What is Cryptocurrency and How Does it Work?

Hey there! You’ve probably heard about  cryptocurrency before. If you haven’t, you might know names like Bitcoin,  Ethereum, Solana, or Dogecoin.

Yep, those are cryptocurrencies. A lot of people buy  them as investments, hoping their value will go up. Some also use them as a form of money to buy  and sell things.

You might have seen how the price of cryptocurrency started really low and then  shot up. Some people made a lot of money, but others lost money too. That’s why some people are  still unsure or even afraid of cryptocurrencies.

So, you might be wondering: what exactly is  cryptocurrency? How does it work? And what do terms like “blockchain” and “mining” mean?

In  this video, we’ll break down everything you need to know about cryptocurrency and how it works. Section 1. What is a cryptocurrency?

The word cryptocurrency comes from the words crypto  and currency. “Crypto” means hidden or secret, referring to cryptography, a way to hide  information to keep it safe. "Currency" just means money.

So, cryptocurrency is digital  money that is secured by cryptography and exchanged through a computer network. Because  it's digital, cryptocurrency has no physical form. You might have seen pictures of Bitcoin and  thought this is what cryptocurrency looks like, but it’s not.

Cryptocurrency has no physical form  as it’s all online. You can send it, receive it, and use it to buy things, just like regular money. Now, you might ask, "What’s the difference between cryptocurrency and the money in my digital wallet,  like U.

S. Dollars or Euros in my mobile banking app? " Well, traditional currencies like the U.

S.  Dollar and Euro are controlled by central banks. To send those currencies, you need a bank  or payment service.

But with cryptocurrency, you can send money directly to your friend  without needing a middleman like a bank. But wait, why doesn't cryptocurrency need a  bank? Here’s a bit of history.

Cryptocurrency’s modern story began with Bitcoin, which was  created in 2009 by an anonymous person known as Satoshi Nakamoto. He seems Japanese and you  will see this Japanese guy face that most people assuming is him because his name and background  seems true, but actually nobody knows who he is. Unlike traditional currencies like U.

S. Dollar  and Euro that are printed and controlled by central banks or governments, cryptocurrency  was created to be free from control. Some people didn’t like the idea of governments controlling  money, so they made cryptocurrency as a way for people to exchange money directly with each other  without needing a bank or any central authority.

So, cryptocurrency is actually money?  And not investment like stock? Well yes, cryptocurrency was actually made to be used as  money, like the U.

S. Dollar – for buying, selling, sending, and receiving money. Over time, however,  cryptocurrency became more like an investment.

In some countries, like El Salvador, people still  use cryptocurrency to buy things in everyday life, but most people use it to try to grow their money.  For example, you might buy Bitcoin when it’s worth $10,000 and sell it when it’s worth $60,000 to  make a profit. Most people don’t want to use cryptocurrency as currency due to its volatility,  like buying a coffee for 0.

001 Bitcoin today, but tomorrow you might need to pay 0. 002 Bitcoin  for the same coffee because of its fast price changes, making it unpredictable. This made most  people still prefer to use traditional currency as money and cryptocurrency as investment.

Cryptocurrency started with Bitcoin, but now there are many other coins like Ethereum,  Tether, and even meme coins. So, that’s a simple definition and a bit of history about  cryptocurrency. Let’s move on to the next section.

Section 2. How does a cryptocurrency work?  Cryptocurrency works using a technology called blockchain.

So, what is a blockchain? Imagine  Bob has a notebook where every transaction is written down. Once a transaction is written,  it’s locked in and can’t be erased or changed.

Now not only Bob has the notebook, but everyone  in this blockchain network has a copy, so no one can cheat or mess with it. If Bob hacks and  changes the notebook, it will be obvious as it’s different from other’s notebook and that notebook  will be invalid. Each page in the notebook is a block in blockchain, and when one block is full,  a new one is added to the chain.

That’s why it’s called blockchain which is a chain of blocks! So, how does cryptocurrency use blockchain technology? When a new transaction is made,  the transaction details are sent to a network of computers around the world that are using  the blockchain.

These computers then check if the transaction is valid by solving a very  hard puzzle or equation. Once they solve the puzzle and confirm that the transaction is  correct, the information is added to several blocks. These blocks are linked together,  making the data permanent and unchangeable.

