Cryptocurrency is a decentralized digital currency that uses encryption to generate money and to verify transactions. In simpler terms, it’s an alternative to traditional currencies, which are backed by a centralized government like the US Dollar (USD).

Cryptocurrency may seem like a daunting subject at first, but the core concepts surrounding cryptocurrency are pretty straightforward. Below, we will breakdown the cryptocurrency basics to explain cryptocurrency in a simplified way. See our how cryptocurrency works page for a breakdown of how things like transactions and mining work.

Understanding Cryptocurrency: An Analogy

Imagine a world where, instead of money, we used giant carved stones as our currency. Further, because these stones are so large, we kept them in a public place where everyone could see them and anyone could check who owned which stone.

When you wanted to buy something, you would simply tell everyone that you were transferring ownership of one of your rocks to someone else. Then, everyone would know that you no longer owned that rock, and you couldn’t spend it again.

Further, if anyone ever wanted to make a new stone, all they had to do is spend time carving it so that people recognized that is was the same kind of valuable stone as all of the other ones. The time spent carving the stone makes it valuable and worth something to other people in the rock-spending community.

A General Description of Cryptocurrency

Cryptocurrency is a lot like the theoretical rock currency described above:

  • Every cryptocurrency has a public ledger that contains the past and present ownership of each coin.
  • If you want to make transaction, you simply broadcast to the cryptocurrency’s network that you’re transferring ownership of some cryptocurrency of yours to someone else.
  • The network then spends computational power on both verifying your transaction (that you do own the cryptocurrency your spending and that you haven’t spent it before), and adding it to the ledger.
  • In the process, this computational time and effort creates new cryptocurrency as a reward to the community members who helped make the transaction possible.

Cryptocurrency Today

There are many specific cryptocurrencies currently becoming popular and widely-used as currencies, commodities, and electronic payment systems. The most commonly-used cryptocurrency is, by far, Bitcoin. However, other cryptocurrencies (like Ripple, EthereumLitecoin, and more) are growing in both public acceptance and value.

Be sure to explore other pages on this site for more information on the specific mechanics and uses of cryptocurrency or for detailed guides on getting started using specific cryptocurrencies like bitcoin.

Next: How Cryptocurrency works

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What do you think?

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Danial Khan on

Very high level description of cryptocurrency. I think this topic requires more explanation.

John Githinji on

Is there any rule from any government?

Thomas DeMichele on

The rule from government is you need to pay taxes when you sell, trade, or use it (meaning you need to account for capital gains taxes at the end of the year and generally in quarterlies if required to file quarterlies). See the details: https://cryptocurrencyfacts.com/the-basics-of-cryptocurrencies-and-taxes/

MOKSHATH on

There is any permission of RBI and Central govt?

Thomas DeMichele on

There is no permission required from any government to use cryptocurrency on one level, as the system is regulated by code and not governments. However, as good citizens we all have to follow our local laws. So in India you need to keep up to date on the laws in India and follow them. If a state has laws related to cryptocurrency, then you must follow these laws. This is dictated by the state and not the crypto algorithms.

Does this make sense?