How do cryptocurrencies work?

To understand how cryptocurrencies work you must also understand several basic concepts:

The first is that it is based on Blockchain or blockchain technology. The blockchain is a public record of cryptocurrency transactions validated in chronological order. When a block has been confirmed, through mining, it becomes part of the chain. Put very simply, blockchain is like a giant Excel, or a giant notebook. Everyone has it, where everyone can write, it is always updated, but no one can modify what is already written. It is worth clarifying that each cryptocurrency has its own blockchain.

The second concept is mining. This is a process that consists of performing mathematical calculations to confirm transactions in the network of a cryptocurrency. Through mining, the amount of a cryptocurrency can be increased while confirming transactions. In the traditional economic system, states and governments can print banknotes at will. This does not happen, for example, with Bitcoin. The creation of new Bitcoins depends on the mining process, where it is the miners who create new coins, as originally laid out in the Bitcoin software. The same process occurs with many other cryptocurrencies.

Another important concept is that of Exchanges, which are companies that allow you to exchange currencies such as euros or dollars for Bitcoins and get into the crypto world in a simpler way. They work as a kind of “exchange houses”. They are free and you can easily open an account in a matter of minutes. When you buy cryptocurrencies, they are stored in ‘Wallets’ or purses, within the same account, where you can store or exchange them.

Each cryptocurrency has its own algorithm, which manages the amount of new units issued each year. For example we have the Bitcoin, which every four years is reduced by half the amount of coins produced, and only a total of 21 million Bitcoins will be issued. This is a fundamental difference with conventional currencies, since, as we mentioned before, banks and governments can print banknotes at their own free will. This gives Bitcoin more capacity to generate value over time, unlike currencies issued by banks and governments that can devalue with over-issuance.

And since the algorithms of different cryptocurrencies are different, the maximum units of each cryptocurrency also varies. This can also affect their value and performance, although it’s not something that novice users need to worry so much about at first.