What is crypto currency and how does it work?

Cryptocurrency is a type of digital currency which is a medium of exchange. Cryptocurrencies are stored in digital wallets, and the transactions are verified and tracked via a distributed ledgers.

Xe Consumer

January 19, 2023 8 min read


What You Need To Know About Cryptocurrencies

Simply put, cryptocurrency is a form of decentralized digital money. Decentralized means that it’s not controlled by any government or central bank. It is also digital, which means that it is stored and transferred via computer networks instead of physical paper bills or metallic coins. The two most popular cryptocurrencies are Bitcoin and Ethereum, but there are many other currencies that are significant players in this space.

For many people, the crypto world can be a little mysterious. Complex computer terminology combined with high-level economic debates about “value” can cloud the issue and create unnecessary confusion.

Today, we will dispel this fog of complexity by sharing our knowledge and expertise on cryptocurrencies. Read on to learn more about what cryptocurrencies are and how you can get started buying and trading your own digital money.

The Basics - What Is Cryptocurrency?

A cryptocurrency is a form of digital money that uses cryptography to secure transactions and control the creation of new units. It operates on a distributed ledger system called a blockchain which records all transactions securely and permanently.

The ledgers for Bitcoin and Ethereum are also considered public ledgers. This means that all transactions are recorded publicly while maintaining the anonymity of users. A public ledger allows anyone to verify the security and validity of all transactions occurring on the platform, thereby providing increased protection for all transfers.

The benefits of using cryptocurrency include:

  • Faster transaction times than traditional banking systems

  • Lower fees for international payments

  • Increased privacy due to its decentralized nature

  • No risk of inflation as there is a finite amount of coins available for circulation.

Additionally, many people view cryptocurrency as an investment opportunity due to its potential for high returns over time if properly managed.

Cryptocurrencies are maintained through their blockchain validation methods, also known as consensus mechanisms. Although different currencies have developed different approaches, the two major protocols are the Proof-of-Work (PoW) method and the Proof-of-Stake (PoS) method.

With proof-of-work, powerful computers solve mathematical problems in order to validate each transaction and update the ledger. As a reward for the contribution of their computing power to the network, they are then rewarded with a small amount of cryptocurrency. This process is what is traditionally known as cryptocurrency mining.

The second method is proof-of-stake. In proof-of-stake, transactions are validated by users that are “staking” or holding on to their crypto holdings. Instead of a competition based on computing power, users are rewarded randomly, thereby creating a more energy-efficient and scalable protocol for verifying transactions.

What Is A Cryptocurrency Exchange?

A cryptocurrency exchange is an online platform where users can buy and sell different types of cryptocurrencies, such as Bitcoin or Ethereum, using fiat currency (e.g., USD).

Key features include:

  • Real-time pricing information on various currencies

  • Order books that show current buy/sell orders for each currency pair listed on the exchange

  • Margin trading options that allow users to borrow funds from other traders in order to increase their buying power

  • Advanced charting tools which provide technical analysis data such as moving averages or support/resistance levels.

Well-known exchanges include:

One of the challenging aspects of crypto trading is fluctuating value. Unlike more stable fiat currencies, cryptocurrencies change values very quickly and frequently. Consequently, it is vital for traders to keep a close eye on exchange rates and values. This is where charts come in.

Currency exchange charts are also used by traders when making decisions about when to buy or sell particular currencies based on crypto currency prices over time. These charts display historical data points as well as volume traded during those periods. This allows traders to identify trends in market sentiment towards particular currencies before making trades accordingly.

You can also use currency converters to get a quick understanding of the current value of cryptocurrencies in a currency you are more familiar with, such as USD.

What Is Bitcoin?

Bitcoin is a decentralized digital currency created in 2009 by an anonymous person or group of people known as Satoshi Nakamoto. It is the first and most popular cryptocurrency, allowing users to make secure and anonymous payments without the need for a third-party intermediary. Bitcoin has become increasingly popular over the years due to its low transaction fees, fast transactions, and global acceptance.

The history of Bitcoin dates back to 2008 when it was first proposed by Satoshi Nakamoto in a white paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System.” The idea behind this new form of money was to create a decentralized system that would allow users to send and receive payments without relying on any central authority or government.

