They can be used to buy items and they can even be exchanged for government currencies. However, the major difference between normal currencies and cryptocurrencies is how they are generated. As you may know, governments typically print out a set amount of money that they can put into circulation. However, this is not how cryptocurrencies are generated and this is where cryptocurrencies can get confusing.
While government currencies are printed and circulated throughout the nation, cryptocurrencies are actually generated by users through a process called “mining”. The reason why it is referred to mining is that the currency is actually already there but it is not activated. It is hidden within design of the system and by “mining it out”, more currency is activated that can be internally circulated. Whoever managed to mine out the new coins or tokens, gets to keep it. Through mining, one user verifies a certain transaction that took place between two people using the cryptocurrency as payment. Once the transaction is verified, it gets permanently put on the blockchain‒a digitized public ledger where all transactions involving the cryptocurrency are placed. So, essentially a person who is mining is providing themselves with new currency, while also being able to support the entire system by verifying whether another user’s transaction was valid or not.
The blockchain really is quite simple. Just imagine a long chain, where the first verified transaction ever is at the very beginning, whereas the latest verified transaction is at the very end.
It is important to understand that the transaction is never actually placed onto the blockchain until a user or a group of users confirm that the transaction is legitimate. Possibly the biggest advantage of the blockchain is that it is entirely decentralized, meaning that no user or group of users has more access to the chain than another. In fact, each block is secured using cryptography, meaning that only by breaking the cryptographic hash, will you be able to see the transaction that came before yours on the chain. Therefore, the blockchain is secure by default. That is the major beauty of the blockchain, as transactions can be completely anonymous and virtually untraceable. This is why many people fear that cryptocurrencies are being used for illegal matters and possibly money laundering.
As you can see, cryptocurrencies are quite similar to actual currency. You can use them to buy things and most can be exchanged for government currencies. However, they are completely digital and the way new currency is generated is quite a bit different. Yet, possibly the largest advantage cryptocurrency has over real money is that the entire system is decentralized, allowing a much greater amount of anonymity than using real money. The idea of a decentralized blockchain could be revolutionary, as not only could it be used to store cryptocurrency transactions, but maybe in the future, it could even be used to store medical data or military documents since it is very hard to decrypt other blocks on the blockchain.