Still don’t understand how cryptocurrencies work? Here’s a guide to crypto markets

June 25, 2021

Cryptocurrencies have risen in popularity over the years, especially since the beginning of 2020, to the point where they are now a part of mainstream financial conversations and investment decisions. However, while cryptocurrencies such as Bitcoin have risen by huge amounts during this time, drawing a lot of attention, there are still many out there who have only heard of this phenomenon and have no idea about what cryptocurrencies are or how they work. Thus, here we will take a detailed look at cryptocurrencies with a view to informing people of what could be one of the biggest financial innovations in history.

A CNBC poll in 2017 found that 33% of Americans had not heard of Bitcoin, while a further 44% had just some information about it. This was four years ago, and the subsequent rally in crypto is sure to have changed those numbers, but there are still millions out there with no knowledge of this phenomenon. Cryptocurrencies are essentially codes that ascribe value and allow people to store or send it online. These codes are open-source, meaning that anyone can modify and create new tokens, and Bitcoin was one of the first cryptocurrencies ever, being created over a decade ago. The code verifies and groups transactions onto a public record known as a blockchain, which is arguably even more important than cryptocurrencies in terms of its importance to public services.

One of the easiest ways to think of crypto, especially Bitcoin, is to consider them as digital gold. If more people are investing in crypto because they believe others see its value, the price for the crypto will rise and vice versa. But that also means the amount of cryptocurrency available must be closely controlled to preserve its value. The algorithm that generates a cryptocurrency is available for download on developer websites like GitHub and, in theory, is available for anyone to use to create a new cryptocurrency. But the process is highly competitive because the actual amount of cryptocurrency to be put in circulation is limited. These limits vary depending on the cryptocurrency and are set by whoever created the code. For instance, the bitcoin algorithm limits the number of bitcoins that can be generated to 21 million. At that point, no more will be made.

Creating new tokens requires a lot of computing power to solve complicated mathematical problems. This process uses a lot of electricity, as multiple high-powered computers try to solve problems first at ‘crypto farms’ all around the world, and has generated controversy and criticism, as these mining farms are consuming huge amounts of electricity. Most of this electricity is generated by fossil fuels as well, which threatens to reduce all the gains made through the use of renewable energy over the last couple of decades. For example, crypto mining uses more electricity than the entire countries of Argentina or the Netherlands annually.

Despite this, there are thousands of cryptocurrencies on the market, with more being theorized and created as well. The likes of Bitcoin and Dogecoin are the most well-known, however, here are quite a few tokens that are not so well-known but have generated huge returns despite not being popular. It is quite interesting to note that the creator of Bitcoin is still unknown – he/she is only known as Satoshi Nakamoto who has remained anonymous till today.

Another interesting part of the crypto story is that tokens are not technically stored anywhere. Evidence of how much cryptocurrency you hold is stored on the blockchain. The ledger is updated across the network with each new transaction — when a new bitcoin is mined as well as when someone moves their cryptocurrency. To access your personal cryptocurrencies, you need a private key or complicated password that’s generated by code when you create a wallet. In bitcoin, the private key is a 256-bit password, which is cryptography language meaning there could be dozens of characters in a seemingly endless number of variations. The private key creates a unique signature that enables you to use your cryptocurrency to make transactions. The private key also correlates to a public key, which miners can see, and a bitcoin address, which you can think of as similar to a public bank account number. The address is a unique, 26- to 35-character, a case-sensitive string of letters and numbers, showing where cryptocurrency is sent on the blockchain. The private keys can be stored inside specialized virtual wallets, which are apps offered by crypto exchanges.

While traditional payment systems rely on banks to verify transactions, cryptocurrency transactions are verified by miners on the blockchain. Miners run mathematical checks to make sure that a transaction is valid, and a majority of the nodes must agree that it was a valid transaction before it’s added to the blockchain.

This is a basic overview of crypto and the crypto market.