What Is Cryptocurrency And How Does It Works?

what is cryptocurrencyIn my previous post, I talked about blockchain and cryptocurrency is the creation base on the blockchain technology. So, do you know what is cryptocurrency? You might hesitate to answer me because it sounds familiar to you, but you don’t really know what it is. But what if I ask, “Do you know what is Bitcoin?”. Perhaps, you might say “Aha, I know!”

In this post, I will explain briefly on what is cryptocurrency and how does it works. However, I will not go into the technical detail of cryptocurrency creation. Then I will move on the give you some example of different type of cryptocurrency. Lastly, I will also touch on how to buy cryptocurrency.

Basically, the purpose of this post is to give you an overview of cryptocurrency. So that you can have a basic understanding of what cryptocurrency is.

History Of Cryptocurrency

History of Cryptocurrency

Let’s start with the history of cryptocurrency. It is always good that we understand the background of the things we want to learn about.

Cryptocurrency is a digital currency designed to work as a medium of exchange. It uses cryptography techniques to control and manage its creation securely. Bitcoin is the first digital currency creation by Satoshi Nakamoto in early 2009.

Satoshi Nakamoto’s intention is to develop a peer-to-peer electronic cash system. It is a completely decentralized network, no servers involved and no central controlling authority. Google docs is the best analogy for cryptocurrency.

The traditional payment network relies on a central authority, which is the bank, to do the hard work to declares the correct balance statement. However, this process is entirely out of our site.  As you know, all currencies are controlled and regulated by a centralized government.

In contrast, a decentralized network like Bitcoin, all transactions are open source, everyone in the network can see every account’s balance. Bitcoin uses Blockchain technology to achieve this. With this, there is no third party that can affect the currency. The only party can affect it is the people who are actually participate in the peer-to-peer network.

How Does Cryptocurrency Work?

How Does Cryptocurrency Work

As we said earlier, cryptocurrency is digital currency that is created based on blockchain technology using cryptography techniques. Blockchain is like a super database and accessible to public to anyone like the internet. The blockchain contains all transaction made in cryptocurrency and it is constantly growing.

The cryptocurrency transaction is always start with people want to buy something or transfer the cryptocurrency to someone else. I will break down the process into steps as below.

# You need a cryptocurrency wallet

Like the conventional bank account, you need an account and setup the cryptocurrency wallet. A cryptocurrency wallet is like the online banking account. You can check your balance and manage payee or recipients details for payment or transfer transaction.

# Initiate a transaction

You can initial a transfer transaction from your cryptocurrency wallet. You can see your balance and enter recipient details and choose an amount you want to transfer and click “Send” to transfer. After you click “Send”, your request will be sent to the cryptocurrency network. A group of connected computers (also know as notes) in the network will then validate the transaction.

# Verification and authentication

If you are familiar with online banking, then you know that for every transfer transaction you need to enter a security code from your security device for verification and authentication. The same principle work for cryptocurrency. In cryptocurrency, you must include your signature in the transaction using cryptography technique. Cryptography is a very complex mathematic formula that encrypt your signature and use as a proof of your signature’s authenticity.

# Adding transaction (new block of data) to the public ledger

The next step is to spread the transaction to the network for validation. In cryptocurrency network, there are many computers (nodes) join voluntarily to validate the transaction. These nodes create and maintain the history of transaction by solving mathematical problems. They also get an incentive by offering their computer processing power to service the network. Hence, we also call these nodes “Miner”.

When your transaction is verified and confirmed, it will be stored in the public ledger. Once the transaction is recorded in the ledger, it is permanent and unalterable. This is how it ensures the balance accuracy and coins ownership to avoid theft and double spending.

Different Type of Cryptocurrency

type of cryptocurrency

Please don’t make the mistake that Bitcoin is the only one cryptocurrency. There many more available. Over 900 of digital currencies are available and the demand is constantly rising. However, I am not going to walk you through all the digital currencies. Let’s check out the following 3 most popular ones.


Bitcoin is the first and most popular cryptocurrency available today. Satoshi Nakamoto is the founder of Bitcoin. Bitcoin is one of the buzzwords has come up a lot in the last few years. In last December (2017), Bitcoin hits a new high record at around US$20,000!


Ethereum is an open software platform based on blockchain technology that enables developers to build and deploy decentralized applications. It is also an operating system featuring smart contract. Like Bitcoin, Ethereum is a distributed public blockchain network. Ethereum was proposed in late 2013 by Vitalik Buterin, a cryptocurrency researcher and programmer.


On October 7 2011, Litecoin was released via an open-source client on GitHub by Charlie Lee. The Litecoin Network went live on October 13 2011. It is basically a fork of the Bitcoin Core client. Litecoin is often described as silver to Bitcoin’s gold due to larger supply resulting in lower price.

How to Buy Cryptocurrency?

How to buy cryptocurrency

By now, you should have the basic understanding of cryptocurrency. I guess the next question you may ask is “How to buy cryptocurrency?” Let me explain it in the following 3 processes.

Open a digital currency exchange account

When we say buying cryptocurrency, meaning you are converting your fiat currency into cryptocurrency. To do this, you need to open an account with a digital currency exchange. When open an account, you will need to provide personal detail like identity card number, address proof, an email address, mobile phone and bank detail.

Below is some well-known exchange you can open an account with.

Coinbase (Buy and sell Bitcoin, Bitcoin Cash, Ethereum and Litecoin in US and other countries)

Coinhako (Buy and sell Bitcoin and Ethereum in Singapore and Malaysia)

Luno (Buy and sell Bitcoin and Ethereum in Malaysia and Indonesia)

Set up a digital currency wallet

In order to store your cryptocurrency like Bitcoin and Ethereum, you need a digital wallet. Digital wallets are either a software you download to your computer, online wallets or physical “offline” wallets. Most of the digital currency exchange do provide digital wallet service. However, for security concern and as a backup, some people choose to store their cryptocurrency in a physical “offline” wallet.

Moving cryptocurrency into your wallet 

This is simply the process of taking your cryptocurrency off the exchange and putting it into your wallet. Alternatively, you can choose to store your cryptocurrency using digital wallet service provided by the exchange.


In my opinion, cryptocurrency is a great invention and potentially a world-changing technology. However, there are still many people don’t really understand what is cryptocurrency. I guess this mainly due to the complexity of the mechanism behind it.

No matter you like it or not, the revolution is already happening. You can either get involve with it and learn what is cryptocurrency or just stand on a side and observe.


To Your Success,

Kwah Choon Hiong


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