What Is Cryptocurrency and How Does It Work?

Miami could soon become the crypto capital of the world, if efforts by the city’s mayor to attract companies invested in the digital currency succeeds.

During an interview with CoinDeskTV in November, Mayor Francis Suarez announced that the city is working on a plan to create and distribute digital wallets to residents.

“We’re going to be the first city in America to give a bitcoin yield as a dividend directly to its residents,” Suarez said.

The city has since made strides in achieving Suarez’s dream by hosting Bitcoin 2021, the world’s largest cryptocurrency conference, and even launching its own digital currency, MiamiCoin.

The city’s moves were well-received by those already invested in the digital world, but confusion plagues other South Floridians who still do not understand the concept of cryptocurrency.

So, what are cryptocurrencies and how do they work?

Cryptocurrency is a form of digital money that can be used on the internet and is not backed by a central banking system, as the Federal Reserve does for the U.S. dollar.

“Cryptocurrency is actually backed by a highly complex technology that’s based in cryptography, and that actually is what gives it the value rather than a country saying that this has value,” said NerdWallet spokesperson Chris Davis.

Bitcoin became the first cryptocurrency in the market after it debuted in 2009. It is also the most recognizable digital currency of the bunch. Now, there are thousands of alternative coins, including Ethereum, Litecoin, Dogecoin, and Solana. 

Every transaction that is done using Bitcon or any other “Alt-coin” is tracked on a blockchain, which records every transaction that takes place using that crypto.

Rather than being recorded on a single ledger, transactions are widely distributed across thousands of computers in what are called blockchains.

And, what exactly are blockchains?

Blockchains are distributed digital ledgers that store data of any kind. In the cryptoverse, that data can be information about cryptocurrency transactions, ownership for NFTs, or DeFi smart contracts.

All the data must “come to a consensus to say that this transaction is legitimate” Davis said.

New blocks are created nearly every 10 minutes before being attached to previous chains. The longer a blockchain becomes, the harder it is to change, hack, or cheat it.

“Every time you verify a transaction, you have to verify that every transaction that ever occurred on the previous blocks is legitimate as well,” Davis said.

What can blockchains be used for?

Some companies have already begun utilizing private versions of blockchains to keep records of their goods and where they are coming from. For instance, companies that specialize in supply chain management. 

Digital art – where more confusion may arise – is another example for where blockchains can be used to determine ownership and authenticity.

“Without needing a third party you could actually validate that this art is actually an original piece of art, but you could also pay that particular person and transfer the asset automatically,” said Florida International University economics professor Hemang Subramaninan.

Is there anything you can’t buy with cryptocurrency?

Although an increasing number of businesses are beginning to accept cryptocurrency as a form of payment, many still do not. 

“As far as I know, you can’t pay your taxes on crypto, the IRS does not accept it. It really comes down to does the buyer accept it,” Davis said.

Florida Gov. Ron DeSantis announced in December that he wants the state to begin accepting digital currency. DeSantis proposed allocating $700,000 of his $100 billion plan to create three pilot programs to give cryptocurrency a trial run at the state level.

If approved during the 2022 legislative session, Florida would have three different crypto programs: $250,000 to allow people to pay for vehicle titles with cryptocurrency to the Department of Highway Safety and Motor Vehicles, $250,000 to the Agency for Health Care Administration to identify Medicaid fraud, and $200,000 for the Department to Financial Services so businesses can pay state feeds in crypto.

“I think, as you’ve seen in South Florida, a lot of people have flocked to Florida over this issue. So, our view at the state government is this is something we welcome and we want to make sure that the state government is crypto-friendly,” DeSantis said.

How do you keep or store cryptocurrency?

There are two primary forms of wallets that can store cryptocurrency, similar to how leather wallets hold physical dollar bills. Those two types of digital wallets are called hot storage and cold storage wallets.

Hot wallets are done online using websites such as crypto.com, Coinbase and Gemini.

The downside of hot wallets is that they can be susceptible to hacking, theft, and loss. All of which have occurred to crypto investors, Davis said.

A cold storage wallet is an offline way to store coins and other forms of cryptocurrency. It’s a physical piece of hardware, such as a thumb drive.

“It is impossible for anyone to get to that information if it’s not online,” Davis said. “They would have to physically come in and steal information off of the device.”

Access to these devices are enabled with passwords. Crypto experts have advised investors to safeguard them due to documented cases where passwords have been lost along with millions of dollars worth of digital currency.

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