Cryptocurrency Explained: How does it actually work? Guide

Cryptocurrency, often referred to as crypto, represents any form of currency that exists digitally or virtually, utilizing cryptography to secure transactions. Instead of relying on a centralized issuing or regulating authority, cryptocurrencies use a decentralized system for recording transactions and issuing new units. BTCC’s Crypto Academy provides valuable insights into this emerging field, serving as the basis for this article.

Can Cryptocurrency Revolutionize Finance?
Cryptocurrency: How does it actually work?
What Purchases Can Be Made Using Cryptocurrency?
How to Spot and Avoid Cryptocurrency Fraud and Scams?
Is Crypto Safe? What You Need to Know

Can Cryptocurrency Revolutionize Finance?

Cryptocurrency revolutionizes payments as a digital system, eliminating the need for banks in transaction verification. Its peer-to-peer nature allows individuals across the globe to seamlessly send and receive funds. Unlike traditional, physical currency, crypto payments are solely digital entries in an online database, detailing each transaction. Transactions, when made, are logged in a transparent public ledger, while the currency is securely stored in digital wallets. The name ‘cryptocurrency’ stems from its use of encryption technology to authenticate transactions, involving complex coding in data storage and transfer between wallets and ledgers. This encryption ensures utmost security. Bitcoin, launched in 2009, stands as the original and most recognized cryptocurrency today.
Cryptocurrencies have sparked significant interest due to their profit potential in trading, with speculators often pushing prices skyward, making the market even more appealing to investors seeking high returns.

Cryptocurrency: How does it actually work?

Cryptocurrencies function on a distributed public ledger known as the blockchain, which serves as a comprehensive record of all transactions, constantly updated and maintained by currency holders. The creation of cryptocurrency units occurs through a process called mining, involving the use of computational power to solve complex mathematical problems that generate coins. Users also have the option to purchase these currencies from brokers and securely store and manage them using cryptographic wallets. Ownership of cryptocurrency doesn’t entail possession of any tangible asset; rather, it represents a key that enables the transfer of a record or unit of measurement from one individual to another, bypassing the need for a trusted third party. Despite Bitcoin’s existence since 2009, cryptocurrencies and blockchain technology applications are still emerging in financial terms, with more use cases anticipated in the future. Eventually, transactions involving bonds, stocks, and other financial assets could potentially be traded using this technology.

What Purchases Can Be Made Using Cryptocurrency?

While Bitcoin was initially envisioned as a medium for everyday transactions, from buying coffee to purchasing real estate, this hasn’t fully come to fruition. However, the number of institutions embracing cryptocurrencies is steadily increasing. Although large transactions using Bitcoin are still uncommon, a diverse range of products can be purchased with crypto on e-commerce platforms. Here are a few examples of what you can buy with digital currencies today.

Technology and e-commerce sites: Several companies selling tech products accept crypto on their websites, including newegg.com, AT&T, and Microsoft. Additionally, Overstock, an e-commerce platform, was one of the first to accept Bitcoin, and Shopify, Rakuten, and Home Depot also accept it.
Luxury goods: Luxury retailers like Bitdials offer high-end watches such as Rolex and Patek Philippe in exchange for Bitcoin.
Cars: Car dealers, ranging from mass-market brands to high-end luxury dealers, have started accepting cryptocurrency as a form of payment.
Insurance: Swiss insurer AXA announced in April 2021 that it began accepting Bitcoin for all its insurance lines, except life insurance due to regulatory issues. Premier Shield Insurance, offering home and auto policies in the US, also accepts Bitcoin for premium payments.

In the US, if you’re shopping at a retailer that doesn’t directly accept cryptocurrency, there’s a solution: crypto debit cards. These cards, like BitPay, let you use your crypto holdings to make purchases, bridging the gap between digital assets and real-world spending. It’s a seamless way to integrate crypto into your daily life.

How to Spot and Avoid Cryptocurrency Fraud and Scams?

Cryptocurrency scams are increasingly common, with various types emerging. Be cautious and informed to avoid falling victim to these crimes.

Fake Websites: These are bogus sites loaded with fake testimonials and crypto jargon, promising massive, guaranteed returns as long as you keep investing.
Virtual Ponzi Schemes: Criminals in the cryptocurrency world promote non-existent investment opportunities in digital currencies. They create an illusion of huge returns by paying off old investors with funds from new investors. One such notable scam, BitClub Network, raised over $700 million before its perpetrators were charged in December 2019.
“Celebrity” Endorsements: Scammers often pose online as billionaires or famous figures, promising to multiply investments in a virtual currency, but instead steal whatever is sent to them. They might also spread rumors via messaging apps or chat rooms that a renowned business person is backing a specific cryptocurrency. After encouraging investors to buy and driving up the price, these scammers sell their own stake, causing the currency’s value to plummet.
Romance Scams: The FBI has warned about a growing trend of online dating scams where fraudsters convince people they meet on dating apps or social media to invest or trade in virtual currencies. In just the first seven months of 2021, the FBI’s Internet Crime Complaint Center received over 1,800 reports of romance scams involving cryptocurrencies, with reported losses totaling $133 million.

Cryptocurrency fraud is a widespread issue, with scammers posing as legitimate virtual currency traders or setting up bogus exchanges. These criminals lure unsuspecting individuals into giving them money. Another common crypto scam involves fraudulent sales pitches for individual retirement accounts in cryptocurrencies. Beyond these deceptive practices, there’s also the straightforward cryptocurrency hacking, where thieves break into digital wallets to steal virtual currency. In this digital landscape, it’s crucial to stay vigilant against such scams and protect your hard-earned assets.

Is Crypto Safe? What You Need to Know

Cryptocurrencies are typically designed using blockchain technology, ensuring transaction security. This technology records transactions into “blocks” and time-stamps them, creating a digital ledger that’s difficult to tamper with. To further enhance security, transactions often require a two-factor authentication process, such as entering a username and password, followed by an authentication code sent to your personal cell phone. However, despite these robust security measures, cryptocurrencies are not completely hack-proof. High-dollar hacks have caused significant losses for cryptocurrency startups, with Coincheck and BitGrail suffering major breaches of $534 million and $195 million respectively, ranking as two of the biggest cryptocurrency hacks of 2018.
Cryptocurrency investments offer significant potential for gains but also carry the risk of big losses due to value swings driven entirely by supply and demand. Unlike traditional financial products like stocks, bonds, and mutual funds, these investments have far less regulatory protection. Investors should be prepared for market volatility and understand the unique risks associated with virtual currencies.