How Does Cryptocurrency Work? A Beginner’s Guide


everyone is talking about crypto. But a 2021 Pew Research survey found that only 16% of Americans invest, trade or use any. Partly because a lot of people don’t understand how cryptocurrency works.

Yeah, that sounds like me. What is cryptocurrency?

It’s crypto-based digital money (hint: sending encrypted and secure messages). And the transactions are recorded in a digital ledger. Also known as a database called block chain. Which makes it almost impossible to fake or double spend.

I am following. So how does cryptocurrency work?

Cryptocurrencies are created through a mining process. Let’s look at Bitcoin, for instance. For a Bitcoin to be created, it needs to be mined. Hint: Mining occurs as a result of specialized computer networks solving a mathematical puzzle. Once the puzzle is solved, the winner gets a newly minted coin, in this case a Bitcoin. But mining equipment can cost thousands of dollars. Those who want to get into cryptocurrencies without mining can buy cryptocurrencies through a crypto exchange (think: Coinbase, Gemini, and Binance).

PS: most crypto mining is not environmentally friendly. Because it takes a lot of electricity to power those competing computer networks.

How does cryptocurrency gain value?

Our cash has value because it is issued by a centralized authority and is used in our economy. Cryptocurrency is decentralized (also known as not backed by any authority) and is not widely used in the same way. Instead, its value comes from scarcity and high demand. Kind of like gold and other precious metals. And it gains value when demand increases.

I understand. Now how do you spend crypto?

First, you will need a digital wallet to store your crypto. Then you are ready to do your shopping. Tip: Major companies like Microsoft and Overstock.com accept crypto payments. So do some service providers, like AT&T, Dish Network, and Twitch.

Is cryptocurrency safe?

The Fed is working on ways to regular it’s. Because fraud. Just last year, scammers stole more than $14 billion in cryptocurrency. But you can help keep your digital money safe by choose and manage your wallet wisely.

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If you don’t understand cryptocurrencies, you’re not alone. But it may be the future of money, so it’s worth learning about now. And you don’t have to be a tech wiz to know how to buy, spend, and store it.

Skimm’d by Dae Cason, Megan Beauchamp, Kamaron McNair, Stacy Rapacon, and Alicia Valenski