What Is Cryptocurrency and How Does It Work (for Beginners)

What Is Cryptocurrency

Cryptocurrency – in simple words, it is digital money that exists only in the form of virtual coins and is created on the network without the participation of real money. Cryptocurrency can be stored in special electronic wallets and transferred between wallets directly, bypassing banks. There are over 2500 types of cryptocurrencies.

Bitcoin is the most famous and the first cryptocurrency that was launched into the network during the 2009 crisis by the mysterious Satoshi Nakamoto.

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General Principles of Cryptocurrency

The usual currency must be launched into the network, and the cryptocurrency appears in this very network. Cryptocurrencies do not have an issuing center (i.e., a bank that issues banknotes) in principle. As a rule, in order to fully define a cryptocurrency, a lot of complex terms, references to encryption, cryptographic methods and other technologies and theories are required. Below we have formed a more precise definition of cryptocurrency, but with some technical terms:

In fact, a cryptocurrency is a kind of electronic currency, which is based on the methods of cryptography. It works thanks to blockchain technology (blockchain), and the protection of coins and transactions occurs with the help of an electronic signature. The computing power of computers located in different parts of the world can participate in the release of new digital coins, this process is called mining (from English mining – literally means “mining”).

The electronic form can have a ruble, dollar, euro, for example, when using electronic payment systems like PayPal, Webmoney and Yandex.Money. But all this money is centralized and controlled by the state banks of the countries. Cryptocurrency is not issued in any particular country, but is created in the virtual space without any reference to the state and locality. Cryptocurrency can be bought for ordinary money, like everything that has any value.

Video: What Is Cryptocurrency in Simple Terms

In Theses About Cryptocurrency

If we briefly present all the information about the cryptocurrency, we get the following theses:

  • Cryptocurrency is digital coins that can be used instead of traditional money. It exists only in digital form.
  • Cryptocurrency was created in 2009 by an unknown person or group of people under the pseudonym Satoshi Nakamoto.
  • Bitcoin is the first and most popular cryptocurrency at the moment.
  • The main properties of cryptocurrency:
    1. Based on cryptography and blockchain technologies.
    2. There are anonymous and pseudo-anonymous cryptocurrencies.
    3. Cryptocurrency management is decentralized.
    4. As a rule, the emission (issuance of banknotes) of cryptocurrencies is limited, for example, only 21 million Bitcoins can be issued.
  • Cryptocurrencies are created by a one-time issue, or by mining.
  • The maximum price of Bitcoin was $20,000 on December 17, 2017. (UPD. $40,000 Jan 07, 2021)
  • At the moment, there are more than 2,500 types of cryptocurrencies.
  • Cryptocurrency value is supported:
    • market demand,
    • new technologies,
    • mining difficulty,
    • expensive equipment to maintain the network.
  • The official legal status of cryptocurrencies in Russia has not been established.
  • Many countries have recognized cryptocurrency as legal tender, property or virtual money:
    • Japan;
    • South Korea;
    • USA;
    • Canada;
    • Australia;
    • Sweden;
    • Denmark and others.

What Is Cryptocurrency for?

Digital coins can already be used today to purchase goods via the Internet. Using cryptocurrency, making money transfers to any country in the world is much easier and cheaper than using traditional methods. This is due to the lack of participation of banks and financial institutions in the implementation of the transaction.The transfer of cryptocurrency goes directly from one person to another, so the commission for the transaction is much less and is divided between the system participants themselves, who support its performance – the miners.

Having received a transfer in the form of digital coins, they can be exchanged for rubles, dollars or other currencies. This is done through special exchanges and exchangers. With their help, you can buy or cash out cryptocurrency.

For example, “Matbea” provides an opportunity to buy or sell many popular cryptocurrencies at any time at the current rate and in automatic mode. To do this, you need to register by phone number or email, as well as verify your identity.

The next step in acquiring cryptocurrencies will be replenishing the balance on Matbea itself with rubles, dollars or euros. This can be done through Sberbank or any VISA \ Mastercard. Further, the exchange of fiat funds for digital money is already taking place. The entire commission is already included in the course.

The purchased coins go to the user’s personal wallet, which can be kept for a long time. For online storage, the Matbea wallet is very securely protected: withdrawal operations require confirmation by three-factor authentication.

Three-factor authentication is when three codes are requested:

  • PIN;
  • From SMS;
  • From email.

To sell cryptocurrency on Matbea, you must also first register. After that, a wallet will automatically appear, to which you need to send the sold cryptocurrency. And then exchange it for rubles, dollars or euros.

The received money can be withdrawn in various ways, including VISA\Mastercard.

All operations are carried out around the clock and automatically. The service has been working steadily since 2014 and has earned the trust of many users. Cryptocurrency transfers between Matbea accounts are not subject to transaction fees, that is, absolutely free. All transactions are processed instantly and automatically.

