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How Does Cryptocurrency Work? A Step-By-Step Guide From Mining to Spending
- By Localcoin
- October 13, 2021
At Localcoin, our mission is to provide a simple, secure buying and selling experience of digital currency for customers across North America. From running North America’s largest Bitcoin ATM network to our online retail platform, we are constantly seeking to innovate in the blockchain infrastructure space. Welcome to our blog, where customers can educate themselves on the world of cryptocurrency, learn more about our company vision and more!
If you’re thinking that cryptocurrency is too confusing or difficult to understand, we get it. But while these digital currencies may appear to be complicated, they don’t have to be! In this post, we’ll break down how cryptocurrency works — from the creation of crypto coins, all the way to having them in your own digital wallet. Keep reading to discover how cryptocurrency works in this simple, step-by-step guide.
Browse This Content:
- A Quick Recap on Cryptocurrency
- Step 1: Miners Create and Circulate New Coins
- Step 2: Crypto Coins Are Bought and Sold
- Step 3: Crypto is Used in a Variety of Ways
- Here’s Where to Buy Cryptocurrency
A Quick Recap on Cryptocurrency
If you’re unfamiliar or need a refresher, cryptocurrency is a digital medium of exchange that is created, stored and processed outside of a central bank or government. Bitcoin is the original cryptocurrency, and thousands more coins have emerged in light of its success. Most cryptocurrencies including Bitcoin operate using a decentralized authority, eliminating the need for intermediaries who know your personal information and have access to your funds. The ability to make financial transactions without a middleman is one of many reasons why enthusiasts and advocates use cryptocurrency.
Step 1: Miners Create and Circulate New Coins
So, you know what cryptocurrency is, but where does it come from?
To put it simply, most cryptocurrency is mined into existence — not underground with a pickaxe, but digitally with powerful computers. It is necessary both for the generation and circulation of new coins, and to uphold the blockchain that allows a coin to be decentralized.
How Does Cryptocurrency Work to Incentivize Miners?
You can think of miners as auditors who are paid for their work in crypto.
Mining crypto is the process of validating transactions on the blockchain, otherwise known as proof-of-work; this responsibility is spread out among many computers all over the world (called nodes) which eliminates the need for a central authority to oversee the regulation of these currencies.
Using large amounts of computational power, miners verify the legitimacy of cryptocurrency transactions by solving for their encrypted hash values (in other words, by solving complex mathematical problems). Once these problems are solved, blocks of transactions are considered verified and added to the blockchain where they are immutable and irreversible.
In return for verifying transactions and adding new transactions to the blockchain, miners receive newly minted coins. For Bitcoin mining in particular, miners have to verify 1MB worth of transactions and they must be the first to arrive at the right value in order to be rewarded with newly-minted coins.
What is Blockchain Technology?
Blockchain technology is essential to how cryptocurrency works. A blockchain is a type of secure database where data is grouped into blocks and chained together in chronological order, hence the name “blockchain”. In the context of cryptocurrency, blockchains are used as public, digital ledgers (records) of all transactions made pertaining to their respective coins. This network is decentralized because no one owns the ledger.
Step 2: Crypto Coins Are Bought and Sold
“Transactions” on the blockchain refer to the buying and selling of crypto coins. Buying or selling crypto through an exchange or ATM can be as easy as clicking a few buttons, but there’s a whole process happening behind the scenes to securely move crypto from one place to another. Here’s what’s really happening when you buy or sell coins from your wallet:
1. To make a transaction, one sends out or broadcasts a file that contains all the necessary information, including how many coins are being traded and the sender/recipient information. This is sent out to the blockchain from one’s crypto wallet.
2. This transaction file is then analyzed by many different nodes on the blockchain network to confirm its authenticity.
3. From there, the transaction file and others are chained together chronologically on the blockchain. Miners will compete to verify these transactions for the chance at getting a reward. This competition comes down to using computational power to solve for the transaction’s encrypted hash value. Successful miners are rewarded with newly minted coins.
4. The user receives confirmations that measure how many new blocks have been added since their transaction, making it increasingly verifiable and irreversible. Each crypto coin requires a different amount of confirmations to be “complete”.
5. After a varying amount of time, the transaction is complete and the user has successfully either sold or purchased crypto coins!
What is the Purpose of a Crypto Wallet?
Crypto wallets are another essential part of how cryptocurrency works. In order to send or receive any kind of coin, you’ll need a secure crypto wallet. These digital wallets exist to keep track of ownership and to generate the public addresses you need to make transactions. Your coins are protected in your wallet by a private key: a long string of letters and numbers that act as a password to access your coins. Wallets can come in the form of mobile apps or even as hardware.
Step 3: Crypto is Used in a Variety of Ways
Cryptocurrency is used by enthusiasts, advocates and investors all over the world for a variety of different purposes, from investing and trading to transferring money overseas and beyond. Cryptocurrency is even accepted by some major retailers in parts of the world, and can be day-traded like any other stock in the form of crypto ETFs. Some of the reasons why people love and use crypto include:
- The ease and security of international transfers: Cryptocurrency can be sent from anywhere, to anyone, quickly and securely. Plus, transaction fees are often relatively low, making cryptocurrency a fierce competitor to wire transfers.
- The excitement of investing in a new form of currency: Many enthusiasts believe strongly in the future of decentralized, digital currency. Many just enjoy the thrill of investing in constantly fluctuating currencies. Large online communities exist where enthusiasts and investors discuss the latest crypto news, investment strategy and more.
- The benefits of anonymity: Cryptocurrency allows individuals to make financial transactions without a middleman, keeping your personal information and transaction activity private from financial institutions and governments. You can essentially be your own bank!
No matter what you think about cryptocurrency, it’s safe to say that it is here to stay — making waves in the world of finance and challenging the way we think about currency.
Here’s Where to Buy Cryptocurrency
Whether you’re interested in cryptocurrency as an exciting hobby or as a more private and secure alternative to banking, crypto is being made accessible to anyone by Localcoin. Now that you know how cryptocurrency works, all that’s left to do is buy and sell crypto with the help of Localcoin ATMs!
To learn more about Bitcoin ATMs, check out our blog post!
Localcoin ATMs offer a simple, user-friendly way for anyone to buy and sell Bitcoin, Litecoin and Ethereum. Newcomers and experts alike can easily access Localcoin ATMs in their communities, whenever and wherever they need to. As one of North America’s largest Bitcoin ATM networks, with more than 650 terminals across Canada and the U.S, Localcoin is making it accessible for everyone to buy and sell cryptocurrency.