What is cryptocurrency?

Key points

• Cryptocurrency has burst onto the scene in the past decade.
• You must be vigilant, as this asset class is very volatile. 
• Large losses were realized in 2022 followed by a rally in 2023 and 2024.

There may come a day when schools add Cryptocurrency 101 to their curriculum. Until then, you’ll have to educate yourself.

Cryptocurrency — or crypto, as the cool kids call it — entered the lexicon in 2009. It has since taken the world by storm. You can hardly turn on the news without seeing a mention of this asset class. So you may have little choice but to learn what cryptocurrency is and how it works.

What is cryptocurrency?

A cryptocurrency is a digital currency that functions via an encryption algorithm. This is a technical method of securing data on the blockchain, which we explain below. 

Cryptocurrencies commonly run without the backing of a central party, such as a government or central bank. Instead, they exist in a decentralized manner.

Cryptocurrency vs. physical money comparison

Bitcoin launched in 2009. It was seen as a technological breakthrough in the area of digital cash. Thousands of cryptocurrencies have launched in the years since. 

The market cap of all coins rose as high as $3 trillion during the 2021 bull market before collapsing during the 2022 “crypto winter.” The total market is worth around $2.6 trillion today. Bitcoin and ethereum dominate much of the market.

How does cryptocurrency work?

A cryptocurrency transaction is essentially an agreement between two people about the price they’re willing to pay or accept, said Julio Rivas, associate professor of finance at the Lipscomb University College of Business. 

“The appeal of cryptocurrencies is that they are not controlled by any government. Therefore, people who buy or invest in them believe that the asset is not manipulated,” Rivas said.

But this scares some people. Who is in charge? Who backs this so-called currency? It also makes crypto volatile. The price depends entirely on the value each party to the transaction gives it.

When you buy cryptocurrency, you don’t get actual coins. Instead, you get two keys. Your private key is a string of letters and numbers that lets you access your crypto. It functions as a password. Your public key allows others to send you crypto.

What is a blockchain?

Some say the blockchain is where the real magic happens. A blockchain is the technology on which a cryptocurrency runs. When you hear the term blockchain, you can visualize a public ledger or database. This database is updated in real time. It records every transaction using that cryptocurrency. 

For example, the bitcoin blockchain can be seen here. It lives on the internet in plain sight for all to see. Every transaction in the history of bitcoin is recorded on it. These transactions are recorded in blocks. Each block is linked to the previous one to form a chain. 

“This structure ensures that once information is added, it cannot be altered or deleted, providing a secure and transparent way to record transactions,” said Kwamie Dunbar, associate professor of finance and director of fintech programs at Worcester Polytechnic Institute.

Different forms of blockchain technology have been developed in conjunction with different cryptocurrencies. In the case of bitcoin, the blockchain is maintained by a group of volunteers known as miners. Miners solve complex mathematical puzzles with powerful computers. 

Cryptocurrency examples

There are thousands of cryptocurrencies. Many aren’t worth much. But each crypto is unique.

“Think of (cryptocurrencies) as stocks. They are basically the same asset class, but they are very different from each other,” Rivas said. 

Below are some of the most well-known coins in the space.

Bitcoin 

Bitcoin has a first-mover advantage and operates differently from most cryptocurrencies. It runs on a proof-of-work blockchain. This means it’s theoretically more decentralized than other cryptos. But that comes at the cost of a mammoth energy consumption bill. 

Some liken bitcoin to a digital form of gold. They hope it can one day be a store of value where you can park your wealth outside the control of governments and central banks.

But it remains incredibly volatile. Bitcoin’s previous all-time high was more than $68,700 in November 2021 before a precipitous fall throughout 2022. It rallied in 2023 in anticipation of the approval of spot bitcoin exchange-traded funds. Bitcoin reached a new all-time high of more than $73,700 in March 2024. 

Ethereum

Ethereum is the second-biggest cryptocurrency. But it’s vastly different from bitcoin.

It’s attempting to become the base layer of a new decentralized system. Other cryptos and decentralized applications can be launched on top of ethereum. A good way to view it is as a playground for developers. 

Decentralized finance and non-fungible tokens are two of the most famous areas of development on ethereum. 

Ethereum reached its all-time high of more than $4,800 in November 2021. Its value fell in the wake of rising interest rates and the FTX failure in 2022. Ethereum exceeded $4,000 again in March 2024 but has since fallen to less than $3,500.

Litecoin

Former Google engineer Charlie Lee launched litecoin in 2011.

