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How Does Cryptocurrency Work? What to Know Before Investing

August 10, 2024

Alyssa Towns photo by Alyssa Towns  /  August 10, 2024

How Does Cryptocurrency Work
<p>If you’ve heard of Bitcoin, Ethereum, or even Dogecoin, you’ve heard about cryptocurrencies.</p> <!--more--> <p>But do you understand how they work?&nbsp;</p> <div class="lh-featured-snippet"> <h2>How does cryptocurrency work?&nbsp;</h2> <p><span style="background-color: #ffffff;">Cryptocurrency is a digital or virtual currency that uses cryptography (secure communication techniques) and operates independently of a central governing authority. Cryptocurrencies rely on blockchain technology, or decentralized ledgers, to record and validate transactions between parties, which involves transferring cryptocurrencies between wallets.&nbsp;&nbsp;</span></p> </div> <p>Investors, traders, and institutional entities use <a href="https://www.g2.com/categories/cryptocurrency-exchanges" rel="noopener" target="_blank"><span>cryptocurrency exchanges</span></a> to begin investing in cryptocurrencies. They use these platforms to execute transactions, analyze market trends, and manage digital asset portfolios.</p> <a id="cryptocurrency-vs-traditional-currency" data-hs-anchor="true"></a> <h2>Cryptocurrency vs. traditional currency&nbsp;</h2> <p>Cryptocurrency and traditional currency are both mediums of exchange, but they differ significantly across many aspects, including their structure, control, and usage. Here’s a comparison of cryptocurrency and traditional currency.</p> <table style="border-collapse: collapse; table-layout: fixed; margin-left: auto; margin-right: auto; border: 1px solid #99acc2;"> <tbody> <tr> <td style="border: 1pt solid #000000;">&nbsp;</td> <td style="border: 1pt solid #000000;"> <p style="text-align: center;"><strong>Cryptocurrency&nbsp;</strong></p> </td> <td style="border: 1pt solid #000000;"> <p style="text-align: center;"><strong>Traditional currency&nbsp;</strong></p> </td> </tr> <tr> <td style="border: 1pt solid #000000;"> <p><strong>Forms&nbsp;</strong></p> </td> <td style="border: 1pt solid #000000;"> <p>Only digital; there are no physical mediums</p> </td> <td style="border: 1pt solid #000000;"> <p>Exists in physical form (coins and banknotes) and in digital form (through online bank balances)&nbsp;</p> </td> </tr> <tr> <td style="border: 1pt solid #000000;"> <p><strong>Governing authority and regulation&nbsp;</strong></p> </td> <td style="border: 1pt solid #000000;"> <p>Operates on a decentralized network using blockchain technology without a central governing authority</p> </td> <td style="border: 1pt solid #000000;"> <p>Central banks and governments issue and regulate all forms</p> </td> </tr> <tr> <td style="border: 1pt solid #000000;"> <p><strong>Storage</strong></p> </td> <td style="border: 1pt solid #000000;"> <p><a href="https://www.g2.com/glossary/crypto-wallet-definition" rel="noopener" target="_blank"><span>Crypto wallets</span></a> store private keys, which grant users access to their cryptocurrencies</p> </td> <td style="border: 1pt solid #000000;"> <p>Physical wallets hold cash and credit cards</p> </td> </tr> <tr> <td style="border: 1pt solid #000000;"> <p><strong>Supply&nbsp;</strong></p> </td> <td style="border: 1pt solid #000000;"> <p>Some cryptocurrencies, like Bitcoin, have a finite supply&nbsp;</p> </td> <td style="border: 1pt solid #000000;"> <p>Central banks can print more money as needed</p> </td> </tr> <tr> <td style="border: 1pt solid #000000;"> <p><strong>Transaction process</strong></p> </td> <td style="border: 1pt solid #000000;"> <p>Transactions are peer-to-peer, meaning they occur between users without any intermediaries; network participants (called miners) verify transactions and record them on a <a href="https://www.g2.com/glossary/blockchain-definition" rel="noopener" target="_blank"><span>blockchain</span></a> (public ledger)&nbsp;</p> </td> <td style="border: 1pt solid #000000;"> <p>Transactions generally involve intermediaries such as payment processors and banks; financial institutions verify transactions</p> </td> </tr> <tr> <td style="border: 1pt solid #000000;"> <p><strong>Privacy&nbsp;</strong></p> </td> <td style="border: 1pt solid #000000;"> <p>Transactions are pseudonymous and identified by public keys rather than personal information such as names&nbsp;</p> </td> <td style="border: 1pt solid #000000;"> <p>Transactions are tied to the identity of the account holders, whether an individual or a business entity</p> </td> </tr> <tr> <td style="border: 1pt solid #000000;"> <p><strong>Accessibility&nbsp;</strong></p> </td> <td style="border: 1pt solid #000000;"> <p>Anyone (with or without a bank account) can access and use these services</p> </td> <td style="border: 1pt solid #000000;"> <p>Transactions require access to banking services, which excludes those who can’t access these systems</p> </td> </tr> <tr> <td style="border: 1pt solid #000000;"> <p><strong>Economic impact</strong></p> </td> <td style="border: 1pt solid #000000;"> <p>Since there isn’t a central governing authority, cryptocurrencies are volatile and less stable</p> </td> <td style="border: 1pt solid #000000;"> <p>Banks use monetary policy tools to manage stability and control inflation&nbsp;</p> </td> </tr> </tbody> </table> <p>To summarize, cryptocurrency uses cryptography to secure transactions. All transactions are recorded on a blockchain, which is an unchangeable ledger. Authorities, like banks and governments, don’t regulate cryptocurrencies, so their value fluctuates.</p> <a id="blockchains-and-mining" data-hs-anchor="true"></a> <h2>Traces of transactions: blockchains and mining&nbsp;</h2> <p>What makes cryptocurrency different from traditional or fiat currencies is that it uses decentralization and strong cryptography to make <a href="https://www.plasma.org/learn/future-of-blockchain-technology" rel="noopener" target="_blank">financial transactions</a> more secure. Cryptocurrency uses decentralized monitoring systems like blockchain technology.</p> <h3>What is blockchain?&nbsp;</h3> <p><a href="https://www.g2.com/categories/blockchain" rel="noopener" target="_blank"><span>Blockchain</span></a> technology is a distributed ledger with a growing list of records (called blocks) linked through cryptography. Transactions occur publicly across the peer-to-peer network for transparency; however, these transactions are pseudonymous. This helps guarantee privacy and anonymity while ensuring an accurate transaction record.</p> <p><img src="https://lh7-rt.googleusercontent.com/docsz/AD_4nXe9Ew-Wgsy5EjMnnhaC8UGHOwQve29DDd9iUBAOiCKlBDcG3aa5K4MiZdn-H2GZg4SUgM7eU1uFjYCG2HReS0-YsQnlmBFEfvzWpLgpaxYLLW75j79EUMk045wKyBQQpdkOTYXi3qtYoaV7JC3tnnOQGR4?key=b2Q2AouKeSKPZh-Fcon2NA" width="600" height="501" loading="lazy" style="margin-left: auto; margin-right: auto; display: block; width: 600px; height: auto; max-width: 100%;" alt="how does blockchain work"></p> <h3>What is cryptocurrency mining?&nbsp;</h3> <p>Since no governing authorities can validate transactions, Bitcoin and other cryptocurrencies use <a href="https://www.g2.com/glossary/cryptocurrency-mining-definition" rel="noopener" target="_blank"><span>mining</span></a> to verify transactions and generate new coins. Mining requires a vast network of computing resources worldwide to verify and secure transaction information. Anyone with Internet access and enough computing power can mine for cryptocurrency.&nbsp;</p> <p>Some cryptocurrencies use proof-of-work (solving complex math problems) for their mining process, while others use proof-of-stake (owners offer coins as collateral for a chance to validate blocks).&nbsp;</p> <p>Miners receive a reward for their work, typically in the form of cryptocurrency coins. Once miners validate transactions, a miner is chosen to add the new transactions to blocks (thus, the chain grows).&nbsp;</p> <a id="how-to-get-started-with-cryptocurrency" data-hs-anchor="true"></a> <h2>How to get started with cryptocurrencies&nbsp;</h2> <p>Now that you know how cryptocurrency works, investing is easy. To get started, follow these steps.</p> <h3>1. Do your research and choose what cryptocurrency to invest in&nbsp;</h3> <p>Understand and evaluate the unique characteristics of each cryptocurrency you’re considering, and determine which one(s) you want to invest in.&nbsp;</p> <h3>2. Select a cryptocurrency exchange&nbsp;</h3> <p>Once you know which cryptocurrencies to buy, you must choose an exchange or investment platform and create an account. You will need to verify your identity to fund your account, so ensure you have your identity information readily available.&nbsp;</p> <h3>3. Consider your storage options&nbsp;</h3> <p>Since cryptocurrency is digital, you need a digital location to keep your coins safe. You can keep them on the exchange platform where you’re investing and may also want to obtain a crypto wallet. Crypto wallets hold private keys that allow you to access your crypto.&nbsp;</p> <h3>4. Buy crypto and manage your investments&nbsp;</h3> <p>Once your cryptocurrency exchange platform account is set up and verified, you can purchase your first cryptocurrency. How much you want to buy is entirely up to you and may depend on your budget, risk tolerance, and investment strategy. Over time, continue to manage your investments for the long term.