How does cryptocurrency work?

About 25 million people around the world use bitcoin, a type of cryptocurrency, or digital money, that lets consumers buy goods and services, or trade their coins for a profit.

And while the value of cryptocurrencies like bitcoin, ethereum and ripple has been volatile over the past few years, these brands have maintained a steady following.

But how do these forms of payment actually work?

For starters, the currency is decentralized, meaning unlike credit and debit, it’s controlled solely by users and computer algorithms as opposed to a central bank or government.

Digital coins can be obtained online for dollars, through the exchange of good and services, or by trading already-obtained cryptocurrencies for other cryptocurrencies. There are even bitcoin ATMs or kiosks where users can purchase bitcoin by using cash or debit.

Cryptocurrency transactions are sent using software called cryptocurrency wallets. The person who creates the transaction uses the wallet to transfer balances from one public address to another. Each transaction leads back to a unique set of keystrokes, and whoever owns that passcode owns the amount of cryptocurrency associated with it.

All transactions and balances are recorded on a digital public ledger called a blockchain.

There are a few things to know before buying into cryptocurrency. One is that you should only purchase what you can afford to lose. Much like stock exchanges, the value of cryptocurrencies fluctuates based on market conditions. Bitcoin, for example, dropped from a high near $14,000 in June 2019 to just below $10,000 as of press time.

And although some big brands like Microsoft, Starbucks and Whole Foods have the capacity to accept cryptocurrency payments, spending can still be tricky.

Since digital money is created and stored electronically, “payments made with virtual currencies are not only irreversible, they also do not have the same legal protections as most traditional payment methods, such as the ones you have when using a credit card,” according to a Federal Trade Commission report resurfaced by the Better Business Bureau.

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