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What Cryptocurrency Is and How Does it Work?

In the comments to two of my previous blogs, Is Lazur a Scam? and Is free-bcash a scam? I received quite a few comments on what cryptocurrency is and how does it work. I present to you here a brief primer on this subject so that you can participate in this market or at least be well-informed about it.

What Cryptocurrency Is and How Does it Work?

Cryptocurrency is a medium of exchange (like money) but that exists only in the digital world. You will never see or feel a bitcoin (the first and still foremost type of cryptocurrency). It relies on encryption, which makes the transaction secure. The decentralized control of each cryptocurrency works through distributed ledger technology, typically a block chain, that serves as a public financial transaction database. It is an alternative to cash, credit cards or cheques. It allows for you to be completely anonymous and you can send or receive it without going through a third party like a bank.

The most important feature of a cryptocurrency is that it is not controlled by any central authority: the decentralized nature of the block chain makes cryptocurrencies theoretically immune to the old ways of government control and interference. Cryptocurrencies can be sent directly between two parties via the use of private and public keys. These transfers can be done with minimal processing fees, allowing users to avoid the steep fees charged by traditional financial institutions.

The benefits of this is that you can send money back to your family without incurring hefty international fees if you’re working a different country. Merchants no longer have to worry about payment fraud or invalid checks because people can only spend what they have.

To describe the exact way that it works, Wikipedia explains, “The validity of each cryptocurrency’s coins is provided by a block chain. A block chain is a continuously growing list of records, called blocks, which are linked and secured using cryptography.[23][26] Each block typically contains a hash pointer as a link to a previous block,[26] a timestamp and transaction data.[27] By design, block chains are inherently resistant to modification of the data. It is “an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way”.[28] For use as a distributed ledger, a block chain is typically managed by a peer-to-peer network collectively adhering to a protocol for validating new blocks. Once recorded, the data in any given block cannot be altered retroactively without the alteration of all subsequent blocks, which requires collusion of the network majority.”

Cryptocurrency Mining

Put simply, mining is the process of validating other people’s transactions with a computer and then adding them to the long, public list of all transactions known as the block chain. In exchange, people get rewarded with cryptocurrency. This is usually done on huge computer “farms” that takes vast amounts of electricity to keep them running and, especially, cooled from the heat they generate. As you can imagine, this isn’t something that most of us would want to start from home.

By Marco Krohn – Own work, CC BY-SA 4.0, https://commons.wikimedia.org/w/index.php?curid=40495567

Cloud Mining

The types of cryptocurrency mining that I review are all cloud miners. Cloud Mining is the process of bitcoin mining that uses a remote datacentre with shared processing power. This type of cloud mining enables all of us to mine bitcoins (or other types of cryptocurrency) without having to manage the hardware. It simply uses software on our computer and, if the computer is on anyways, does not carry any extra electrical costs.

Although Bitcoins were the first created and still the most commonly used today, there are other types of cryptocurrencies like: Etherium, Litecoin, Doge, XRP, Stellar Lumens and others.

Cryptocurrency Wallets

In order to use cryptocurrencey, you will need a virtual wallet to put it in. This is basically a software program where Bitcoins are stored and traded. To be more technically accurate, however, bitcoin wallets keep a secret piece of data called a private key which is used to sign transactions, providing mathematical proof that they have come from the owner of the wallet. The electronic signature also prevents the transaction from being altered by anybody once it has been issued.

There are many bitcoin wallets out there and it would take pages and pages to describe them all. I have found that the two most commonly used are LocalBitcoins and Coinbase and I will describe both below:

LocalBitcoins

This is one of the oldest exchanges and is available in nearly every country in the world. LocalBitcoins is one of the most private ways to purchase bitcoins and it allows you to buy bitcoins with many payment methods (including PayPal). LocalBitcoins itself does not impose any limits on its users. Users are free to decide on their own prices and limits. Unlike other exchanges, which require ID verification and personal information, Local Bitcoins allows you to buy bitcoin without connecting your name to the bitcoin you’re buying. There is a wide range of payment methods available and users are free to buy and sell using any payment method.

