What is cryptocurrency?

We are increasingly hearing people and companies talk about cryptocurrencies. The popularity of cryptocurrencies has been rising for years, and more and more people are deciding to purchase cryptocurrencies. Before you decide to buy crypto, it may be wise to learn more about what you are actually buying.

What are cryptocurrencies and what can you use them for?
Cryptocurrency is a digital currency that can be used for making payments and as an investment. This currency uses blockchain technology, which makes cryptocurrencies decentralized. There is no central or authoritarian organization that controls and manages cryptocurrencies.

There are countless different types of cryptocurrencies, with Bitcoin (BTC) and Ethereum (ETH) being the most well-known and widely used. Each cryptocurrency operates differently. This is because each cryptocurrency employs a different technology. This technology can also be used for other purposes, which can make a cryptocurrency more valuable.

How do cryptocurrencies work?
A cryptocurrency operates through the blockchain. It is important to understand how the blockchain works in order to gain a better insight into how cryptocurrencies function.

Blockchains consist of a network of computers called nodes. The number of nodes present in a network can vary per blockchain. In a public blockchain, anyone can add a computer to the network and become a node. All these nodes have software installed that runs the blockchain.

When someone executes a transaction, it is sent to the entire blockchain network. The nodes in the network then process all transactions. Transactions that are incorrect, for example because the sender does not have enough cryptocurrency, are discarded. All approved transactions are combined with other transactions, and then this group is converted into a hash. What remains is called a ‘block’. Each block contains the hash of the previous block, creating a chain of blocks. This is where the term ‘blockchain’ comes from.

Cryptography
Cryptography is an important component of cryptocurrencies. Every user has a public key and a private key. These keys consist of a few characters and are stored in the crypto wallet. This is the place where cryptocurrencies are kept, comparable to a bank account.

The public key is publicly known and can be shared with others. The private key, on the other hand, is only known by the rightful owner and cannot be shared with others.

When you make a transaction (send cryptocurrency), you specify which cryptocurrency you want to send, how many coins you want to send, and who the recipient is. You provide the public key of the recipient. Then, you sign your own transaction with both your private and public keys. These keys together create a unique cryptographic outcome known as a digital signature.

This ensures that no one else but you can send your own cryptocurrencies. As long as no one else has your private key, no one can access your cryptocurrencies.

The recipient can only accept the transaction when they possess the correct private key. This key is linked to the public key, which is found in the transaction. Therefore, only the rightful recipient can accept the cryptocurrencies.

Decentralization
A key feature of cryptocurrencies is decentralization. Normally, central banks manage currencies. They determine whether new banknotes are printed, control all money flows, and ensure monetary policy. With cryptocurrencies, it is the nodes that manage the currency.

Users are no longer dependent on decisions made by authoritative parties. Instead, they can often even participate in decision-making within the governance of a cryptocurrency. Many cryptocurrencies operate as a DAO, which stands for Decentralized Autonomous Organization. A DAO is essentially an organizational form where governance is in the hands of all users. Everyone has an equal say in the decisions that need to be made, making cryptocurrencies created by and for the users.

What cryptocurrencies are available?
The number of cryptocurrencies is growing almost every day. It is becoming increasingly easier to create a cryptocurrency. Not every cryptocurrency is equally well-known or used as much as others. The following cryptocurrencies are the most well-known and can also be purchased through Knaken:

– Bitcoin (BTC);
– Dogecoin (DOGE);
– Ethereum (ETH);
– Ripple (XRP);
– Cardano (ADA);
– Solana (SOL);
– Litecoin (LTC);
– Tether (USDT).

How is the value of cryptocurrency determined?
Generally, it is known that cryptocurrencies can be highly volatile. This means that the value of cryptocurrencies can drop significantly but can also increase sharply. For example, it is not unusual for the value of a cryptocurrency to rise or fall by 30% within a day.

Such price changes almost never occur with fiat currencies or stocks. One of the reasons for this high volatility is that there is currently little to no regulation for cryptocurrencies. Additionally, the market is still young, making it more vulnerable to fluctuations.

The value of a cryptocurrency is determined by supply and demand. When demand increases relative to supply, the price of the cryptocurrency will also rise. Conversely, the opposite occurs. An increase in supply compared to demand will cause prices to fall.

Maximum supply of Bitcoin
Bitcoin has a maximum supply of 21 million coins. New coins are added daily, but once the 21 millionth coin is reached, no more new Bitcoins will enter circulation. This is why Bitcoin is often compared to gold, which also has a maximum supply. The scarcity surrounding Bitcoin can lead to a price increase over the long term, as supply will eventually only plateau while Bitcoin is increasingly accepted in more places, leading to an increase in demand.

The security of cryptocurrencies
Because crypto uses blockchain technology, this form of money is incredibly secure. However, hacks do occasionally occur, resulting in a significant number of cryptocurrencies being lost. The technology is secure, but it is still in its infancy. If developers make a mistake during programming, things can sometimes go wrong.

You largely control your own security. By using strong passwords, two-factor authentication (2FA), and hardware wallets, you can reduce the risk of losing your crypto.

Crypto is often said to be used for criminal purposes. This is certainly the case, but fiat currencies like the euro are also used for criminal purposes. The use of crypto by criminals is relatively much lower than that of fiat currencies. With regulation and legislation, criminal use is even decreasing further.

How and where can you buy cryptocurrency?
You can buy cryptocurrencies on a crypto exchange. This is a platform where cryptocurrencies are offered for sale. It is also possible to sell cryptocurrencies on a crypto exchange at the prevailing rate.

When you look for a crypto exchange, you’ll quickly find that there are plenty of options. However, it is wise to do some research on the exchange before deciding to use it for transactions. There can be considerable differences between crypto exchanges, which means that certain exchanges may be more cost-effective than others.

For example, there may be differences in the number of cryptocurrencies you can buy and sell, as well as different transaction fees for each exchange. The platform of the exchange may also be easier to use than that of another exchange, as some exchanges are focused on advanced crypto traders and therefore offer more features.

On Knaken’s crypto exchange, you can safely and quickly purchase cryptocurrencies. You can do this via the web or mobile application, and you can pay directly with iDEAL, bank transfer, or credit card. After you pay, the cryptocurrencies are immediately credited to your wallet.

Conclusion
Cryptocurrency is a digital currency that uses blockchain technology. This technology consists of a large network of computers that validate transactions of users. After validation, transactions are grouped into blocks. These blocks are linked together, creating a chain of blocks. That’s why this technology is called ‘blockchain’.

Anyone can use cryptocurrencies, but you only need a crypto wallet where the cryptocurrencies are stored. Through cryptography, only you can access your cryptocurrency, making crypto a very secure payment method. The buying and selling of cryptocurrencies is done on a crypto exchange, but it is also possible to send cryptocurrencies directly from your wallet to another wallet.

New cryptocurrencies are being created every day, and today there are already tens of thousands of cryptocurrencies. Some of these cryptocurrencies are used more than others, including Bitcoin, Ethereum, Cardano, Litecoin, and Ripple.