Cryptocurrency is a digital currency that works as a medium of exchange just like real-world currencies such as the US dollar. It is created through mathematical engineering (algorithm). The key idea behind cryptocurrency is that it is designed to be open, anonymous, secure, fast and bypasses traditional financial structures.
It uses encryption techniques to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank. (Encryption is the process of converting legible information into an almost uncrackable code.)
Bitcoin was the first cryptocurrency that was created by Satoshi Nakamoto in 2009. It is still the most popular and valuable cryptocurrencies in the world. However, over the past decade, many new cryptocurrencies have been created, with over 900 different cryptocurrencies available on the internet. After Bitcoin, the second most talked about cryptocurrency is Either which is a token for the Ethereum project. Other popular ones are Ripple and Litecoin.
How do Cryptocurrencies Work?
Cryptocurrencies make use of decentralized technology to allow users to store money and make payments to other users on the network with complete anonymity and without going to a bank. Any cryptocurrency runs on a distributed public ledger called a blockchain. It is in this blockchain that all the transactions are recorded and the balances held by the currency holders are stored and updated.
At its core, the blockchain is essentially a database of all transactions happening in the network. The database is public and therefore not owned by any one party. It is distributed, that is, it is not stored on any one computer owned by somebody. Instead it is stored on many computers across the world. The database is constantly synchronized to keep the transactions up-to-date, and is secured by the art of cryptography making it hacker proof. (Learn more about Blockchain technology)
How to Buy Cryptocurrencies
Digital currency maintains its users complete anonymity. When you make a purchase with traditional money your personal information is attached to each and every transaction which can be used to track you and take note of your purchases. But cryptocurrency transactions carry no personal information.
A person can acquire a cryptocurrency such as Bitcoin in two ways: 1) Mining, i.e., is by participating in the currencies network to confirm transactions and earn some cryptocurrency as a fees for the work done. For example, with Bitcoin, miners use special software to solve math problems linked to blocks which is the basis for approving the transactions. The miners are issued a certain number of bitcoins in exchange of doing this work.2) Buy, i.e, you can buy a cryptocurrency from one of the online cryptocurrency exchanges and websites that readily sell many cryptocurrencies including Bitcoin, just like you would by real currencies such as USD, INR, etc. One such example is Coinbase, which is a secure online platform for buying, selling, transferring, and storing digital currencies.
In order to use any cryptocurrency you will need to use a cryptocurrency wallet. Each cryptocurrency has an official wallet which you can download from their website. There are also many other wallets that allow you to store cryptocurrencies. A wallet actually does not store the cryptocurrency. Remember that the currency itself is just a transaction in the blockchain (distributed ledger). The wallet stores a combination of public key (known only to you) and a public key. This public key is s digital code that is connected to a certain amount of cryptocurrency on the blockchain. The wallet stores these private and public keys, and allows you to send and receive coins. Individuals holding cryptocurrencies (such as Bitcoin) can directly send / receive coins with each other without the need of any other third party (not even an exchange) just by sharing their public keys.