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What is cryptocurrency and how does it work?

Last Updated on January 31, 2024

James Headshot
Written by
Adam Headshot
Edited by
Table of Contents
Disclaimer: This is not a validation of cryptocurrency or any particular provider, service, or product. It should not be taken as advice to engage in trading or use any services. Please check our terms and conditions.

Cryptocurrency, often referred to as crypto, is a type of digital currency that has gained significant popularity in recent years. Utilising cryptography for security, this innovative form of payment provides users with a decentralised and transparent way to conduct transactions. With the advent of blockchain technology, cryptocurrencies operate independently of central authorities such as governments and banks.

Some well-known examples of cryptocurrencies include Bitcoin, Ethereum, and Ripple, each providing unique features and benefits for users. As digital assets, these virtual currencies have the potential to revolutionise the way people transact and invest worldwide.

For those looking to dive into this world, we recommend checking out our best crypto exchanges in Australia list to start your journey with crypto.

Getting Started with Crypto

What is Cryptocurrency

Cryptocurrency, also known as crypto or digital currency, is a form of virtual currency that operates as a medium of exchange, allowing for transactions to occur without the need for a central authority, such as a bank or government.

One of the main features of cryptocurrencies is their decentralised nature, which means that they are not controlled by a single institution or authority. Instead, they make use of a distributed ledger technology called blockchain to record and verify transactions.

Cryptocurrencies are created through a process called mining, in which powerful computers solve complex algorithms and validate transactions in the blockchain. As a reward for their work, miners receive new units of the cryptocurrency.

The growing popularity of cryptocurrencies has led to the creation of various types of digital assets, including Bitcoin, Ethereum, and Ripple, among many others. Although they share some common features, each cryptocurrency has its unique properties and uses.

In summary, cryptocurrency is a digital and virtual form of currency that operates as a medium of exchange using an encrypted network to perform transactions securely and transparently. With its decentralised nature and the use of blockchain technology, it has the potential to transform the world of finance.

Origins of Cryptocurrency

The concept of cryptocurrency has its roots in the early 21st century, when an individual or group of individuals known as Satoshi Nakamoto introduced Bitcoin in 2009. Bitcoin, the first cryptocurrency, was developed as a decentralised digital currency to provide an alternative to more traditional forms of currencies such as the dollar.

Cryptocurrency relies on blockchain technology, a digital ledger that records transactions made with crypto. This technology ensures the security and decentralisation of cryptocurrencies.

Following the introduction of Bitcoin, numerous other cryptocurrencies emerged. One notable example is Ethereum, which was developed in 2015. Ethereum is a blockchain platform that not only supports its own cryptocurrency, Ether (ETH), but also enables the creation of decentralised applications (dApps) and smart contracts.

Today, the world of cryptocurrency has expanded rapidly, and the market has seen tremendous growth. The total market capitalisation of cryptocurrencies reached a peak of $3 trillion in 2021.

Popular Cryptocurrencies

Bitcoin

Bitcoin is the first and most well-known cryptocurrency, created in 2009 by an anonymous figure known as Satoshi Nakamoto. It is a decentralised digital currency that relies on a peer-to-peer network, allowing users to send and receive funds without the need for a central authority. Transactions involving Bitcoin are recorded on a secure, public ledger called the blockchain. The finite supply of 21 million bitcoins as well as its widespread adoption have contributed to its significant market share among cryptocurrencies.

Ethereum

Ethereum is another prominent cryptocurrency and is the native currency of the Ethereum blockchain. Launched in July 2015 by Vitalik Buterin, Ethereum introduced the concept of smart contracts, allowing for the execution of complex agreements without any intermediaries. These smart contracts are executed on the Ethereum blockchain and power a wide range of decentralised applications (dApps). Ether, the fuel that powers Ethereum’s network, has secured its place as the second-largest cryptocurrency by market capitalisation.

Dogecoin

Dogecoin began as a lighthearted joke in 2013, featuring the popular internet meme of the Shiba Inu dog breed. Developed by Billy Markus and Jackson Palmer, Dogecoin emerged as an alternative to traditional cryptocurrencies and gained recognition for its friendly and humorous approach. Despite its beginnings, Dogecoin has garnered a passionate community and has even been used for fundraising efforts. Over time, it established itself as a notable cryptocurrency with a significant following.

Understanding Blockchain

Blockchain technology is the underlying foundation of cryptocurrencies. It is a distributed ledger, that maintains the records of transactions in a secure and decentralised system. This technology allows for the tracking and verification of cryptocurrency transactions.

The core element of blockchain technology is its decentralised nature, which means it operates without a central authority. This is achieved through a network of computer nodes, where each node maintains a copy of the blockchain. Every time a new transaction is made, it is broadcasted to all the nodes, and they work together to verify and add the new transaction to the blockchain.

