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What is Cryptocurrency & How Does it Work

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January 18, 2022


What’s Inside

You’d have to be living under a rock these days to have not heard words like “cryptocurrency”, “Bitcoin” or “blockchain” flying around every casual discussion. While some know exactly how it works and are aware of its evolution; for many, the concept remains vague and shrouded with unclarity. So before we get into some interesting developments in the world of crypto, let’s understand exactly what it is and how it works.

‍What is Crypto?

Cryptocurrency is a type of digital or virtual money. It serves as ordinary money, or currencies, such as dollars, pounds, euros, yen, etc. But it has no physical counterparts — banknotes or coins that can be carried around, that is, the cryptocurrency exists only in electronic form. Cryptocurrencies work using a technology called blockchain.

How does Cryptocurrency Work?

Blockchain is a decentralised technological concept that is very simple at its core. It has one big aim: to remove a third party gatekeeper and make everyone a gatekeeper instead. This means that the records of any money transfer between two people are available for everyone to view, making it the only source of truth. This will require sophisticated computing, thus the need for technology to implement such a system.

Why was Cryptocurrency Created?

The monetary ecosystem and the money we use today were designed in an era when technology did not exist.These concepts  were developed for paper money and areover 400 years old. Like gold and copper coins were replaced by paper notes (which must have seemed revolutionary for that time), cryptocurrencies are a bold attempt to re-design the monetary system as we know it with tools that are more relevant in today’s technological ecosystem.

Instead of relying on centralised gatekeepers, cryptocurrencies use a technology called blockchain to establish trust between a group of unknown people who want to do transactions with each other.

Some supporters like the fact that cryptocurrency removes central banks from managing the money supply since, with time, these banks tend to reduce the value of money via inflation. Other supporters like the technology behind cryptocurrencies, the blockchain, because it’s a decentralised processing and recording system and can be more secure than traditional payment systems.

Okay, now that we’ve wrapped our heads around what crypto is, let’s delve deeper into the gamut of possibilities blockchain presents.

The Many Faces of Blockchain

Broadly speaking we can divide these applications into two categories: Current and Aspirational applications. Cryptocurrencies like BitCoin and Dogecoin are widely known for their inflated trade value and are associated with get-rich-quick ideologies (which some say is a bubble about to burst and others swear their lives by), but that is not all one can do with blockchain.

People can use blockchain in different ways. To send money globally At a fraction of costs incurred currently, to borrow with privacy & without discrimination, lending and borrowing using NFTs as collateral, no-loss lotteries and for growing one’s portfolio. Some Cryptocurrency enthusiasts in the music industry also envision a future where artists are paid fairly, the secondary ticketing market is no longer ravaged by scalpers, and the value of digital memorabilia soars.

What’s more is that even the RBI is looking to jump aboard the crypto train. They recently stated that they will be looking at a phased-introduction of the Central Bank Digital Currency. A CBDC is a form of virtual currency or cryptocurrency that is issued by a central bank as an alternative to its currency. These are largely stable coins, i.e. cryptocurrencies launched by governments whose value is tied to their currency that are backed by sovereign reserves and, unlike private crypto assets like Bitcoin or Ethereum, the value of these digital coins is not subject to volatile market fluctuations.

Will it Really Become the Currency of the Future?

As we can see, the directions that blockchain could go in are endless. But as they say, the proof is in the pudding, and only after individuals, governments, and markets are fully exposed to them, have had a chance to dabble with them, and have understood the pros and cons of cryptocurrency will we be able to see seismic changes in the financial ecosystem as we know it. What we can say for sure is that cryptocurrency is a long-term play and anyone looking at it merely for its wealth creation aspects is missing the point.

Whether it will become our new main currency, a solidly acceptable alternative or get entirely co-opted by the governments and banks is yet to be seen. But what is known is that governments and banking institutions will put up a tough fight to maintain their stronghold over our financial lives. 


 Cryptocurrency is a revolutionary innovation that has the potential to transform the way we interact with money and each other. However, it also faces many challenges and risks, such as volatility, regulation, hacking, fraud, and environmental impact. Therefore, you should be aware of the benefits and drawbacks of cryptocurrency before investing or using. 

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Frequently Asked Questions

1. What does crypto mean?

Cryptocurrency, also known as crypto-currency or crypto, refers to any digital or virtual form of currency that employs cryptography to ensure secure transactions. Unlike traditional currencies, cryptocurrencies operate without a central issuing or regulating authority, relying instead on a decentralised system to record transactions and create new units.

2. How does crypto make you money?

Cryptocurrency makes you money in the following ways: buying and holding, trading, mining, staking or participating in Initial Coin Offerings (ICOs) or Token Sales. It's important to note that cryptocurrency investments carry risks, including price volatility, regulatory uncertainties, and security vulnerabilities. Do careful research and establish a clear understanding of the market before you engage in any crypto-led investment activities.

3. Is crypto a good investment?

The suitability of cryptocurrency as an investment varies depending on your circumstances, risk tolerance, and market conditions. Crypto investments can offer high potential returns but also come with significant risks. It's important to conduct thorough research, understand the volatility and regulatory landscape of the cryptocurrency market, and consider professional advice before making any investment decisions.


Fi Money is not a bank; it offers banking services through licensed partners and investment services through epiFi Wealth Pvt. Ltd. and its partners. This post is for information only and is not professional financial advice.
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