryptocurrencies on the exchange, make sure to set price alerts for better timing.
- Transfer your purchased cryptocurrencies to your personal wallet for added security. Always verify the wallet address carefully before initiating the transfer.
- Stay informed about market trends, regulatory changes, and security best practices.
- You should always be cautious of scams and overly speculative investments. Make sure to conduct thorough research before making investment decisions.
Relevant Read: What is a CEX in Crypto and How Does it Work?
Final Words
You can better understand how cryptocurrency works if you simply acquaint yourself with a few key aspects. Yes—make sure to familiarize yourself with blockchain, cryptography, wallets, decentralization, consensus mechanisms, mining, tokens, smart contracts, volatility, exchanges, wallet security, regulation, and risks. All these are foundational elements of the cryptocurrency ecosystem.
Once you grasp it all, you will be ready to walk through the world of crypto trading. Don’t forget to grab effective trading tips along the way.