The blockchain itself is composed of a series of connected blocks, each containing verified transaction data. This structure helps ensure that previous transactions cannot be altered, providing a high level of security and trust in the system.

There are multiple consensus mechanisms utilised by various blockchains. One popular example is Proof-of-Work (PoW), where nodes must solve complex mathematical puzzles to validate transactions. Another consensus mechanism is Proof-of-Stake (PoS), which aims to address the energy concerns associated with PoW. In PoS, nodes are required to hold a certain amount of the native cryptocurrency as a stake to participate in the validation process.

Understanding Decentralisation

Decentralisation is a fundamental characteristic of cryptocurrencies, stemming from the fact that they were created as an alternative to traditional financial systems. By removing the need for a central authority such as a bank or government, decentralised cryptocurrencies aim to promote transparency, security, fairness, and reduce the potential for manipulation or fraud.

In a decentralised system, transactions occur on a peer-to-peer network. Decentralisation in the context of cryptocurrency is achieved through blockchain technology, which serves as a public ledger that records and validates each transaction without the need for a central authority.

One of the key benefits of decentralisation is enhanced security, as the distributed nature of the network makes it more resilient to hacking attempts or system failures. It also eliminates the risks associated with placing trust in a central authority.

In addition, decentralisation fosters increased financial inclusion by allowing for greater access to the global financial system.

Decentralised cryptocurrencies, however, are not without their challenges. The lack of central regulation has led to concerns regarding the potential for criminal activities, such as money laundering and tax evasion.

Overview of Mining

Cryptocurrency mining is an essential process in the world of digital currencies. It involves the validation of transactions and creation of new coins within a decentralised network. Mining relies on a competitive approach where miners, the individuals or entities with specialised hardware and software, compete to solve mathematical problems.

The key concept behind mining lies in proof-of-work. Miners apply their computational power to solve complex cryptographic puzzles, and once the solution is found, the transaction is added to a block on the blockchain. The successful miner is rewarded with a portion of the cryptocurrency for their efforts.

The mining process involves the following steps:

  1. Miners collect recent transactions and organise them into candidate blocks.
  2. They perform proof-of-work calculations on these blocks to find a valid hash.
  3. The miner who finds the valid hash first adds their block to the blockchain and broadcasts it to the network.
  4. Other nodes validate the new block, and the mining process begins again with a fresh set of transactions.

Overview of Tokens

In the world of cryptocurrency, there are two primary entities: coins and tokens. Both serve different purposes and have unique characteristics, but they are often used interchangeably.

Tokens are digital assets that are built on top of an existing blockchain. They typically represent assets or utilities within a specific project or ecosystem and can be used for various purposes like accessing services, voting rights, or rewards. The most common type of tokens are built on the Ethereum blockchain, known as ERC-20 tokens.

Coins, on the other hand, are always native to their blockchain, acting as the primary digital currency for that chain. Coins are primarily designed to be used as a medium of exchange, much like traditional currencies.

One essential aspect to consider about tokens and coins is their supply. The supply of a digital asset refers to the total number of units that exist (circulating supply) or will ever exist (maximum supply). Coins generally have a fixed maximum supply. Tokens, however, can have a flexible supply, which is determined by the project’s development team.

Cryptocurrency Exchanges

Cryptocurrency exchanges are online platforms where individuals can buy, sell, or trade cryptocurrencies. They act as intermediaries between buyers and sellers. These exchanges provide a convenient way for investors to access the global cryptocurrency market.

Trustworthiness and security are crucial considerations when choosing a cryptocurrency exchange. Some of the most popular cryptocurrency exchanges offer a wide range of features to facilitate trading. Additionally, exchanges typically charge fees for transactions, but differ in their fee structures. It is essential for investors to compare these fees and choose an exchange that best suits their needs.

Another important aspect of cryptocurrency exchanges is the level of liquidity they provide. Exchanges with higher liquidity offer more competitive prices and faster transaction times.

List of Cryptocurrency Exchanges A to Z

About The Authors

James Headshot
Written by

Crypto Technical Writer

James Page, previously the lead writer at Crypto Head and a registered psychologist, brings a unique perspective to the world of blockchain and cryptocurrency.

His extensive experience in the industry and ability to present complex concepts in an understandable manner make his articles a valuable resource for readers seeking to navigate the ever-evolving crypto landscape.

Check James out on:
Adam Headshot
Edited by

Co-Founder / Managing Editor

Adam Morris, the co-founder of Crypto Head and a respected crypto expert, offers insightful commentary and analysis on cryptocurrency, NFTs, and the evolving digital landscape.

His extensive experience and features in top-tier publications like Forbes and CNN underscore his deep understanding of the crypto world and its future potential.

Check Adam out on: