What Is Cryptocurrency?

Cryptocurrency has been one of the hottest areas of investing in recent years, but it’s a complex and potentially risky area. Before investing in crypto or using it in financial transactions, it’s important to understand how cryptocurrencies work, who creates and controls them, and why you might want to buy cryptocurrencies.

While there may be opportunities to build wealth investing with the best cryptocurrency exchanges, there are a lot of pitfalls involved with crypto investing, such as the potential for scams and speculative price swings. So it’s worth understanding what’s happening to make an informed decision before you get started.

What is cryptocurrency?

Cryptocurrency is a type of decentralized digital currency that is generally issued and accounted for along the blockchain. Unlike banknotes or minted coins that have a tangible physical form, cryptocurrencies can only be accessed using computers and other electronic devices.

A decentralized currency is a currency not issued by a government or financial institution. While a company, person, or government might start a new type of cryptocurrency, it’s not just one entity that controls the currency, the way a central bank might manage a nation’s currency. Instead, cryptocurrencies and their blockchains are run by decentralized networks of computers worldwide. Anyone with advanced technology skills and coding experience can participate in or even create a cryptocurrency.

The lack of a central authority can also make cryptocurrencies more secure, in the sense that “there’s no one central point of failure,” explains David Donovan, executive vice president at Publicis Sapient.

How do cryptocurrencies work?

While there are thousands of cryptocurrencies, many with unique traits, they all tend to work in similar ways at their cores. To understand how crypto works, though, it’s helpful to understand some of the commonly used terms in this sector. While it’s hard to avoid some jargon when discussing crypto, the concepts can be relatively easy to understand. Some of the main aspects to know include the following:

Blockchain technology

A cryptocurrency’s blockchain is a digital record of all the transactions involving that crypto. Copies of the blockchain are stored and maintained by computers around the world, with transactions on one copy affecting all others.

Blockchains are often compared to general ledgers, part of traditional double-entry bookkeeping systems where each transaction leads to debit and credit in different sections of the books.

“It works like a general ledger — it’s that simple,” says Donovan. Perhaps you start with two coins and send one to someone. “On the blockchain, it would say I’m sending you one coin, and I now have one coin, and you have one coin.”

On a blockchain, though, each grouping of transactions is turned into a block and chained to the existing ledger. Once a block is added it can’t be reversed or altered — which is why people describe blockchains as “immutable.”

Some cryptos have their own blockchain. For example, there are Bitcoin and Ethereum blockchains. But there are also cryptos that are built on top of an existing blockchain rather than starting from zero.

Note: Ether is the cryptocurrency native to the Ethereum blockchain, but it is available for trading through multiple exchanges or brokerages like Coinbase, Binance.US, Ninjatrader, and Robinhood.

Public transactions under pseudonymous

Cryptocurrencies have another defining feature in terms of privacy. The blockchains are public ledgers, which means anyone can see and review the transactions that occurred. However, they can also provide a degree of anonymity, as transactions can be made under pseudonyms, creating a system known as pseudonymous.

When conducting crypto transactions, there are two keys to use, rather than how in a traditional banking transaction you would use identifiers like your name or Social Security number.

“You have a private key, which is how you initiate transactions, and a public key, which is how someone identifies you in the market,” says Donovan.

While a blockchain’s transactions are tied to a crypto wallet’s public key, nobody necessarily knows who controls that wallet, because the public key is simply a code. This is why cryptos are often described as pseudonymous — the public key is a person’s pseudonym.