Once that’s done, the transaction is successful. In regular transactions, like sending U. S.

Dollars or Euros, a bank validates and processes  the transaction. But with cryptocurrency, it’s these computers around the world that  validate it by solving hard puzzles and equations. Now, you might wonder, who are these  computers solving the puzzles?

Well, people who solve puzzles and validate the  transaction are called miners. Why they do that? When they solve the puzzles or equations,  the cryptocurrency system rewards them with new coins.

This is called mining, and based from  the system called proof-of-work. That’s why you may have heard about Bitcoin miners using  powerful computers, because they want to solve as many puzzles as they can. The more puzzles  they solve, the more cryptocurrency they earn.

Not all cryptocurrencies are mined  this way. Some, like Ethereum now, use a different method called proof-of-stake,  which I will explain in another video. Section 3.

Cryptocurrency as an investment. Now,  here’s the juiciest part, is cryptocurrency a good investment? Well, the answer depends.

Some people  have made a lot of money by buying crypto when the price was low and selling it when the price  went up. For example, if you bought Bitcoin in 2016 when it was around $500 per coin, and sold it  in 2024 when it hit $60,000, you would have made a 13,000% return! That kind of return sounds  like a dream to many professional investors.

But, like any investment, big return also means  big risk. Cryptocurrency is very volatile, meaning its price can go up and down very quickly.  For example, if you bought Bitcoin at $45,000 in May 2022, then saw it drop to $16,000 by December  2022, if you sold it, you would have lost 65% of your money.

Then, it rose again to $70,000 in  2024. This doesn’t just happen with Bitcoin, it happens with most cryptocurrencies  because their prices are so unstable. So, you might ask, "Why is cryptocurrency  so volatile?

" Crypto volatility comes from several factors, including supply  and demand, market sentiment, regulation changes, technological development,  market manipulation, and even more. However, the biggest drivers are speculation and media hype. Many investors buy cryptocurrencies hoping to make quick profits.

They often chase trends and  popular narratives without fully understanding the asset. For example, when the media announced  that ProShares released the first Bitcoin ETF, and the price of Bitcoin soared to $65,000  as excitement grew among investors. However, if investors start to doubt a  cryptocurrency’s future, they may panic and sell off their holdings, leading to sharp price  drops.

For instance, when China announced a ban on cryptocurrency, the price of Bitcoin dropped  to $29,000 as uncertainty about its future spread. And that’s why cryptocurrency  market is hard to predict. Section 4.

Another terms in cryptocurrency.  We have talked about blockchain and mining, now let’s go over some other common terms that  you may see a lot in cryptocurrency. First is Bitcoin.

Bitcoin is the first and most well-known  cryptocurrency. It’s often called digital gold because it was the original and is still the  most valuable. Bitcoin’s supply is limited, which can make it more valuable over time.

Second is Altcoin. An altcoin, short for “alternative coin,” refers to any  cryptocurrency that’s not Bitcoin. Examples include Ethereum, Solana, and more. 

There’s also a type of altcoin called meme coins, like Dogecoin or Shiba Inu. So, altcoins  are all cryptocurrencies other than Bitcoin. Third is a wallet.

A cryptocurrency wallet  is different from a regular wallet that holds your cash. A crypto wallet doesn’t actually store  your cryptocurrency. Why?

Because cryptocurrency is always on the blockchain. What a crypto  wallet does is store your public and private keys. There are two types of wallets: hot wallets  and cold wallets.

Hot wallets store keys online, making them easily accessible, but they are also  more vulnerable to hacking. On the other hand, cold wallets store keys offline, like on  a hard drive. This type is safer but less convenient.

Also, if you lose your hard drive,  you could lose your crypto too! For example, a guy named James Howells had his ex accidentally  throw away his hard drive that contained private key to 8,000 Bitcoins. He’s still trying to find  it in the landfill to this day.

What a poor guy! Fourth is keys. As I mentioned before, a  cryptocurrency wallet contains two types of keys: the private key and the public key.

The  public key is like your wallet’s address, people can use it to send you cryptocurrency.  While the private key is more like a password, it proves that you own the cryptocurrency in your  wallet. You can share your public key to anyone but you must keep your private key secret.