Although LocalBitcoins is private and does not require I.D. verification or any personal information besides an email address to sign up. Most buyers or sellers will request identification before making a trade. Trades generally take under an hour to finalize (which is very fast) and I have found 15-30 minutes to be more on average as I use this exchange myself. Unfortunately, however, it ONLY trades in bitcoins and not any of the other cryptocurrencies and the funds in your wallet are not insured.

Click here to get a LocalBitcoins wallet.  Its free.

Coinbase

This is also an extremely popular and proven exchange. Unlike LocalBitcoins, it trades not only in Bitcoins but also in Etherium, Litecoin, XRP and Stellar Lumens. Like LocalBitcoins, customers can buy bitcoin with a connected bank account, debit card, SEPA transfer, Interac Online, and many more payment methods (byt not PayPal).  Although it is an easy way for new users to buy bitcoin, it may track how they spend their bitcoin. Although the range of payment methods are not as wide as LocalBitcoins, a huge plus is that Cash held in Coinbase wallets are FDIC insured up to $250,000. Unfortunately, it can also take days for your trade to go through, depending on your method of payment and country of origin.

Click here to get a Coinbase wallet.  Its free.

Conclusion

I hope that this blog de-mystifies crypocurrencies for you!  Please make sure you leave any comments and questions below, however, so that I can further update and improve it.  I always love to hear from my readers!

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Darlene Thompson

After being sucked into various on-line scams, especially those involving bitcoins, I have dedicated this site and my work herein to ensure that nobody falls into the traps that I have and to assist people in making REAL money on-line, from home. After all, if you can dream it you CAN do it and I'm here to help!

32 Comments

  1. Hi Darlene, my friend has a business about cryptocurrencies. Although she explain it to me many times, I still don’t get it. How can there be an imaginary value you can pay with.. 

    But I know lots of people used to mine for BitCoin and they also say cryptocurrencies are safer than having money in the bank because they are centalised or something like that.

    Great post,

    Katya

    • Hiya Katya – your friend is right!  LOL  Thank you so much for your comment!

  2. Hello Darlene, Tha k you for taking time to teach us about crypto currency. I have really been interested in this whole Bitcoin thing because people talk about it all the time and I wonder what all the hype is about but now seeing the amount of security that goes into transactions, it’s actually worth the hype. Is there any platform online that gives Bitcoin on registration because I see alot of platforms that have this claim, how true is it?

    • Hi Henderson,

      Some do give a tiny amount when you sign up but I would suggest sticking to one of the older, tried and true ones that I have listed.  OR google the platform of your choice with, “Is xyz a scam? and get more info before diving in.  There are some scam bitcoin wallets out there.  If you are talking about cloud mining platforms then it truly is a minefield and you should definitely google it!

      Have fun but don’t give them your money unless you’ve really tested it out and gotten payment FIRST.

  3. Thank you for doing a breakdown of what cryptocurrency is all about and I really appreciate you for that. I learnt of how lucrative bitcoin mining can be though I’ve not really invest in it. I’m always skeptical when it comes to the issue of cryptocurrency due to the volatility in their prices and irregularities that mars them. However, reading through this post, I have gained the basic knowledge of what cryptocurrency entails and what or where to get trading started.

  4. Hi Darlene, this is a fascinating post.  I keep hearing and reading about cryptocurrencies but I have never seen it in a real-world example.  You stated it is used by PayPal.  I will need to look at my PayPal account and see if it’s available.  

    What is the process for using cryptocurrency?  How does one go about signing up to use this payment type?

    Thanks for sharing!

    Cal

    • Hiya Cal,

      First of all, you won’t find it in Paypal.  First you need a wallet and I’ve recommended two, however, only LocalBitcoins uses Paypal.  The wallet will let you buy, sell and send your bitcoins.  Just click on the title of LocalBitcoins and it will take you right there!