Coming to consensus

Because cryptocurrencies are decentralized, there’s not a singular authority that verifies transactions, like how a clearinghouse instructs banks on depositing or withdrawing funds from a customer’s account. Instead, cryptocurrencies commonly use one of two mechanisms to create a system of trust and determine which transactions are valid and added to their blockchain:

• Proof of work. This relies on people around the world, known as miners, competing to be the first to solve complex cryptographic puzzles and add the next block to the blockchain. This often involves guesses of random numbers and thus is often automated via mining systems. The winners are paid after the other members of the network verify the solution, which is generally easy to do once the correct number is produced. “The way you make sure all the participants are validating the transactions is the hard work, effort, and money they’re spending solving the problem,” says Donna Parisi, global co-head of global financial markets and financial institutions sector lead, leader of family office initiative at A&O Shearman. However, proof-of-work systems require a lot of energy to power.

• Proof of stake. This is a newer and less energy-intensive mechanism. “Proof of stake is they validate transactions on the blockchain by people putting value on the line,” explains Parisi. “They stake some of the currency they own to make sure they only validate true transactions.”

  More specifically, the more someone stakes, the more say they have in verifying the next block, and the trust comes from the fact that this person could lose some or all of the coins they’ve staked if they’re found to act maliciously.

Types of cryptocurrencies

There are thousands of different types of cryptocurrencies, and collectively they have a global market value of nearly $3 trillion as of March 2025, according to CoinMarketCap. Most of that comes from a handful of popular cryptocurrencies, such as:

• Bitcoin
• Ethereum
• Tether
• XRP
• Dogecoin
• Solana
• USD coin
• Litecoin
• Binance coin
• Dai
• TRON
• Cronos
• Polkadot

Bitcoin, the first cryptocurrency, was launched in 2009 as an alternative type of decentralized and digital money. Since then, people have also created cryptocurrencies that serve other functions or are designed for specific types of transactions.

“Cryptocurrencies can have many different uses,” says Parisi. “Some are used in gaming environments to earn rewards in a game, while others facilitate payments. Some are designed for cross-border remittances … some are designed for micro payments.”

For example, stablecoins like USD Coin are a type of cryptocurrency that try to maintain a steady and fixed exchange rate with another asset, such as the U.S. dollar. Governance tokens are another example of a specialized cryptocurrency. They give token holders voting power in a corresponding crypto project.

What is digital currency?

Digital currency is a type of currency that can only be accessed in an electronic form, such as through a computer or mobile phone. This money has no physical equivalent, unlike tangible forms of currency like banknotes or minted coins. But just like physical money, digital currencies can be used to purchase goods and services.

Digital currencies can take many forms, such as how a video game might have its own digital currency that can only be used within the gaming platform. There’s also been an emergence of central bank digital currencies (CBDC). And cryptocurrencies are one of the more popular forms of digital currencies.

Digital currencies come in two forms:

• Centralized currency: Currencies issued by governments or financial institutions as part of the commercial banking system that are available to the general public.
• Decentralized currency: Currencies not issued by governments or financial institutions. Instead, decentralized currencies operate through peer-to-peer financial networks to eliminate the middleman (e.g., banks) and allow lending, trading, and borrowing directly with other parties.

“There’s a strive toward decentralization,” says Nisa Amoils, managing partner and founder at A100x Ventures. “Digital currencies like cryptocurrencies continue to be a worthwhile investment for many investors.”

That’s not to say crypto investing is without risk — there’s certainly plenty to be mindful of. However, digital currencies like crypto are often appealing to investors who are wary of government-issued funds and are seeking alternatives.

“Some people who had been excluded from the traditional financial system, or have had their currencies devalued, are seeking an opportunity to participate in the markets, and this is a retail-driven phenomenon first,” says Amoils. “There’s this crisis of trust, and people want wealth creation for themselves. And so that spurred this whole kind of trading speculative movement.”

How to invest in cryptocurrency

You can start investing in cryptocurrencies through existing crypto exchanges and traditional investing platforms. Some of the best cryptocurrency exchanges (such as Kraken and Coinbase) offer assets like tutorials, staking rewards, low fees, and more.

Some of the best investment apps that offer cryptocurrencies (such as Robinhood) also offer broad access to different coins and tokens, along with low fees, analytics, and more.

