How does Cryptocurrency Work?

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How does Cryptocurrency Work

If you keep tabs on the current events, you must be familiar with cryptocurrency mechanics even if you are not a crypto investor.

Well if you don’t like to stay updated about general happenings in the world, you might still be unsure about what cryptocurrency is, is it safe money or not, and how it works. 

This article will help you understand how does cryptocurrency work and what it actually is.

What is Cryptocurrency?

Cryptocurrency is entirely digital money that does not exist in a physical form like paper money. It exists in the online world only where you can make transactions and trades with this digital money.

You can even buy things using cryptocurrency just like you do with your debit card, except there is no bank acting as a mediator.

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What is the Origin of Cryptocurrency?

Bitcoin was the first cryptocurrency launched in 2009. Just like whenever a change happens, people tend to react in different ways. The same happened when Bitcoin was introduced.

Where it enticed a lot of people to invest in Bitcoin, several other people were dubious about it that it might be a scam or illegal money.

But Bitcoin yet made its way through all the obstacles and impediments and now holds a market cap of 1 trillion dollars.

This led to the invention of other cryptocurrency brands. And today public markets are trading more than 6700 cryptocurrencies. However, these are not legalized by the US government except for Bitcoin.

The famous cryptocurrencies are Ethereum, Bitcoin Cash, and Litecoin and these can be bought using PayPal as well. Whereas cryptocurrencies with less popularity are known as altcoins.

The most famous among the altcoins is Dogecoin. The Tesla guy, Elon Musk has shown tremendous interest in Dogecoin by mentioning it in his Tweets quite frequently.

Who Controls the Crypto?

Cryptocurrency is not regulated by some bank or entity rather it is decentralized and regulated by algorithm.

Money that exists in the digital world only is transacted and recorded on the blockchain, which can be considered a decentralized public ledger.

What is Blockchain Technology?

All the cryptocurrencies run on Blockchain technology which is a decentralized technology. It does not have a central location where it saves information about transactions or balances.

Instead, the information is spread across the globe on computers and the added information appears in the form of a new block. These blocks determine the trend of the cryptocurrency market.

The blockchain is made up of cryptography and is difficult to hack or disrupt, thus it makes the transaction secure and risk-free. Each block is connected to the previous block via hash (a one-way cryptographic code).

What is Mining?

Mining is a simple process done through the software on a computer – where users confirm their transactions by solving a mathematical puzzle.

The first transaction determines a block which is followed by other transactions made by the public. All these blocks eventually determine the profit and losses. The user who makes the transaction is known as the ‘miner’.

The miner who succeeds at solving the puzzle first would get newly mined coins in reward. The miners also get the transaction fees that had been paid by those who created the transactions.

Besides, miners sometimes also pool computing power and they get to share the new coins. The algorithm recognizes the consensus and works on it.

Such as, if more users trying to solve the puzzle are submitting the same transaction data, the algorithm would confirm the common transaction as correct.

Related Post: How to Mine Cryptocurrency?

How to Buy/Sell Cryptocurrency?

Cryptocurrency can be bought from crypto exchanges or brokers. Brokers are generally the third party that sells or buys the cryptocurrency.

While the crypto exchanges are a platform where investors can buy or sell cryptocurrency directly – exchanges act like an online stock exchange.

Besides, crypto ATMs are a new trend on the rise. However, there are only Bitcoin ATMs launched yet but we are certain to see the Crypto ATMs for altcoins in the future as well.

You only have to put the cash into the machine and you can purchase Bitcoin (hopefully, altcoin in the future). There are also peer-to-peer exchanges that might or might not be regulated by a third party.

In P2P exchange, investors post requests to buy or sell cryptocurrencies. Once they find a suitable prospect, the deal would be closed and transactions are made.

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Can Cryptocurrency be Converted to Cash?

Making digital money sounds trendy but withdrawing it into cash would make you feel really rich. If you have a large deposit of cryptocurrency in your digital wallet, you may want to turn it into cash.

There can be several ways to convert your cryptocurrency into cash or to save it into a bank. You can sell your currency on exchange – Coinbase and Kraken are the most suitable of all.

Well, you would have to check which exchange allows which altcoin to be traded or exchanged. You can sell the cryptocurrency and have the cash withdrawn from your bank account directly.

How does Crypto get Taxed?

According to the 2014 IRS (Internal Revenue Code), cryptocurrency is treated as a digital asset rather than a digital currency. As per this rule, the assets would be charged if you earn a profit upon selling them.

Such as if you buy Bitcoin for 30 dollars and the Bitcoin value got raised while you held them. And you end up selling your 30-dollar worth Bitcoin for 150 dollars. The amount you earned as profit – 120 dollars would owe capital gains taxes.

However, if you spend or sell cryptocurrency at a loss, no taxes would be incurred. Only profit would be charged for taxes.

Besides, any cryptocurrency deposits kept in hold for more than a year and then sold at profit would be treated as long-term capital gains.

Such gains would be taxed at a lower rate keeping your annual income in view. While the profits gained on crypto deposits held for less than a year would be taxed at your normal income tax rate.

How much Risk is Involved?

If you’re new to the crypto business, you must be prepared for crazy rides of volatility. If you don’t deem yourself a person with resilient nerves, you may not be able to take the strain the volatility of cryptocurrency is notorious for.

Here, you can expect the unexpected at any moment. You may earn a massive profit or you may lose all of your investment at any moment.

It is best to trade with the money you can afford to lose. Don’t gamble with large shares of your hard-earned money if you’re not prepared to recover from the loss anytime soon.

Final Thoughts

Cryptocurrency is going to change the economic situation worldwide whether one likes it or not. The change has already begun and it’s only a matter of time when the cryptocurrency will rule out the existing ways of the economy.

The cryptocurrency aims at decentralizing the money and giving the investor full control over money. However, we can only predict the change it’s about to bring in the future and the crypto age will be quite different from the recent one.

If you want to know more about Crypto then check other blog posts on our website.