How Do Bitcoin and Cryptocurrencies Work?

The invention of the internet has brought the world closer than anyone from earlier ages could have ever imagined. Between video calling, email and social media, communicating with someone who lives in another country or even on another continent has never been easier.

Unfortunately, sending money to other countries often feels much more difficult than it should be. Wouldn’t it be nice to be able to send money or make international payments as quickly and easily as sending an email? Thanks to the invention of cryptocurrency, that’s now possible.


How Cryptocurrencies Work

Cryptocurrencies have been described as “internet cash,” but technically speaking they are digital currencies that secure their networks using cryptography (complicated math problems that only computers can solve) and record all transactions in a database called a blockchain.

Unlike an ordinary database, a blockchain is distributed across thousands of computers rather than existing on a company server. Since the database doesn’t exist in one central place, hackers cannot break into it and create fake transactions.

The blockchain controls the creation of new coins and verifies that transactions are valid, which allows you to send payments directly to another person without the need for a government or bank to prevent someone from trying to introduce counterfeit coins to the network. Since blockchains aren’t controlled by a central authority figure, no one can control them, change them or shut them down, which is an important feature for people living under dictatorial governments.

Bitcoin, which was released in 2009 by a programmer or group of programmers operating under the pseudonym Satoshi Nakamoto, was the world’s first cryptocurrency. Nakamoto designed bitcoin as a system to facilitate person-to-person transactions over the internet — a sort of “digital cash.”

New coins are created through a process known as mining. “Miners” contribute computing power to the network — securing it against potential attacks and validating transactions — and receive coins as a reward. Concerned that most government-backed currencies would lose value due to inflation, Nakamoto restricted the number of bitcoins that will ever be created to 21 million; however, bitcoins are divisible, so it is possible to hold as little as one one-hundred-millionth of a bitcoin.

Coins are stored in software programs known as wallets. Unlike banks, cryptocurrency wallets give users full control of their money. This both a benefit and a responsibility, because if you lose access to your wallet and you do not have a backup, you will not be able to retrieve the money inside it.

Since Bitcoin’s release, hundreds of developers have modified the Bitcoin source code or used blockchain technology to release their own cryptocurrencies, known as altcoins. Most altcoins are unoriginal and do not survive for very long, but some have introduced innovative features such as increased privacy and the ability to write web applications that run on the cryptocurrency network.

Both bitcoin and altcoins can be acquired at cryptocurrency exchanges. Some exchanges, such as Coinbase, even allow you to purchase coins using your debit card or bank account.


How Cryptocurrencies Are Used

Cryptocurrencies can be used to make everyday purchases at a growing number of businesses, but they also have a myriad of other potential applications. Here are three ways you can use cryptocurrencies to accomplish tasks that conventional money can’t:

Send Payments Overseas Quickly & Cheaply

Because cryptocurrency networks are global, you can use bitcoin and other digital currencies to send payments overseas with ease, often at a fraction of the cost of wire transfers and currency conversion fees. Moreover, cryptocurrency transactions process in seconds or minutes, while many conventional overseas transactions can take days.

Write Smart Contracts

One of the most exciting uses for blockchain technology is the ability to write smart contracts. Smart contracts are self-executing computer programs that are programmed on top of a blockchain and enable the automation of a myriad of processes, including managing insurance contracts, loans, and even utility bills.

Many people also expect that smart contracts will be used to create censorship-resistant social media and journalism platforms. For users, these platforms will look a lot like Twitter, Facebook and other websites they frequent, but totalitarian governments will not be able to shut them down since they will not be controlled by a single company.

Secure Your Wealth

Many younger investors have begun turning to cryptocurrencies — bitcoin in particular — to secure their wealth during times of financial turmoil. Historically, precious metals such as gold and silver have served this function, but these commodities are heavy and not easy to transport. Cryptocurrency wallets, on the other hand, can be stored on a phone or flash drive and are consequently quite portable.


Clearly, these are valuable use cases, but cryptocurrency is still a relatively new invention, so it is likely that the most revolutionary applications of this technology haven’t even been discovered yet.