What Is Cryptocurrency and How Does It Work?

Crypto has been a hot topic of conversation in recent years, thanks to the rise of Bitcoin and other cryptocurrencies. But what is cryptocurrency exactly, and how does it work?

At its core, crypto is just a digital representation of money. It’s not backed by any government or precious metal, so it’s largely driven by speculation and investor demand. But cryptocurrencies also provide unique opportunities for new kinds of payments, investments and even technology.

The most well-known example is Bitcoin, which can be used to buy goods and services at a number of retailers and online stores. In addition, some nonprofits and charities accept donations in Bitcoin. Increasingly, travelers are using crypto to cut down on expensive currency exchange fees when they’re traveling abroad.

Despite its recent popularity, crypto is still a relatively new form of money. That means it has some growing pains to overcome, but it’s also full of potential. Let’s take a closer look at what it is, how it works and some of the pros and cons of using it.

A Blockchain

The backbone of cryptocurrency is a technology called a blockchain. It’s basically a shared database that records and verifies transactions in a secure, decentralized way. Cryptocurrencies like Bitcoin are built on top of the blockchain to create a digital economy.

Because the blockchain is spread across a network of computers, it’s difficult to hack or control. This allows the Bitcoin and other cryptocurrencies to operate without a central authority, and reduces transaction fees. The blockchain is maintained by “miners” who compete to be the first to solve a complex math problem, which updates the blockchain with verified transactions.

One big reason that people use crypto is because it provides a level of security not available in other forms of payment. With a crypto wallet, you can hold your value securely on a smartphone or computer, no matter what happens to the companies that manage your account. That gives you freedom and peace of mind, which is particularly important in this era of data breaches and identity theft.

While some people enjoy the sense of security and independence that comes with crypto, others are drawn to its potential for change. The anonymity and censorship-resistant nature of cryptocurrencies make them attractive to groups that are often excluded from the global financial system, such as criminals, tax evaders and political dissidents.

But it’s worth remembering that crypto holdings are not insured by a bank or the federal deposit insurance corporation, and can be lost if the platforms you use to buy and sell them are hacked or fail. That means you should only invest in crypto with money that you’re willing to lose.