Updated on July 23, 2024

Have you heard of Bitcoin? Well, of course it is. Recently, cryptocurrency is a very popular asset that can fill wallets nicely. So if you are looking for an instrument that would suit you as a trader, why not try this one? In this article, we will explain how cryptocurrencies work, what blockchain is, and how transactions with them take place.

What is cryptocurrency

When you hear someone talk about cryptocurrency, they may be referring to any digital or virtual currency. It is therefore a currency that does not have a physical form and any transactions take place only in the digital world. You don’t have to worry about any transfers being at risk. All cryptocurrencies are secured by cryptography. This means that they are encrypted so that they cannot be forged. Additionally, it prevents someone else from tampering with the transactions you make.

We can imagine it similar to the money you have in your account. This will help you understand how cryptocurrencies work. But with a few differences. The main thing is that you cannot withdraw this money from the account so that you can pay with it in cash. In addition, it is not possible to pay everywhere using cryptocurrency. The difference is also that cryptocurrencies are not issued or regulated by any specific institution.

So while, for example, the Czech National Bank supervises the Czech koruna and regulates its exchange rate, there is no such central authority for cryptocurrency. It is also related to the fact that its exchange rate is not affected by any inflation or any government or other interventions. What determines the exchange rate of cryptocurrencies is solely supply and demand. This may be related to the economic and political situation in the world.  

The very first cryptocurrency was Bitcoin, which is still the most well-known among people today. It saw the light of day in 2009. And while the first bitcoin owners were attracted by curiosity, today they are mainly interested in investors who see great potential in them. Therefore, they collect them in their digital wallets, where the cryptocurrency is stored. Individual transactions are recorded in a digital ledger, anonymously.  

How cryptocurrencies work

As said before, cryptocurrency is a digital currency. Many of you have probably heard of it in connection with investments and trading. And it’s understandable. Their popularity among traders continues to rise. Moreover, since 2009, when the first cryptocurrency, Bitcoin, was created, there are many other cryptocurrencies to invest in. For example, in 2015, the second most popular cryptocurrency ethereum was added. They also include Litecoin. It is known for enabling very fast transactions.

Investors who decide to mine or buy a cryptocurrency store it in their wallet. Of course, to the virtual one. This is where any user transactions are added and subtracted. Users make these transactions via a key. After entering it, they can freely deal with the cryptocurrency at their disposal.

All transactions are recorded in a digital ledger. Right here you can track all cryptocurrency transfers. But anonymously. This book is called blockchain. The ledgers of all cryptocurrencies are highly secure to prevent unwanted manipulation of transactions. Although bypassing these ledgers is difficult for hackers, it is not completely impossible to get hold of cryptocurrencies. They have hacked into the wallets of some users several times in the past. In this way, the hackers stole several million dollars worth of cryptocurrency.

But this anonymity is only apparent. Although your name is not associated with a specific transaction, it is not difficult to find it through the address. Each wallet is assigned a specific number. This is then also recorded in the blockchain. All movements of Bitcoin and other cryptocurrencies will then be recorded in the digital ledger for as long as it exists. In addition, the books are public, so anyone can find anything in them.

How to get cryptocurrency

So you already know how cryptocurrencies work. Now it remains to explain how they can be obtained. There are two ways you can receive it. One of them is their mining. Bitcoin mining is well-known. The second option is to simply buy it. Whichever way you arrive at it, it’s important to keep it safe in your virtual wallet. In some cases, this service is provided by the brokers themselves, so you can store your virtual currency conveniently through the platform.

But this is not always the case. Therefore, sometimes you have to reach for another company that provides such wallets. We divide them into hot wallets and cold wallets. These are called cold wallets. What is the difference between them? A hot wallet allows you to store your currency in a storage that is used by online software to protect your data. Conversely, cold wallets, whose providers often charge fees, rely on data protection through offline electronic devices.

Cryptocurrency mining

Although mining evokes working in mines, you won’t need any pickaxes for cryptocurrency. Cryptocurrency mining is mediated by computers. And very powerful computers. But such an action requires a lot of energy and special technique. This is precisely why mining has become the activity of mainly large companies. Of course, there are also individuals who mine cryptocurrencies.

Simply put, miners use powerful computers to solve complex mathematical puzzles. Coins will be generated if the puzzle is solved. Everything is based on the blockchain. During their activity, miners simultaneously confirm and check transactions that are taking place at a given moment for a specific mined cryptocurrency.

Miners sequence these transactions into blocks and then lock these blocks. This is exactly how the blockchain is secured. In addition, a code called a nonce is added to each block. Miners are tasked with converting these codes they invent and the transaction logs into hashes. And that’s their math puzzle. Hash is calculated by the technician using algorithms. If the hash matches, the block is locked and the miner gets the coins. Otherwise, it must enter a different nonce and calculate the hash again. This happens a million times a second. Until the puzzle is solved.

Where to buy cryptocurrencies

The second option, how you can come to cryptocurrency, is to buy. You can buy it at cryptocurrency exchanges and exchange offices, or from traditional brokers. These are the most common ways investors buy cryptocurrency. But there are other ways besides them. Let’s take a closer look at them.