&nbsp;</p> <a id="top-cryptocurrency-exchanges" data-hs-anchor="true"></a> <h2>Top 5 cryptocurrency exchanges&nbsp;</h2> <p>Investors, traders, and institutions use cryptocurrency exchanges to trade cryptocurrency for assets and traditional currencies. Developers and tech industries also use them to develop blockchain platforms and cryptocurrency services to facilitate transactions.&nbsp;</p> <p>Crypto exchanges offer real-time market data, order execution capabilities, and secure storage solutions, empowering users to engage in seamless and efficient trading activities while contributing to price discovery and market liquidity.</p> <p>To qualify for inclusion in the Crypto Exchanges category, a product must:</p> <ul> <li aria-level="1">Accept payments of cryptocurrency in exchange for goods</li> <li aria-level="1">Facilitate traditional blockchain transactions</li> <li aria-level="1">Facilitate the deposit and withdrawal of cryptocurrency funds</li> </ul> <p><em>* Below are the top five leading cryptocurrency exchanges from G2’s Spring 2024 Grid® Report. Some reviews may be edited for clarity.&nbsp;</em></p> <h3>1. OKX</h3> <p><a href="https://www.g2.com/products/okx/reviews" rel="noopener" target="_blank"><span>OKX</span></a> is an innovative cryptocurrency exchange that uses blockchain technology for trading and investments to reshape the financial ecosystem. The exchange serves millions of users across 100 countries and provides its customers with various services, including spot, margin, expiry, options, DeFi, lending, perpetual futures trading, and mining.&nbsp;</p> <h5>What users like best:</h5> <p>“It's simple and easy to use. They offer secure accounts with 2FA. I have been a customer of OKX for years and never had any issues or problems. Their P2P works just great. I am a big fan of this exchange. Thumbs up to the team.”&nbsp;</p> <p>- <a href="https://www.g2.com/products/okx/reviews/okx-review-7519249" rel="nofollow noopener" target="_blank"><span>OKX Review</span></a>, Priyajit S.&nbsp;</p> <h5>What users dislike:</h5> <p>“The fees for transferring funds from my OKX wallet to the platform are too high, in my opinion.”</p> <p>- <a href="https://www.g2.com/products/okx/reviews/okx-review-7520153" rel="nofollow noopener" target="_blank"><span>OKX Review</span></a>, A C.&nbsp;</p> <h3>2. Binance&nbsp;</h3> <p><a href="https://www.g2.com/products/binance/reviews" rel="noopener" target="_blank"><span>Binance</span></a> is a leading cryptocurrency exchange with over 200 million users in 180+ countries. With Binance, users can trade hundreds of cryptocurrencies, earn interest on crypto, buy or earn new tokens, and trade or loan <a href="https://www.g2.com/glossary/nft-definition" rel="noopener" target="_blank"><span>non-fungible tokens</span></a> (NFTs). Users can buy cryptocurrencies on Binance using credit or debit cards, cash balances, Apple Pay, or Google Pay.&nbsp;</p> <h5>What users like best:</h5> <p>“The main and key feature of Binance is easy deposit and withdrawal options. Getting your money with a very secure transaction process takes a few minutes. Also, it is very easy to trade in different digital currencies with many different trade methods and options.”</p> <p>- <a href="https://www.g2.com/products/binance/reviews/binance-review-9589654" rel="nofollow noopener" target="_blank"><span>Binance Review</span></a>, Sayed S.</p> <h5>What users dislike:&nbsp;</h5> <p>“I don't like that some cryptocurrencies are not yet available on Binance. My favorite one is SWEAT, and I can't wait for it to be listed on Binance. It would also be nice to receive salary directly on Binance, like Revolut.”</p> <p>- <a href="https://www.g2.com/products/binance/reviews/binance-review-7860501" rel="nofollow noopener" target="_blank"><span>Binance Review</span></a>, Przemek P.&nbsp;</p> <h3>3. Gate.io</h3> <p><a href="https://www.g2.com/products/gate-io/reviews" rel="noopener" target="_blank"><span>Gate.io</span></a> is a full-service digital asset exchange platform for millions of users worldwide; however, Gate.io restricts or prohibits the use of services in restricted locations such as the United States, Canada, Iran, and Cuba. In locations where Gate.io is available, users can buy, sell, and swap digital currencies. The system also provides liquidity mining, digital asset lending, cloud mining, and slot auctions.&nbsp;</p> <h5>What users like best:</h5> <p>“I have been using Gate.io for the past month and have found a friendly app where I can trade spots and futures. Also, they own an amazing program called Startup that introduces new tokens to the community using an extensive marketing approach through airdrops and live videos to explain the reach of each project.”