      Have a great day!

  5. I have invested in bitcoin in the last 2 years as well and some alt coins. I love the principle of the blockchain technology and beleive like many that it will change the world again as the internet has done. But it will take it to another level. So when I get the opportunity to learn more about cryptocurrency and the blockchain I get excited for everyone although not everyone gets it yet.  I am particularly interested in knowing more about LocalBitcoins as it is the first time I have heard of them – I like the fact that one can use PayPal as a method of payment giving more people around the world access to cryptocurrencies from their phones. Excellent in my books! Thanks again.

    • Thank  you for your comments, Rina!  Yes, LocalBitcoins is definitely the more flexible and private of the two.  I’ve used it for years.

  6. This is a very good post, you have given a vivid explanation of what the crypto currency world is all about. I use the local Bitcoin wallet to make transactions mostly because it accepts PayPal and its very effective. Crypto currency is really secure and ideal for sending money across countries. Very thorough and interesting post here. 

    Regards Henderson

  7. spot on overview of cryptocurrency you have given here through this well written post. I’m looking into investing in the cryptocurrency and I decided to understand the rudiments of what I want to invest in rather than just making a blind investment and I must say, you have done a great job of demystifying the concept of cryptocurrency to me. However, I would like to know if there is a connection between bitcoin and all other cryptocurrencies. Since bitcoin is always fluctuating, does it affect other coins too?

    • Hiya Stepho,

      Actually, each cryptocurrency is its OWN currency and fluctuates at its own rate – kind of like how an individual country’s currency will fluctuate.

      Thank you for your comment!

  8. Cryptocurrency has always scared me as I have never really understood what it is all about. I know it is an online currency but how do you get free bitcoins, or do you have to pay real money to get them first then start trading with them?

    I would be to afraid of paying for something that I wouldn’t really have possession of or maybe even lose my hard earned cash altogether

    • Hi Matthew,

      You have to pay real money to get them.  Its like, as a Canadian, if I wanted US currency, I would have to go to my bank and purchase it.  Same deal, really.  If you think of it though, how often do you handle cash?  We do so much on-line these days through our banks that not many of us carry wads of cash around.  This is similar.  Its still in your cryptocurrency wallet, like your money is in your bank account.

      Hope this helps and have a great day!

  9. Thank you so much for this article. You put this very technical process into simple terms. I am very interested in the difference between the localbitcoin and the coinbase. It was also helpful to learn more about the wallet and its purpose. Definitely, cryptocurrency is the wave of the future. Which is more common: the localbiocoin or the coinbase?

    • Hi Myra!

      I personally prefer LocalBitcoin because of its speed. Coinbase advertises ease of use but if I want to buy bitcoins, I generally want/need them right away and I’m just not willing to wait the 4 days that Coinbase can take. Coinbase has its other advantages, though, as pointed out in the article. These two are the top two that are used and both have proven track records, so really the choice is yours!

      All my best to you!

  10. Great post on cryptocurrency. I dabbled a little bit with trying to set up cryptocurrency account, but it was right at the time when Bitcoin tanked, and I kind of drifted away from it for a while. Cryptocurrency to me is an interesting concept. Thank you for pointing out all the background info on cryptos. It’s important to understand that it’s not governed by a central authority. Wallets are also an important thing to understand. I think Coinbase is one exchange that I was interested in initially. Maybe I’ll give it another chance by checking out your links here, thank you!

  11. I appreciate your article on cryptocurrency and how they work.  Very informing and comprehensive article.  My question is about how people get scammed?  Since the title of the website deals with scams and being a retired senior citizen I have already been the target of scammers.  It seems so prevalent anymore and especially with something a person might not understand very well.

    You did a great job of explaining the positives about it but I was actually expecting to read something negative.  If I were ever to try it I would be like you and start with something very small like $5 or $10.  

