Cryptocurrencies are digital or virtual currencies based on a blockchain (a distributed network). They offer an alternative to traditional, government-backed fiat currencies. Most understand it to be a highly volatile asset class, with huge risk-return potential, but that’s only half the story.
Cryptocurrency is a digital or virtual currency based on a distributed network called a blockchain. Crypto transactions are secured using cryptography, ensuring that only the sender of a cryptoasset and its intended recipient can access it.
Unlike fiat currencies that are issued by a central authority, cryptocurrencies operate within a decentralized framework. This means that transactions are recorded and new units are issued by a network of participants rather than a single governing body. Anyone with internet access can participate in this peer-to-peer system, enabling rapid and borderless transactions.
Despite their price volatility, cryptocurrencies at their core are secure, decentralized digital currencies that offer a compelling alternative to traditional, government-backed fiat currencies.
What is cryptocurrency mining?
Crypto mining is one of the most well-known yet least understood methods for generating cryptocurrencies. There are three primary avenues for obtaining crypto: as a reward for blockchain work, through purchasing from a crypto exchange, or via mining.
To eliminate the need for third-party intermediaries, users are responsible for validating and adding transactions to the blockchain. Networks using a system known as Proof of Work (PoW) employ a mining mechanism to ensure complete decentralization.
Participants engaged in this process are termed validators or miners. They utilize computer resources to solve intricate mathematical problems, and the first to resolve the challenge earns the right to validate the subsequent block of transactions, earning new coins as a reward.
Tip: Investors interested in purchasing and owning cryptoassets could consider buying them from exchanges or trading platforms.
Understanding the cryptocurrency market
The cryptocurrency market is bifurcated into two main categories: crypto coins and crypto tokens. The launch of Bitcoin in 2009 marked a significant milestone, introducing a potential alternative to government-issued fiat currencies.
Since then, thousands of cryptocurrencies have emerged, each with specific purposes beyond mere investment vehicles. Coins are native to their own blockchains, primarily serving as a means of payment, aligning them more closely with traditional currencies. In contrast, tokens are created on existing blockchains and often function more like assets. For example, ETH is the native coin of the Ethereum blockchain, while ApeCoin (APE) is a token created on Ethereum.
Tip: As Bitcoin was the first cryptocurrency, all other cryptos are referred to as “altcoins.”
Different types of cryptocurrencies
With the rising popularity of cryptocurrencies, understanding the various types is crucial for potential investors. Each type serves different purposes within the ecosystem.
| Token Type | Function |
|---|---|
| Utility | Utility tokens serve specific functions on their blockchains, enabling users to perform actions on a network or decentralized application (dApp). |
| Security | Security tokens represent ownership of an asset and can be issued by companies to raise capital. |
| Payment | Payment tokens typically have their own blockchains and serve primarily as a medium of exchange. |
| Governance | Governance tokens provide voting rights on a blockchain, allowing holders to influence project direction and decisions. |
Popular cryptocurrencies
When it comes to popularity, the two largest cryptocurrencies remain Bitcoin and Ethereum, though a variety of other cryptos present considerable investment options. These digital currencies are ranked based on market capitalization, which fluctuates over time.
These popular cryptocurrencies encompass various coin and token types, such as Layer 1 and Layer 2 blockchain assets, in addition to Stablecoins.
As of February 2025, the most popular cryptocurrencies based on market capitalization include:
How to buy cryptocurrency
For those interested in acquiring cryptocurrencies, numerous options are available. A common choice is to use a trading platform, where investors can trade fractional amounts of their chosen cryptocurrencies and implement Stop-Loss and Take-Profit features to mitigate market volatility.
Alternatively, many investors prefer buying their cryptocurrencies on crypto exchanges and then transferring them to their cryptocurrency wallets for added security.
Some choose to bypass direct crypto investments, opting instead to buy shares in blockchain companies or invest in ETFs (Exchange-Traded Funds). Though this route involves indirect investment, it potentially aligns the asset’s value with the general crypto market trends while possibly reducing volatility. There are also options to invest in ETFs that follow Bitcoin’s price movements.
Tip: Regardless of how you buy them, it’s crucial to conduct thorough research before diving into cryptocurrency trading and investing.
Final thoughts
Cryptos can initially appear daunting. Yet, whether or not one grasps the complete concept of blockchain, cryptos themselves are relatively straightforward assets.
Despite the inherent volatility, the fundamental characteristics of cryptocurrencies as secure and decentralized digital currencies make them appealing alternatives to traditional fiat currencies. Understanding these essential elements could empower newcomers to consider starting their investment journey.
FAQs
- How does cryptocurrency work?
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Cryptos rely on a blockchain which functions as a distributed public ledger, documenting all transactions made with the cryptocurrency in question. Being decentralized, transactions remain anonymous while still being accessible for verification at any time.
- Why is crypto important?
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Many investors see cryptocurrencies as a pivotal development in financial history. They enable secure, direct global payments and provide universal access to finance as long as individuals have a mobile phone and internet connection.
For some, the decentralization aspect is significant, offering greater transparency, anonymity, and reducing third-party interference compared to conventional financial channels.
- Why are cryptos so volatile?
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Cryptocurrencies are notoriously volatile asset classes, with values fluctuating dramatically over time. Most coins and tokens have a capped supply, leading to increased prices when demand rises.
Additionally, the speculative nature of crypto means that investor sentiment can shift unpredictably, leading to sharp price movements based on news and trends surrounding new or existing projects.
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This information is for educational purposes only and should not be taken as investment advice, personal recommendation, or an offer of, or solicitation to, buy or sell any financial instruments.
This material has been prepared without regard to any particular investment objectives or financial situation and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Not all of the financial instruments and services referred to are offered by eToro and any references to past performance of a financial instrument, index, or packaged investment product are not, and should not be taken as, a reliable indicator of future results.
eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this guide. Make sure you understand the risks involved in trading before committing any capital. Never risk more than you are prepared to lose.