It was inspired by bitcoin. Lee described litecoin as “the Silver to Bitcoin’s Gold.” Bitcoin was viewed as more likely to be used as a store of value. The thesis behind litecoin was an offshoot of bitcoin that was more suitable for payments.

Tether

Tether is a stablecoin. Its value is pegged to a fiat currency — in this case, the U.S. dollar. One tether token will always trade for $1.

At least theoretically. 

Tether has been dogged by concerns over whether its tokens are really backed one-to-one with full reserves. That, combined with the emergence of rival stablecoins, has seen its market share dip in the last couple of years. 

But it remains the biggest stablecoin in the space.

Dogecoin

Dogecoin is a memecoin. This means it’s an asset inspired by a meme or internet joke — in this case, a shiba inu named Kabosu. 

But that hasn’t stopped dogecoin from actively trading for real money. It even reached a market cap of $88 billion in May 2021. 

Since then, it has fallen back down to Earth. But memecoins like Dogecoin symbolize how much speculation and volatility exists in the cryptocurrency space. 

Understanding the cryptocurrency market

The cryptocurrency market can be confusing because it is tied so symbiotically to human emotion. 

The pandemic period brought meteoric gains. But bone-crushing losses followed as the wider economy pulled back amid rising interest rates to combat inflation. 2022’s returns highlighted that nothing within crypto was immune to immense losses. The year was a cautionary tale of the risks inherent in the space. Multiple cryptocurrency companies filed for bankruptcy, including FTX, whose founder was convicted of stealing $8 billion from customers.

Some argue that cryptocurrency is nothing if not resilient, however. And 2023 and 2024 appear to be evidence of this position.

“The recent introduction of cryptocurrency ETFs marks a significant evolution, allowing retirement plans and individual investors to gain exposure to cryptocurrencies without directly purchasing or holding them,” Dunbar said.

These ETFs have spurred demand for many large cryptocurrencies. Some have reached or neared all-time highs. What the future holds for crypto, though, is anyone’s guess.

Pros and cons of cryptocurrency

There are many other pros and cons to consider before wading into crypto’s murky waters. Here are some of the key benefits and drawbacks.

Crypto tips for beginners

The crypto space might be confusing and overwhelming to a beginner. And the risk is high. If you want to invest in crypto, here are four tips to help you start.

1. Understand the risks

It’s important to educate yourself on crypto’s risks. Also consider how to store it, how to buy it, whether it is legal in your country, and how to avoid common scams and pitfalls.

2. Check past performance

Past performance can indicate how volatile a coin is. But remember that past performance is no guarantee of future performance. 

3. Watch volatility 

Crypto’s volatility is unmatched. Many experts recommend an asset allocation of no more than 5% for crypto. Depending on your risk tolerance, investment horizon and existing portfolio, cryptocurrency may not be a suitable purchase. 

4. Invest only what you can afford to lose

It should be clear by now that cryptocurrency is risky. Many cryptos have gone to zero. And others will do so in the future. Invest only what you can afford to lose. 

Is cryptocurrency a safe investment?

Cryptocurrency is a risk-on investment. There are countless examples of investors losing it all by investing in crypto. 

Cryptocurrency volatility is also dangerous. Many coins have no intrinsic value and will almost certainly go to zero someday. There are also many scams in the space. So if you invest in crypto, you must be vigilant. 

Frequently asked questions (FAQs)

Is cryptocurrency legal?

Cryptocurrency’s legal status is murky. 

Most nations allow the purchase and sale of digital assets by investors. But the rules beyond that — legislation regarding companies, mining and securities laws, for example — vary. 

Some countries, such as China, have banned crypto activity of any kind.

What can you buy with cryptocurrency?

You likely can’t stroll into your local cafe and buy an iced latte with crypto. But some companies, including Virgin Galactic, AMC and Microsoft, accept payments in crypto for certain products.

Is cryptocurrency a good investment?

Cryptocurrency is highly risky and speculative. Any asset with such extreme price swings is not a reliable investment or store of value. But it can be profitable if you have an iron stomach and plenty of time to weather crypto’s storms.

That said, never invest money you can’t afford to lose in cryptocurrency. No one can anticipate what may be in store for this volatile asset class.

What is market capitalization in cryptocurrency?

Market capitalization in cryptocurrency is a specific cryptocurrency’s total value. It’s calculated by multiplying a coin’s price by the number of coins in circulation. For example, a coin trading at $100 with 50 million coins in circulation has a market cap of $5 billion.

The total market cap of the cryptocurrency industry combines the market caps of all the cryptocurrencies trading on the market.