In case the user has any questions, the Matbea team has prepared a detailed video instruction.

Why you need a cryptocurrency, the main points:

  • Creation of a real alternative to the US dollar;
  • The ability to transfer funds around the world without resorting to the services of banks;
  • Decentralization of the issue of money (digital coins do not have a single printing center).

How Cryptocurrency Works

The Internet allows you to share files and information with people located at an arbitrarily large distance from each other. The same principle applies to the transfer of cryptocurrencies.


The basic principle of the cryptocurrency is based on transactions without the participation of banks or any other financial intermediaries. Cryptocurrency moves from one user’s digital wallet to another’s digital wallet directly, like a regular computer file. Since it has an encrypted form and an electronic signature of the owner, no one has the ability to steal it. Access to it will be received only by the person to whose digital wallet the transaction was sent.


The most important aspect in the cryptocurrency world is anonymity. The network only records the movement of coins between wallets, which themselves are designated by a set of randomly generated numeric and alphabetic characters. At the same time, information about the owners of these digital wallets does not appear anywhere.


An algorithm that provides a reliable way to store and securely transfer digital coins from one person to another is called Blockchain. A huge database – Blockchain – stores information about the issue and movement of each digital coin: wallet addresses, transaction time and the number of transferred coins.

It is important to understand that blockchain is a decentralized system. Data is stored not on one server, but on hundreds of thousands of computers around the world. At the same time, each person can download a complete archive of data to a computer and become another link that ensures their safety and reliability. This way of storing information makes the system immune to hacker attacks, since any illegal change of information in one of the copies of the blockchain will immediately make this copy unreliable, due to the fact that most other database instances will have different indicators.

How to make money on cryptocurrency

Cryptocurrency is mined and created in several main ways:

  • One-time issue of all coins that will go into circulation;
  • Issue of coins in several stages. This is determined by the policy of a particular cryptocurrency and is decided by its creators.
  • Mining. This is the most famous and popular way of mining coins available to ordinary users.

There are also many ways to buy cryptocurrencies from other people through:

  • exchange services,
  • cryptocurrency exchanges,
  • partners and so on.

Earn with the help of cryptocurrency by selling it. For example, using ordinary trading on the stock exchange, buying cheaper and selling when the rate rises. You can also immediately sell the coins mined with the help of mining, or wait for the price increase for the mined “digital gold”.

Legislation and cryptocurrency

At the moment, cryptocurrency in Russia does not have an official status and is not regulated by law, but active work is underway in this direction.
Despite the absence of a legislative framework in Russia, some countries have already officially recognized cryptocurrencies as a means of payment along with traditional money.

List of countries where cryptocurrency is legalized:

  • Japan;
  • South Korea;
  • Canada;
  • USA;
  • Sweden;
  • Denmark;
  • Australia and others.

A lot of states are still looking at cryptocurrencies, following the experience of introducing cryptocurrencies into the economies of other countries.

List of the most popular cryptocurrencies today

At the moment, there are more than 2,500 different crypto coins in the world. At the same time, their number is constantly growing.

Since most of these coins have low popularity and are not of great interest, we will give a ranking of the most capitalized cryptocurrencies:


Main characteristics:

  • The first and most popular cryptocurrency in the world
  • Founder – Satoshi Nakamoto;
  • Market capitalization at the moment – more than 120 billion US dollars;
  • The encryption algorithm is SHA-256.


Main characteristics:

  • Founder – Vitalik Buterin;
  • Market capitalization at the moment – more than 59 billion US dollars;
  • The encryption algorithm is Dagger-Hashimoto.
  • It is a platform for creating decentralized online services based on blockchain technology, operating on the basis of smart contracts. The network was launched on July 30, 2015.


Main characteristics:

  • Founder – Ripple Labs;
  • Market capitalization at the moment – more than 25 billion US dollars;
  • The encryption algorithm is ECDSA.
  • Modified payment system, with corrected errors and shortcomings that were found in the functioning of the Bitcoin cryptocurrency

Bitcoin Cash

Main characteristics:

  • Bitcoin fork that forked on August 1, 2017;
  • Market capitalization at the moment – more than 18 billion US dollars;
  • The encryption algorithm is SHA-256.
  • It is considered a modified analogue of Bitcoin with easier coin mining, bug fixes of its predecessor, and fast confirmation of transactions.


Main characteristics:

  • Founder – Charles Lee;
  • Market capitalization at the moment – more than 6 billion US dollars;
  • The encryption algorithm is Scrypt.
  • “Digital Silver”, has a faster transaction confirmation algorithm and a smaller commission


Main characteristics:

  • Founder – Evan Duffield;
  • Market capitalization at the moment – more than 2.5 billion US dollars;
  • The encryption algorithm is X11.
  • An open decentralized payment system using a mechanism called “Darksend” capable of conducting completely anonymous transactions.


