The cryptocurrency market is emerging as a profitable yet risky form of investment. Now, if you are a newbie to this market, it might seem intimidating as the crypto market is known to be very volatile. But as preparation, you must understand how do cryptocurrencies work and how cryptocurrencies gain value.

How do cryptocurrencies work

Bitcoin, Ethereum, and Ripple operate much differently than credit and debit cards. Cryptocurrencies are decentralized. Meaning, it’s controlled solely by users and computer algorithms as opposed to being issued and monitored by the bank or government.

Cryptocurrencies can be purchased online using fiat or traditional currencies or by trading already-obtained cryptocurrencies for a different one. There are even bitcoin ATMs or kiosks where users can directly purchase bitcoin by using cash or debit.

Moreover, all cryptocurrency transactions are recorded on a digital public ledger called the blockchain. Hence, these transactions are known to be immutable, fraud-resistant, secure, and accurate. Typically, cryptocurrencies are stored on cryptocurrency wallets. Here, crypto owners can make quick peer-to-peer (P2P) transactions across borders. 

How cryptocurrencies gain value

As for the value, a cryptocurrency’s price will depend on the trading volume available on a specific cryptocurrency exchange. These exchanges involve thousands of market buyers and sellers on a regular basis. Thus, there is no fixed price for any cryptocurrency.

With relation to how do cryptocurrencies work, these digital assets gain value based on certain factors like coin/token utility, user demand, and scarcity. Nowadays, crypto can be used for various purposes such as e-commerce, governance, services, entertainment, etc. 

Moreover, as a cryptocurrency’s demand rises, so does its value. Particularly if the crypto has a limited total supply. Citing bitcoin as an example, its value has immensely grown for the past decade as its total supply is fixed only to 21 million BTC. Yet, its demand for adoption and usage continuously increases. 

In reality, cryptocurrencies can only gain real-time value if people actually use it — either for daily transactions like payments or trading. Either way, their value will only appreciate in time as the importance of having digital-based currencies becomes more accepted in the mainstream.