What Is Cryptocurrency and How Does It Work?

Cryptocurrencies allow you to buy and sell goods and services for a profit. Learn more about bitcoin, including what it is, how to buy it, and how to protect yourself.

1. What Is Cryptocurrency?

A cryptocurrency (or "crypto") is a type of payment that can circulate without the intervention of a central monetary authority such as a government or bank. Cryptocurrencies, on the other hand, are created using cryptographic techniques that allow people to buy, sell, or trade them securely.

Cryptocurrencies can be used to buy and sell goods and services, but they are more commonly used as investment vehicles. Cryptocurrency is also an important part of the operation of some decentralized financial networks, where digital tokens are used to carry out transactions.

Bitcoin, the most popular cryptocurrency, has historically had a volatile price. It reached an all-time high of more than $65,000 in 2021 before falling back.

2. How do I invest in cryptocurrency?

While some cryptocurrencies, such as Bitcoin, can be purchased with US dollars, others require payment in bitcoins or another cryptocurrency.

To purchase cryptocurrencies, you'll need a "wallet," which is an online app that stores your currency. In general, you open an account on an exchange and then use real money to purchase cryptocurrencies such as Bitcoin or Ethereum. Here's more information on how to invest in Bitcoin.

What online brokers offer cryptocurrencies?

If you're used to traditional brokerage accounts, there are a few online brokers that provide access to both cryptocurrencies and stocks. Robinhood, Webull, SoFi Active Investing, and TradeStation are among the online brokers reviewed by NerdWallet. Look for pure-play cryptocurrency exchanges if you're looking for an exchange that only deals in cryptocurrencies. These platforms, such as Coinbase, Gemini, and Kraken, do not provide access to core assets such as stocks and bonds, but they do have a much larger selection of cryptocurrencies and more wallet functionality.

3. How many cryptocurrencies are there? 

Best cryptocurrency by market cap. These are the 10 largest cryptocurrency trades by market cap as tracked , a provider of cryptocurrency data and analytics.

Cryptocurrency	Market Capitalization
Bitcoin	$783.7 billion
Ethereum	$371 billion
Tether	$78.3 billion
BNB	$77 billion
Cardano	$49.4 billion
USD Coin	$45.6 billion
Solana	$42.4 billion
XRP	$35.3 billion
Terra	$26.9 billion
Polkadot	$24.1 billion

4. Why are cryptocurrencies so popular?

Cryptocurrency investors do so for a variety of reasons. Here are a few of the most well-known:

• Cryptocurrencies such as Bitcoin are seen as the currency of the future, and supporters are rushing to purchase them now, presumably before they become more valuable.
• Some supporters like the fact that cryptocurrency removes central banks from managing the money supply, because these banks tend to devalue money over time through inflation.
• Others support the blockchain technology that underpins cryptocurrencies because it is a decentralized processing and recording system that can be more secure than traditional payment systems.
• Some speculators like cryptocurrencies because they are increasing in value, but they are uninterested in the currencies' long-term acceptance as a means of transferring money

5. Are cryptocurrencies a good investment?

Cryptocurrencies may appreciate in value, but many investors regard them as speculative investments rather than real investments. What's the reason? Cryptocurrencies, like real currencies, generate no cash flow, so in order for you to profit, someone else must pay more for the currency than you did.

This is known as the "greater fool" investment theory. In contrast, a well-managed business increases its value over time by increasing its profitability and cash flow.

For those who see cryptocurrencies such as bitcoin as the currency of the future, it should be noted that a currency needs stability.

Some prominent voices in the investment community have advised would-be investors to avoid them. Notable investor Warren Buffett compared Bitcoin to paper checks, saying, "It's a very effective way of transmitting money and you can do it anonymously and all that." A check is another method of transferring money. Is a check worth a lot of money? Just because they have the ability to send money?

Those who believe that cryptocurrencies such as Bitcoin will be the currency of the future should be aware that a currency requires stability in order for merchants and consumers to determine what a fair price is for goods. Throughout much of their history, Bitcoin and other cryptocurrencies have been anything but stable. For example, while Bitcoin was trading near $20,000 in December 2017, its value dropped to around $3,200 a year later. By December 2020, it was trading at all-time highs once more.

Price volatility creates a quandary. Even if bitcoins become much more valuable in the future, people are less likely to spend and circulate them today, making them less viable as a currency. Why would you spend a bitcoin.

6. Are cryptocurrencies legal?

There is no doubt that they are legal in the United States, though China has effectively banned their use, and whether they are legal ultimately depends on each individual country. Consider how to protect yourself from fraudsters who see cryptocurrencies as a way to defraud investors. Buyer beware, as always.

7. How do I protect myself?

If you want to invest in a cryptocurrency through an ICO, read the fine print in the company's prospectus for the following information:

Who is the company's owner? A recognizable and well-known owner is a good sign.

Is it being backed by any other major investors? If other well-known investors want a piece of the currency, it's a good sign.

Will you have a stake in the company, or will you only have currency or tokens? This distinction is critical. Owning a stake entitles you to a share of the company's profits (you're an owner), whereas purchasing tokens entitles you to use them like chips in a casino.

Is the currency already created, or is the company looking to raise funds to create it? The further the product progresses

Should I invest in cryptocurrency?

Cryptocurrency is a highly speculative and volatile investment. Investing in established companies' stocks is generally less risky than investing in cryptocurrencies like Bitcoin.