    You are kind of making it sound something like stock market with fluctuating value but also like a savings account at somewhere around 7%.  In my day that is what savings accounts in a bank would pay and if you wanted to get risky and try for 12% in stock market you also could lose most of it though,  

    At my age I just have to play it safe so it’s best to stick with something I understand even though you explained this very well and I do agree that it is here to stay.  For me investing in the blockchain technology companies with a small amount might be a better way to be in this market.

    Doug

    • Hiya Doug,

      Thank you so much for the comment.  A few months ago I was in desperate financial straights and got sucked in by a couple of scams.  My advice to you is to start with those sites that are free or VERY low cost (like $5 or $10) and see how it goes.  If things start going off the rails and they start asking for more or if you cannot receive payment as per their stated terms then leave the site and NEVER go back.  NEVER let them give you a song and dance as to why they need more of your money.  I got nailed by another site called Qashway Cloud (TOTAL SCAM) that way.

      So, start small, gain confidence in both the process and the site before you start pouring money in.

      Yes, cryptocurrency fluctuates VERY much like the stock market or, more precisely, money markets.

      Have a great day!

  12. Hi, Darlene and I want to add my thanks for this information.  I have read several posts over the last few months about bitcoin and other cryptocurrencies and I think I’m starting to get a better grasp, be it limited, on how this stuff works.

    A little more info on the mining aspect of it would help me understand more, I think.  That part still sounds like Greek to me and the cost of bitcoins is quite a way up there as well.  Can one start by just spending a few dollars at a time?

    One thing I do like about these currencies is that fact that we can avoid those steep user fees, (unlike the exchange rate between the US dollar and the Canadian dollar; YIKES!!).  Transferring money between family members without incurring hefty international fees is also something I like.

    As I said, I’m understanding a little better? But… there’s still some confusion.  I wasn’t born with a techie mind 🙁

    Learning,

    Wayne

     

    • Hiya Wayne,

      I will add more to the article on the mining aspect.  Thank you for your comment as I use comments like this to add to or improve my blog posts.  Doing your OWN mining (see the picture with the huge mining farm) is completely beyond the reach of 99% of us and totally not worth it.  However, by using cloud mining platforms, you are basically using your computer to either do some of the processing for them (in a very small way) or investing in their activities and getting a small cut.  I would start out by spending NOTHING on some of the free mining sites until you get some confidence.  Check out my article on free-bcash.com for a way to do this.

      Thank you for the excellent suggestions!

  13. Thank you for this very informative article. I have heard and read about crypto-currency and block chain but never exactly understood what it was all about. I always felt as though it may be a scam but it doesn’t look that way. It is comforting to know that there are security measures in place because I am sure these types of transactions are only going to get more popular as the technology develops. Thanks for breaking it down for us. 

  14. Hi Darlene, there’s never a better way to write when you are doing it from what you’ve experienced. This is some extensive work that you have put on there. I have fallen victim to scams on the internet. I never endeavored to do any research on them especially with bitcoin and this cryptocurrency thing. Thanks to you i think i have a better understanding great stuff keep it up.

  15. Cryptocurrency is a virtual money that are stored inside a decentralized virtual bank(block chain wallet) that can offer end to end transaction without middleman intervention. Cryprocurrency happened to be my second online business after freelance writing. It requires alot of knowledge in accurate prediction so as not to run into losses. Cryprocurrency is real and it just in a matter of time when it will be a widely used coin,lols. But to be sincere, I have made alot of profit from this crypto world before it crashed down in early last year. This is just to reveal how true it is for someone that doesn’t believe it exist. 

     

    • Thank you very kindly, Stella, for your insightful and expert comment!

  16. Hi,
    It’s a fantastic article written by Darlene Thompson. I knew a new concept from this article which is about cryptocurrency. Where cryptocurrency is a medium of exchange like money exists in the digital world. It has some fantastic features like cryptocurrency is that it is not controlled by any central authority as well as I can send money back to my family without incurring hefty international fees if I’m working a different country which is very useful to me. Bitcoin is also an attractive topic for me.l would like to recommend everyone to know about cryptocurrency.

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