What exactly is a cryptocurrency?

Cryptocurrency is frequently referred to as "decentralised money," referring to the fact that it is kept, generated, and processed without the involvement of a central bank or government.

Cryptocurrency, unlike traditional "hard" or paper money, has no physical form. Cryptography (the science of encoding and decoding information) secures the data, which is why it's called "cryptocurrency."

When data is encoded, it is converted from one form to a less discernible form, which is then decoded — or reverted — by the end-user back to its original form. This complicated procedure minimises the risk of double spending and counterfeiting, enhancing the security of using cryptocurrencies to make purchases.

In some ways, cryptocurrency functions similarly to Dropbox or Google Drive as a secure, cloud-based filing system.

Because cryptocurrency is decentralised, it avoids interactions with third-party servers and government agencies, which frequently collect large amounts of data and have the ability to control an individual's access to funds. Transactions can be processed anonymously due to the lack of affiliation with a government or banking system, which some users consider a significant benefit.

On the other hand, because there is no government institution accountable for maintaining the central supply, or even a record of the money or its transactions, cryptocurrencies lack one of the fundamental advantages of a real or "hard" money system.

What is cryptocurrency and how does it work?

Cryptocurrencies use blockchain, an online ledger and transaction log, to keep track of their own records.

Blockchains create digital records — of transactions, certificates, or contracts — that can only be added to, not deleted. Crypto-converts argue that this independent transaction log is far more secure than paper records or institutional digital accounts, which can be hacked.

In essence, the platform stores both the buyer's and seller's data as a "hash," or a string of letters and numbers formed by a sophisticated mathematical formula. Because each hash is linked to the one before it, any unauthorised changes to the ledger will be seen as soon as a hash is changed.

The group is converted into a "block" and linked to the other blocks on the server if it reaches a particular number of hashes, hence the name "blockchain." Every ten minutes, the blockchain is updated and stored on a variety of servers throughout the world.

Cryptocurrencies work in a closed system, which means that there is a finite number of them and that new units may only be created according to a set of rules. Some currencies, like bitcoin, have a software-imposed limit on the number of units that can be created. Because of the restricted supply, each unit becomes increasingly valuable, especially as the currency becomes more popular among day traders.