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How does cryptocurrency work?
You now know a bit about what crypto is and the types of digital currencies you may encounter. That’s all well and good, you may be thinking, but how does cryptocurrency work, exactly?

Cryptocurrencies are created through the process of mining. “Mining crypto is like mining gold, but instead of digging the ground to find gold, you need to solve cryptographic problems,” Gotslak says. “These cryptographic problems or puzzles were put in place by the creator of the cryptocurrency.”

But it’s not you—the human—who is solving these puzzles and mining cryptocurrency. It’s a computer—or networks of computers.

“There are two methods of mining cryptocurrencies, known as proof of work and proof of stake,” says Nick Ranga, senior cryptocurrency and forex analyst for AskTraders. “The proof-of-work method consists of specialized computers, known as mining rigs, competing to be the first to solve complex mathematical problems, called hashes. The difficulty of the hashes steadily increases over time, which means the computers doing the mining have to become more and more powerful.”

With the proof-of-work method, miners confirm cryptocurrency transactions for inclusion on the blockchain. But it takes a lot of computing power to do this.

Bitcoin uses proof-of-work mining and has been criticized for “the serious environmental ramifications resulting in billions of pounds of carbon dioxide being emitted by miners’ powerful and high-energy-usage computers,” Sher says. (It’s the same reason people say NFTs are bad for the environment.) “Alternative cryptocurrencies have switched or are in the process of switching to alternative validation methods, such as proof of stake.”

This method is a greener alternative to proof-of-work mining. Sher defines it as “a mechanism in which miners use the cryptocurrency they already own to gain access to mining rights equal to the coins they own, which doesn’t require as much energy usage.”

Both methods, however, do more than just confirm cryptocurrency transactions. There is, after all, a reason people want to mine: It offers miners crypto rewards.