Fifth is Fork. A fork happens when a cryptocurrency splits into two versions. This  happens when the community disagrees on how the cryptocurrency should be run or improved.

For  example, Bitcoin forked to create Bitcoin Cash because some wanted to make transactions faster by  increasing the Bitcoin’s block size, while others disagreed. Those who agreed with the changes  moved to Bitcoin Cash, while those who preferred the original approach stayed with Bitcoin. Section 5.

Pros and cons of cryptocurrency. Of course, as you know cryptocurrency has its  pros and cons. Let’s talk about the advantages of cryptocurrency.

The first advantage is  decentralization. This means no single authority, like a central bank, can control cryptocurrency.  Unlike traditional currency, the government can’t control or set the value of cryptocurrency.

The second advantage is accessibility. Cryptocurrencies can give financial access  to people without a bank. If you need to go to the bank to register your account,  wait a long line and do lots of paperwork, cryptocurrency make it much simpler.

Anyone  with an internet connection can participate without any complicated application process. The third advantage is that cryptocurrency is flexible. You can send money to anyone, anywhere,  anytime.

Crypto operates 24/7 without any breaks. You can transfer money quickly across the world  without needing a bank, and with much lower fees. The fourth advantage is privacy.

Most  cryptocurrencies offer more privacy than traditional banks because your transaction  data is encrypted and harder to trace. However, this data is still stored on a public  blockchain, meaning it’s not completely secret as some believe. Others, especially governments  and IRS, can still track your transactions if they investigate deeply enough, although it’s  more difficult.

While extra privacy is good, it can also cause problems, which we’ll discuss soon. The fifth advantage is, of course, the potential for high returns. Many people invest in crypto  for the chance of making big profits.

Coins like Bitcoin and Ethereum have increased in value  by hundreds of percent per year. Imagine buying Dogecoin and getting a 600% return in just three  months! Not even Warren Buffett can beat that.

But of course, this isn’t all good, because  now we’ll move on to the next part, which is. The disadvantages of cryptocurrency.  The first and biggest disadvantage is volatility as crypto prices can swing wildly. 

If you think stocks are like a roller coaster, then crypto is like that but much more intense.  For example, Dogecoin shot up in value and then dropped just as quickly in just 1 year. So,  you could be rich and poor in the same year.

The second disadvantage is illegal  transaction. As I mentioned earlier, cryptocurrency offers a lot of privacy. But this  same privacy makes it a hot spot for criminals who want to do illegal transactions or launder  their money.

Because cryptocurrency transactions are harder to trace, criminals use crypto to  move money and avoid detection by authorities. The third disadvantage is regulation uncertainty.  Since governments can’t control cryptocurrency, the government are not so happy with that, and  they will not just stand silent about that.

The government are still trying to figure out how  to regulate cryptocurrency. This could change how crypto is used in the future. In fact,  cryptocurrency regulation has become a hot topic in the 2024 U.

S. Presidential election. The fourth disadvantage is scams.

One of the schemes is the scammer will show you a fake crypto  website. Then they lure you to buy and invest in that cryptocurrency with fake promise return. In  the end, you can’t withdraw your money, leaving you stuck.

The other scheme is scammer might ask  you transfer some coins like the classic scam scheme, once you transferred any cryptocurrency  to the scammer, the crypto can’t be reversed. Why? We will talk about it in the next section.

The fifth disadvantage is lack of consumer protection. As I mentioned before, cryptocurrency  isn’t managed by any one person or institution. This can be a good thing, but it also means  that when something goes wrong, there’s no one to help.

If you have a problem with a normal USD  transaction, the bank can help you get your money back. But, as no one can control cryptocurrency,  so once you transferred your cryptocurrency to other, the transaction is irreversible. So, in conclusion, cryptocurrency offers exciting opportunities for those willing to learn  about its potential.

And then your next question, should you use cryptocurrency? The answer depends  on you. Remember!

Don’t rely solely on this video to decide! If you want to use cryptocurrency,  it’s important to do your research first, and don’t fall into FOMO by jumping in without  knowing what you’re doing. It's important to understand the risks before diving in!

If you want me to make other videos explaining these topics, please like and subscribe. Thanks for watching.