Cryptocurrency is a digital payment system that doesn’t rely on banks. When you transfer cryptocurrency funds, the transactions are recorded in a public ledger. Cryptocurrency is stored in digital wallets. It’s a peer-to-peer system that can enable anyone anywhere to send and receive payments. Instead of being physical money carried around and exchanged in the fiat world, cryptocurrency payments exist purely as digital entries to an online database describing specific transactions. Cryptocurrencies are distinguished from fiat currencies (USD, GBP, EUR, etc) because any central authority does not issue them, making them potentially impervious to government intervention or manipulation.
Many cryptocurrencies are built on blockchain technology, which is a distributed ledger enforced by a distributed network of computers.
A blockchain is an open, distributed ledger that records transactions in code. In practice, it’s a little like a checkbook that’s distributed across countless computers around the world. Transactions are recorded in “blocks” that are then linked together on a “chain” of previous cryptocurrency transactions.
With a blockchain, everyone who uses a cryptocurrency has their own copy of this book to create a unified transaction record. Each new transaction is logged, and every copy of the blockchain is updated simultaneously with the new information, keeping all records identical and accurate.
To prevent fraud, each transaction is checked using a validation technique, such as proof of work or proof of stake.
How does cryptocurrency work?
Cryptocurrencies do not exist as a stack of notes or coins. Instead, they live only on the internet.
Units of cryptocurrency are created through a process called mining, which involves using computer power to solve complicated mathematical problems that generate coins. Users can also buy the currencies from brokers, then store and spend them using cryptographic wallets.
How to store cryptocurrency
Once you have purchased cryptocurrency, you need to store it safely to protect it from hacks or theft. Usually, cryptocurrency is stored in crypto wallets, which are physical devices or online software used to store the private keys to your cryptocurrencies securely. Some exchanges provide wallet services, making it easy for you to store directly through the platform.
There are different wallet providers to choose from. The terms “hot wallet” and “cold wallet” are used:
- Hot wallets refer to crypto storage that uses online software to protect the private keys to your assets.
- Cold wallets (also known as hardware wallets) rely on offline electronic devices to securely store your private keys.
Typically, cold wallets tend to charge fees, while hot wallets don’t.