The key features of Bitcoin include:

  • Decentralization - Unlike traditional currencies, which are controlled by governments or other central authorities, Bitcoin is not controlled by any single entity or organization. This means that no one can manipulate the supply or value of Bitcoin as it is completely decentralized.

  • Security - All transactions made with Bitcoin are secured using cryptography which makes them virtually impossible to counterfeit or double spend. Additionally, all transactions are recorded on an immutable public ledger called the blockchain, which ensures transparency and accountability for all participants in the network.

  • Anonymity - Users can remain anonymous while using Bitcoin as all transactions are recorded on the blockchain but do not contain any personal information about either party involved in the transaction. This makes it difficult for anyone to track your spending habits or identity if you choose to remain anonymous when using this digital currency.

  • Proof-of-Work Mechanism - Bitcoin relies on the traditional proof-of-work mechanism for validating transactions.

What Is Ethereum?

Ethereum is another popular cryptocurrency created in 2015 by Vitalik Buterin, with a focus on smart contracts and distributed applications (DApps). It is similar to Bitcoin but offers more features such as faster transaction times, lower fees, and increased scalability due to its use of smart contracts technology. This allows developers to create applications that run exactly as programmed without any risk of fraud or censorship from third parties such as governments or banks.

Ethereum also has its own native token called Ether (ETH), which can be used for various purposes, including paying transaction fees within Ethereum's network and purchasing goods/services from merchants who accept ETH payments. 

The history of Ethereum dates back to 2013 when Vitalik Buterin proposed his idea for a new crypto currencies platform that would enable developers to build decentralized applications (DApps). Using smart contract technology instead of relying on centralized servers like traditional web applications do today.

Ethereum was officially launched in 2015 with its own native token called Ether (ETH). Since then, Ethereum has grown into one of the most popular cryptocurrencies, with millions of users around the world utilizing its platform. This includes trading digital assets such as tokens issued through Initial Coin Offerings (ICOs) and running DApps built on top of its blockchain technology stack. 

The key features of Ethereum include:

  • Smart Contracts – Smart contracts are computer programs that execute automatically based on predetermined conditions set forth within their codebase. They do not require any manual intervention from third parties such as banks or governments. This makes them extremely efficient at executing complex tasks quickly and securely while eliminating potential points-of-failure associated with manual processes traditionally used today. 

  • Decentralized Applications – DApps are applications built on top of Ethereum’s blockchain technology stack. This allows developers to create decentralized versions of traditional web apps without having to rely on centralized servers like they do today. These apps offer increased security since they cannot be censored by anyone other than their creators, making them ideal for running businesses online without having to worry about censorship from external sources. 

  • Token Support – In addition to supporting Ether (ETH), Ethereum also supports many different types of tokens, including NFTs and other currencies built on the platform.

  • Proof-of-Stake – Ethereum was originally built on the proof-of-work mechanism but has now been fully transferred over to the proof-of-stake algorithm. This move was a major event in the world of cryptocurrencies because it removed mining from the network. NFTs and other tokens built on Ethereum were receiving major criticisms because of their energy inefficiency. However, Ethereum has largely resolved the energy consumption issues by moving to this new mechanism.

What Is A Crypto Wallet?

crypto wallet is your door to the cryptocurrency world. This is a digital wallet that stores your cryptocurrencies and connects to exchanges to facilitate your trades and transactions.

There are “hot” wallets and “cold” wallets. Hot wallets are entirely virtual wallets that are only accessible online. Cold wallets are hardware-based crypto wallets that enable you to store tokens offline.

Each wallet type has its own advantages and disadvantages, and users will need to decide whether to prioritize the security of offline wallets against the accessibility of hot wallets. The best crypto wallet is the one that meets your needs.

Examples of hot wallets:

Examples of cold wallets include:

A Trustworthy Partner

The world of cryptocurrencies remains a relatively new and unregulated financial space. Because of this, it is imperative to do your own research and work with a trusted authority in the currency space. 

CoinMarketCap and CoinDesk are two great sources to get the latest updates on this industry and learn more about new cryptocurrencies.

Here on Xe, you can also find a variety of useful currency services, including financial charts and data. You can also use Xe to transfer money quickly and easily.

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The content within this blog post is not intended for use as financial advice. This content is for informational purposes only.

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