</p> <p>- <a href="https://www.g2.com/products/gate-io/reviews/gate-io-review-9009314" rel="nofollow noopener" target="_blank"><span>Gate.io Review</span></a>, Bernie B.</p> <h5>What users dislike:&nbsp;</h5> <p>“Their customer care service is the only part they lack badly. There is no live support or calling option, which results in very high response time, specifically in emergency cases, it affects users the most.”</p> <p>- <a href="https://www.g2.com/products/gate-io/reviews/gate-io-review-7111782" rel="nofollow noopener" target="_blank"><span>Gate.io Review</span></a>, Archit S.&nbsp;</p> <h3>4. eToro</h3> <p><a href="https://www.g2.com/products/etoro/reviews" rel="noopener" target="_blank"><span>eToro</span></a> is an investing app that offers a diverse marketplace comprised of stocks, crypto, options trading, and exchange-traded funds (ETFs). On eToro, users can explore using a unique virtual portfolio that allows them to play with $100,000 in virtual money to learn and hone their investing skills before investing real money.&nbsp;</p> <h5>What users like best:</h5> <p>“I like that eToro's platform is intuitive and easy for people who may not have experience with other brokers or are starting in the world of investments.”</p> <p>- <a href="https://www.g2.com/products/etoro/reviews/etoro-review-8018453" rel="nofollow noopener" target="_blank"><span>eToro Review</span></a>, Jairo C.&nbsp;</p> <h5>What users dislike:</h5> <p>“Although eToro facilitates trading on several different stock exchanges, I have found that not all stocks and ETFs listed can be traded on eToro. This issue is not a significant issue for me, as most, if not all, companies with the largest market capitalizations can be traded on eToro.”</p> <p>- <a href="https://www.g2.com/products/etoro/reviews/etoro-review-4890639" rel="nofollow noopener" target="_blank"><span>eToro Review</span></a>, Dr. Andy T.&nbsp;</p> <h3>5. Coinbase Exchange&nbsp;</h3> <p><a href="https://www.g2.com/products/coinbase-exchange/reviews" rel="noopener" target="_blank"><span>Coinbase Exchange</span></a> makes it easy for people and institutions to engage with crypto assets through trading, staking, safekeeping, and spending. The platform also provides fast and free global transfers. Some popular cryptocurrencies Coinbase provides access to include Bitcoin, Ethereum, Cardano, Solana, Dogecoin, and Tether.</p> <h5>What users like best:</h5> <p>“I like the fact that you do not need any experience in crypto trading to use the platform. Everything is kept clean and simple, making it easy to use.”</p> <p>- <a href="https://www.g2.com/products/coinbase-exchange/reviews/coinbase-exchange-review-6730448" rel="nofollow noopener" target="_blank"><span>Coinbase Exchange Review</span></a>, Steve K.&nbsp;</p> <h5>What users dislike:</h5> <p>“It is expensive. I prefer the Coinbase Pro version because it has lower fees. They were slow to adopt support for a few of the coins I preferred, but they eventually added them.”</p> <p>- <a href="https://www.g2.com/products/coinbase-exchange/reviews/coinbase-exchange-review-6687089" rel="nofollow noopener" target="_blank"><span>Coinbase Exchange Review</span></a>, Andrew R.&nbsp;</p> <p><a href="https://ai.g2.com/bots/default" rel="noopener" target="_blank"><img src="https://learn.g2.com/hubfs/Click%20to%20chat%20with%20G2s%20Monty-AI-3.png" width="1600" height="1000" loading="lazy" alt="Click to chat with G2s Monty-AI-3" style="height: auto; max-width: 100%; width: 1600px; margin-left: auto; margin-right: auto; display: block;"></a></p> <h4>Now accepting digital payment&nbsp;</h4> <p>Cryptocurrency offers new opportunities for investments and trades. It’s important to remember that every cryptocurrency is different, just like your risk tolerance and current circumstances.&nbsp;</p> <p>Only you can decide if investing in cryptocurrency is right for you, but one thing is sure: digital currencies will continue to develop and aren’t going anywhere soon.&nbsp;</p> <p><strong>Will you invest in crypto? Learn about </strong><a href="https://www.g2.com/articles/hardware-wallet" rel="noopener" target="_blank"><strong><span>hardware wallets</span></strong></a><strong> and how they enhance cryptocurrency security.&nbsp;</strong></p>
Alyssa Towns
Alyssa Towns

Alyssa Towns works in communications and change management and is a freelance writer for G2. She mainly writes SaaS, productivity, and career-adjacent content. In her spare time, Alyssa is either enjoying a new restaurant with her husband, playing with her Bengal cats Yeti and Yowie, adventuring outdoors, or reading a book from her TBR list.

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