Main characteristics:

  • Founder – UtopianFuture (pseudonym under which the developer used the Bitcointalk forum);
  • Market capitalization at the moment – about 2.2 billion US dollars;
  • The encryption algorithm is Proof-of-Importance.
  • A peer-to-peer payment system created on March 31, 2015, which introduced new opportunities for blockchain technologies, with the ability to create encrypted messages and a built-in reputation algorithm


Main characteristics:

  • Fork of Bytecoin cryptocurrency (not to be confused with Bitcoin);
  • Market capitalization at the moment is about two and a half billion US dollars;
  • The encryption algorithm is CryptoNight.
  • Cryptocurrency created on the basis of the CryptoNote protocol, which increases the anonymity of transactions through ring digital signatures and the use of one-time addresses during the payment process.


Main characteristics:

  • Founder – Zerocoin Electric Coin Company;
  • Market capitalization at the moment – just under 1 billion US dollars
  • Encryption algorithm – Equihash
  • An open source cryptocurrency that provides privacy and selective transparency of transactions.

What is backed by cryptocurrency

Even at present, there are many skeptics who believe that digital coins are a money surrogate, and buying them is like investing in a pyramid scheme. These people support their position with the argument that the cryptocurrency is not backed by anything. However, this fact is one of its few similarities with ordinary paper money. Until 1971, there was a “gold standard” in the global financial system. He obliged countries to issue national currency only in the amount that was actually backed by the precious metal.

With the abandonment of the “gold standard” states were able to print an unlimited amount of money, which became the main reason for the annual increase in inflation.

Limitation of emissions as protection against inflation

The main advantage of digital coins is their limited emission, in particular, this is true for bitcoin.

No more than 21 million bitcoins can be issued. Limiting the maximum issue is a fundamental factor in the fact that digital coins are not subject to inflation. It is the depreciation of paper money in many countries that is a problem that governments cannot cope with for decades.

New technologies and computing power provide value

The created and debugged system of algorithms for the first time made it possible to create digital money that is virtually impossible to falsify. The digital money technology itself is revolutionary, and therefore carries value in itself.

For example, what is the value of the Facebook company? This is just a site that people enliven with their presence and communication. However, the company’s shares are valued thanks to technology, the idea and its implementation in code. The same thing happens with cryptocurrencies.

Most cryptocurrencies require huge computing power to operate. The equipment itself is very expensive and consumes a huge amount of electricity, which also has its price. Based on the foregoing, the cryptocurrency is backed by the value of technological developments and the cost of equipment that keeps the system running.

Advantages and disadvantages of cryptocurrency

Among its undeniable advantages are:

  • Availability of money at any time. The impossibility of freezing the account and withdrawing funds from the holder
  • The increasing complexity of cryptocurrency mining and the limited supply ensure that there is no inflation. Cryptocurrency is a deflationary financial instrument
  • Low fees for transfers to anywhere in the world, due to the absence of intermediaries.

The disadvantages include:

  • Inability to cancel a payment. The absence of a common trade organizer, of course, introduces a tangible destabilization in the credibility of the cryptocurrency.
  • Volatility. This is what makes it an extremely speculative instrument with an unstable exchange rate, which can both increase and fall in price in a short period of time.

There are also some controversial points. Such as:

  • Decentralization. Neither individuals nor any state bodies can control the issue and movement of cryptocurrencies – this is a programmed process.
  • Anonymity. This increases the attractiveness of cryptocurrencies in terms of taxation, leaving the shadow economy. And yet, if we consider this issue from a different angle, it becomes obvious that there is an increase in the risks of losing currency during the bankruptcy of electronic exchanges or as a result of a hacker attack. And, of course, this significantly complicates the regulation of the economy at the state level.

Books about cryptocurrency

For those who wish to delve deeper into the topic of cryptocurrencies, we have made a small selection of books dedicated to cryptocurrencies and the technologies underlying them:

  1. Nathaniel Popper – “Digital Gold: The Incredible Story of Bitcoin”
  2. Alex Fork – Bitcoin. More than money”
  3. Maxim Levin – “PGP: Coding and encryption of information with a public key.”
  4. William Moguiar – Blockchain for Business
  5. Don and Alex Tapscott – The Blockchain Revolution
  6. Paul Vigna and Michael J. Casey – “The Cryptocurrency Era: How Bitcoin and Blockchain Challenge the Principles of the World Economy”
  7. Roger Wottenhofer – Blockchain Science
  8. Yvonne Jenkins – Bitcoin: Money Without Borders
  9. Melanie Swan – Blockchain. Scheme of the new economy»
  10. Nick Bilton – Cybercriminal #1. The story of the creator of the underground network empire”
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