How do cryptocurrencies work

Here is how cryptocurrencies work

Cryptocurrencies use a series of state-of-the-art technologies, combining P2P services (peer to peer exchange) with cryptography.

From the users’ point of view, transactions are carried out from electronic wallets, by means of which they can send or receive Bitcoins or the cryptocurrency in question. The appearance of any of these digital wallets is that of a mobile application and it works in a very similar way to online banking, although without an intermediary body to control the transaction.

As for their “guts”, cryptocurrencies are encrypted files that work in a similar way to a bank account. Bitcoin (or other cryptocurrency) transactions are carried out when public codes match, which are related to the passwords (or cryptographic keys) created by the users. This transaction is then registered in Blockchain, which guarantees its security.

How are cryptocurrencies created?

In principle, anyone with sufficient programming knowledge can create a cryptocurrency from an existing one, as most cryptocurrencies are open source and can be downloaded and modified. You can also do this, in an easier way, through the platforms that exist to create cryptocurrencies, such as Wallet Builders.

But if what you want to do is get units from an existing cryptocurrency, the possibilities are twofold:

  • Manufacturing new Bitcoin or other cryptocurrency units through a process that is commonly referred to as “mining”. The problem is that the more Bitcoins you mine, the harder it is to get new Bitcoins, so you need, in most cases, special computers that are very powerful and consume a lot of energy. That’s why this process of generating Bitcoins is practically only done through server farms.
  • Accepting cryptocurrency as a method of payment for goods or services, by buying them from an exchange house, or buying them from someone. The number of sites that accept Bitcoins as a payment method is limited, and is changing over time, such as Microsoft or some Subway restaurants that now accept them. Other companies, such as Amazon, do not accept Bitcoin payments directly, but they do accept them through payment gateways that act as intermediaries, such as Bitrefill and Fold.

Are cryptocurrencies dangerous?

Cryptocurrency is a relatively recent technology that is being studied by experts and banks around the world. Generally speaking, the idea that this is a scam or a fraud, as many people believe, is ruled out for two reasons: firstly, because cryptocurrencies do not promise false returns and, secondly, because they have the Blockchain technology supporting them. Although it is true that they are not free from the stigma of volatility and fear of the unknown.

An example of the change in attitude towards cryptocurrencies over the years is that of the European Central Bank (ECB), which has gone from warning about cryptocurrencies, because of their volatility, the lack of legal protection and the lack of support from a public authority, to considering the creation of a digital currency.

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