Brokers

Traditional brokers, i.e. brokers, usually offer their clients a large number of cryptocurrencies. Including Bitcoin of course. In addition to them, there is the possibility to trade with other assets, such as commodities, shares or even forex pairs. With brokers, you will pay the lowest possible fees. However, count on fewer cryptographic functions. In addition, few of them allow you to deposit Czech crowns and you have to keep accounts in US dollars or euros.

Cryptocurrency Exchanges and Exchanges

On the contrary, expect higher fees for this option. They can easily reach 5%. In addition, you will not find such a selection of cryptocurrencies here, as is the case with brokers. On the other hand, you can shop in any currency you want. Pay attention to which of the exchange offices you choose. There is an inordinate amount of them. In addition, it is often just a scam. It is therefore necessary to choose a verified company with a tradition.

Other options

There are three other, albeit less common, ways to buy cryptocurrency. The first of these is buying from another person. Whoever it is, you just have to agree with him. It is easy. But be careful who it is. Think first about whether he can be trusted. Another way is to buy directly in the wallet. Some of them also offer this function. Here, too, the fees are higher. The last option is to buy from bitcoin machines. As the name suggests, you only buy Bitcoin here. We do not recommend this method as the machines charge the highest fees. More precisely, you pay roughly 10%. Judge for yourself whether it’s worth it.

Cryptocurrency and its taxation

Since cryptocurrencies are a relatively new business, there is currently no special law governing their taxation. This is the case with other traded assets. For example, with gold and stocks. However, the state does not see cryptocurrencies as an investment, so taxes are paid in the same way as any other income. Therefore, the subject of tax is the profit you generate based on them. So if you just hold the cryptocurrency, no taxes apply to you. This only happens in the case of their exchange or sale. So it is an income tax.

You can calculate this income simply. It is the difference between the amount you bought the cryptocurrency for and the amount you received for it. The amount of tax is then calculated from this difference. If you are a company or an individual who is engaged in cryptocurrency mining, you will deduct the cost of mining bitcoins or other cryptocurrencies from your earnings. You pay taxes even if you inherit or receive bitcoins and other cryptocurrency.

Types of virtual currencies

Although we most often encounter Bitcoin, it is not the only cryptocurrency. Especially in recent years, other cryptocurrencies have also grown in popularity. What is the difference between them?

Bitcoin

It is no wonder that Bitcoin is the most famous of the cryptocurrencies. It is the first cryptocurrency ever. And although it is a relatively new thing, it is outdated. Bitcoin transactions are not exactly the fastest. Therefore, it cannot handle as many of them as other cryptocurrencies. But Bitcoin is still among the most widespread. In addition, other types of cryptocurrencies can be exchanged for it. Therefore, we can say with exaggeration that Bitcoin is the gateway to the world of cryptocurrencies. 

Altcoin

Altcoin is an umbrella term for cryptocurrencies other than Bitcoin. They have the advantage of being created later. They are therefore more modern and, unlike the original, excel at high speed. Among them we can find, for example, ethereum, litecoin, Solana, or Cardano.

Cryptocurrency and Investments

You can invest in two ways. The first option is that you will actually hold the bitcoins. In that case, you save them and they will be available to you whenever you need them. It doesn’t matter how long you keep them. In short, whenever you think it’s a good time to exchange them, you simply exchange them. Just check how their price is developing. We have already explained how cryptocurrencies work and how to get them. Therefore, we will now focus on the second method of cryptocurrency trading.

The second option is to trade bitcoins through CFD contracts. This means that you do not actually own bitcoins or any other cryptocurrency. And if you don’t own them, you can’t even make real transactions with them. You are only speculating about price growth or, on the contrary, a decrease. When trading cryptocurrency CFDs, you enter into a contract with the other party. At the same time, both parties undertake to pay the other party the difference between the purchase and sale price. This other side tends to be CFD brokers.

You can find a huge number of brokers today. But choose carefully. Firstly, not all CFD brokers allow trading of Bitcoin and other cryptocurrencies. And secondly, some will be more beneficial to you than others. It is therefore ideal to think it through before opening a live account with a particular broker. It is advisable to check it first through a demo account.

Brokers usually provide this account for free. In addition to trying to trade CFD cryptocurrency with a specific broker, you will learn a lot on a demo account. This is because you get a virtual currency that you can “trade” with. So you will learn how to analyze the market. You can try technical and fundamental analysis.

Virtual currencies – yes or no?

You already know how cryptocurrencies work. Now the last question remains. Is such an investment worth it? There are different opinions about virtual currency. Her supporters say she has a promising future. Not only because everything around is subject to digitization today. But also because the rate has increased significantly since its inception. In addition, it is a currency that is not tied to one specific country and can thus be used all over the world. Therefore, cryptocurrencies are often used for cross-border transfers.

 Did you know that some services even now accept payment in Bitcoin? Some of its supporters therefore believe that sooner or later cryptocurrency will become a common payment. Cryptocurrency has greatly simplified payments between two parties. Since it is a decentralized currency, there is no need for a third party. If we imagine our money in a bank account, the role of this third party is fulfilled by the bank. We don’t need this with virtual currency. This means much faster transfer of this currency from one account to another.

Its opponents, on the other hand, claim that investing in cryptocurrencies is very risky given that it is a digital currency. Moreover, they show that cryptocurrency trading is decentralized. Their transactions are thus not subject to sufficient regulation. In addition, they show that, like trading other assets, investing in cryptocurrencies also carries risk. During their existence, they experienced rapid growth, but also rapid decline.