How does a cryptocurrency work?

How does Bitcoin work? What is a cryptocurrency? And why is it worth that much money?

WHAT IS A CRYPTOCURRENCY?

A cryptocurrency is virtual money, created and held electronically. There’s no government control. They are produced by computers, using software that solves mathematical problems. You can open a wallet, which consist of a long string of letters and numbers. Your coins can be stored there. Transactions between wallets happen without a middlemen, which keeps transaction costs very low. Banking and credit card companies ask a much higher percentage than the computer network does. More small businesses around the world are accepting Bitcoin and other cryptocurrencies every day. Some people just buy the bitcoins as an investment.

WHY DOES IT HAVE VALUE?

That’s a proper question. But why does that piece of paper in your wallet have value? Because we all agree to it. Just like money, or a house, or gold, cryptocurrencies are valued because of trust, adoption and usage. More shops, merchants, investors and start-ups are using cryptocurrencies. Value increases when more people are willing to accept them as payment. That’s how value is created.

Scarcity also plays a part in this… if the amount of Bitcoin was infinite, the value wouldn’t go up that much and everybody would be mining. Or maybe nobody would be mining. If gold was as common as sand, it would have no value. Scarcity and the need to use or own it, makes it valuable. The same can be applied to cryptocurrencies.