How Do Cryptocurrency Markets Work?

April 26th, 2018

Cryptocurrency is a decentralized, encrypted digital currency that can be transferred between peers through a process called “mining”. Cryptocurrencies like Bitcoin, work in a simplified process. Here are some of the important things about cryptocurrencies that you need to know:

Public Ledgers

From the start of the cryptocurrency creation, to confirmed transactions, everything is stored in a public ledger. All identities are encrypted. The system uses a special cryptographic technique to ensure that the recordkeeping process is legitimate. All new transactions can also be checked to ensure that the transaction uses coins owned by the spender.

Transactions

It’s all about transferring funds between two digital wallets. Once the transaction gets submitted to the public ledger, it waits for confirmation. This process may take a bit of time. Mining confirms the transaction and then adds it to the public ledger.

Mining

Mining is the confirmation of transactions by adding it to a public ledger. To add a transaction to the public ledger, a miner needs to solve a complex mathematical problem. Mining is open and it can be confirmed by anyone. The first miner who solves the puzzle gets digital currency as reward. The mining process gives value to the digital coins and it is known as a “proof of work” system.

Anatomy of Digital Currency

There are some exceptions to the rule, but some important features make this digital currency different from traditional systems:

Adaptive Scaling: Means that digital currencies are built with measures to ensure that it will work perfectly in both small, as well as, large scales. There are other measures included in the digital currencies to allow adaptive scaling, such as reducing the reward for mining and limiting the supply over time to create scarcity.

Cryptographic: A special technique of cryptography is used by digital currencies to control the creation of new digital coins and to verify the transaction.

Decentralized: All currencies that are in circulation are controlled by a central bank or government so that its creation can be regulated by third parties. Digital currency creation and all its transactions are open source; it relies on only a peer to peer network. No third party or entity can affect the digital currency.

Digital: Most traditional forms of currencies are defined as a physical object, but digital currencies are all digital, you can’t find any physical form of it. Digital currencies are stored in wallets digitally and it can be transferred from one account to another account from digital wallets. In this digital currency system, no physical objects exist.

Open Source: Digital currencies are generally open source. This means developers can create APIs without the need of paying any fee and almost anyone can join or use the network.

Proof of work: Most digital currencies use the proof of work system. It is a system that uses a computations puzzle to limit digital currency mining. This process is quite similar to solving “captcha” which requires specialized mining devices and a lot of computing power.

Pseudonymity: Digital currency owners keep their money in encrypted digital wallets. Account holder’s identification is stored within an encrypted address which they have control of, it is not something attached to an individual’s identity. The connection of digital currency and its owner is pseudonymous, rather anonymous.

Value: For any digital currency to be an effective currency, it must have a value. Actual gold is represented by the US dollar. Gold is scarce, hence it needs to be mined and refined, its scarcity gave this precious metal a value, which in turn gave the US dollar a value.

Digital currencies work similarly. Digital coins are generated by miners. Miners are the individuals who run the programs on specialized hardware for the purpose of solving complex mathematical problems. The work of mining gives it a value, scarcity of coins and its demand causes the value to fluctuate.

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