How Does Cryptocurrency Work?

Did you and your grandmother compare crypto investment strategies this past holiday season? It seems that cryptocurrencies are hitting the mainstream. And it’s almost impossible not to see a crypto headline or hear someone talking about it.

But, it wasn’t long ago that the general public viewed cryptocurrency with a fair amount of skepticism and side-eye. The most prevalent (and infamous) example of why the public was wary of crypto was that it was reportedly used to fund illegal activities.

Fast forward a few years, and you’ll see that more institutions and companies have embraced crypto and blockchain, which leads investors to view digital assets as a promising alternative to build long-term wealth.

But, as the crypto market and the technology evolve, many people still ask what cryptocurrencies are and how cryptocurrency works. This guide will explain how cryptocurrency works and the technology that powers it.

What are Cryptocurrencies?

The definition of cryptocurrency is a digital currency secured by cryptography, making it nearly impossible to counterfeit or double-spend.

A defining feature of cryptocurrencies is that they are generally not issued by any central authority, don’t require a third party (banks) to perform transactions, and are immune to government interference or manipulation.

Many businesses don’t accept crypto as a form of payment yet. But you can use cryptocurrency for cheaper cross-border transfers, as a trading instrument, or held for a possible future appreciation in value.

If invested wisely, cryptocurrency can provide wealth, increase financial inclusion, help the unbanked, and create an economy that anyone can access.

How do Cryptocurrencies Work?

Cryptocurrencies work by storing every transaction on a blockchain. A blockchain is a ledger of information maintained by a network of independent computers. This new technology grants cryptocurrency security and immutability.

Blockchains store new information in blocks and then add those blocks to the chain, hence the name. It allows the creation of an immutable and transparent history of transactions, secured from manipulation, visible to anyone, and impossible to lose.

Cryptocurrencies also serve many uses outside payments. For example, crypto utility tokens provide you access to products or services on a blockchain network. A blockchain project can also create an initial coin offering to raise funds. Similar to an initial public offer inside a blockchain, the purpose is to attract interested investors for a new project on that system.

To store cryptocurrency, it’s necessary to have a digital wallet. A digital wallet allows you to store and send crypto to anyone that shares their wallet address with you. To perform a transaction, the wallet creates a key, and only the two parties involved have access to that key.

You can watch the latest episode of Money Talks with Abra’s CEO. Learn how to buy crypto for your fiat money and the best ways to start buying. Watch the episode here. 

Different Types of Cryptocurrency and Their Use Cases

As you’ve seen above, cryptocurrencies can serve many uses outside payments. We’re moving into a more crypto accepting world, with its use rising in 2021 881% more than 2020. 

To better explain how cryptocurrency works, here are some examples of the most popular types of and their uses:

• Payment Currencies (Coins): The main uses of coins are buying or sending money. You can also hold coins as speculative assets. Examples of popular coins are Terra (LUNA) and Bitcoin Cash (BCH).
• Utility Tokens: This is a blockchain-based token that is bought with the intention of use on that blockchain. You trade these tokens for access to blockchain services or to perform actions on that platform. Popular tokens are Ethereum’s Ether (ETH) and Cardano’s Ada (ADA).
• Stablecoins: Stablecoins, unlike Bitcoin or Ether, are pegged to a fiat currency — mainly the U.S. dollar — and don’t have the volatility of other coins or tokens. They’re used for payments, and with a crypto banking institution or a platform like Abra, you can generate passive interest income by holding them. Examples of stablecoins are Tether (USDT) and TrueUSD (TUSD).

Advantages and Challenges Cryptocurrency Faces

Cryptocurrency still has its advantages and challenges. Here are a few points you should keep in mind about cryptocurrencies.

Advantages:

• Fast and cheap transfer of money for cross-border payments.
• Protected from fiat currency inflation.
• They are immutable and transparent.
• Doesn’t require a third party (banks).

Challenges:

• Volatile. Prices can rise and fall dramatically.
• Crypto can be prone to market manipulation.
• Some countries have high restrictions or prohibit crypto use.
• Can’t be refunded or canceled if sent to the wrong address.

How Does Cryptocurrency Gain Value?

Cryptocurrencies are still evolving, but they follow the supply and demand law like any other investment. Due to many factors involved, the demand for crypto can make the price rise and fall. Coins and tokens can gain value due to:

• Limited supply, which builds scarcity.
• Their utility, with people believing in their use and buying them.
• A loyal following, spreading the message, uses, and news to more people.
• They are speculative assets, bringing the attention of more people who believe their price can rise in the future.

How does cryptocurrency work in 2025? 2030? It’s impossible to know and something you should answer for yourself. The future for cryptocurrencies seems bright, but like any other investment, research is a must. After it, you can decide if cryptocurrencies are for you or not.

Conclusion

Cryptocurrencies are still a new, emerging asset, and we’ll see a lot more coming from this world. Many technologies in the recent past were full of skeptics, and yet we use them today.

With it, do your due diligence. Conduct your research on projects that interest you, and make small investments if you choose to do so. Visit the Abra website to learn more about cryptocurrencies.

Watch our video series: introductions to cryptocurrencies, Money Talks, and more! Abra supports 75+ cryptocurrencies and counting. Join our community and find more people achieving their financial goals through crypto.

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