You can create your own crypto

Anyone with coding skills and/or advanced technical knowledge can potentially create their own cryptocurrencies — although this is not always an easy feat and isn’t recommended for beginners. There are also issues like local regulations to consider. That being said, the three main ways to create crypto are:

• Building a new blockchain: The most advanced way to create crypto, but offers the most flexibility of nodes, architecture, tokenomics, and more.
• Modifying a blockchain: If you can’t create your own blockchain, you can modify an existing blockchain’s open-source code to your liking. Still, this method requires expansive technical knowledge.
• Building upon a blockchain: The simplest way to make your own coins or tokens is by expanding upon an already existing blockchain. But keep in mind that the success of your cryptocurrency will be reliant on the success of the original blockchain. Some blockchains that allow this are Binance and Ethereum.

Are cryptocurrencies secure?

All financial activity contains some security risks. A bank account can be hacked for example. So, it’s no surprise that cryptocurrencies also contain some security risks, although these may look a bit different than security within the traditional financial system.

One thing to note is that the blockchain technology behind cryptocurrencies is often seen as a relatively secure way to conduct transactions and prove ownership of coins. “What’s never been refuted is the value of blockchain — the way the ledger system is set up and every transaction is recorded, and the fact that it’s immutable,” says Donovan.”

However, that doesn’t mean you can ignore how to buy cryptocurrency safely and keep your assets secure. For one, blockchains can still be hacked, even if that’s difficult. The crypto world is also rife with crypto scams. Of course, that’s also true of traditional financial systems and currencies. But several factors could make crypto scams especially worrisome.

For example, cryptocurrency transactions can’t be reversed. There’s also less regulation of cryptocurrencies and platforms than of traditional financial services in the U.S.. Plus, some people may feel pressure to act quickly and send or invest their money because they’re worried about missing out on an opportunity.

“One way to avoid a scam is to invest in more well-established cryptocurrencies,” says Parisi. “You still may be subject to scams or fraud in terms of how you hold it, send it, or receive it.” But you can have some certainty that the cryptocurrency itself isn’t a scam.

Are cryptocurrencies a good investment?

Cryptocurrencies may present a good investment opportunity, and there are many ways to invest in the crypto world, but much depends on factors such as your risk tolerance and personal finance goals. How you use these investments matters too.

For one, you could buy a coin (or coins) and hold onto them, hoping they’ll increase in value. Or you could use your coins in a decentralized finance (DeFi) platform to earn interest through staking or lending. You also might take a more traditional route, such as an exchange-traded fund (ETF) that is tied to cryptocurrencies. There could even be opportunities to invest in projects or supporting industries rather than in the cryptocurrencies themselves.

However, any crypto-related investment can be risky, even if wrapped in a traditional vehicle like an ETF. That’s because of factors such as how crypto is generally less regulated than other assets like public stocks, and there also tends to be more speculative, volatile price movements.

“From an investment perspective, crypto is rapidly evolving,” says Parisi. “You shouldn’t put an amount of assets you’re not willing to lose. It should be, relatively speaking, a small portion of your portfolio.”

Before making any investment, try not to get too enamored by the possible benefits. Make sure you’re familiar with both the positives and what are the risks of cryptocurrency:

Whether or not cryptocurrency is a good investment is subjective. It can be riskies than some other assets, but it can also provide potential benefits like diversification or the possibility for more upside if choosing more speculative coins.

While cryptocurrency investing is a hotly debated topic, it’s worth understanding what’s going on so you can make an informed decision. If you decide to get started, you might just dip your toe rather than investing a significant amount right away.

“Learn about crypto by opening up wallets, accounts, trading currencies, and learning more about the use cases,” says Parisi. “But do it in a reasonable way. We’re still in the early days, and regulation of crypto is still evolving.”

Donovan suggests opening an account with a regulated and publicly traded company like Coinbase. But, he says, “It’s really about being smart and using the system to take baby steps.”

Start investing

FAQs about cryptocurrency