What is cryptocurrency? What to know about this increasingly popular digital currency

Paid non-client promotion: Affiliate links for the products on this page are from partners that compensate us (see our advertiser disclosure with our list of partners for more details). However, our opinions are our own. See how we rate investing products to write unbiased product reviews.

• Cryptocurrencies are digital assets that are created and run on a blockchain.
• Bitcoin and ether are two popular cryptocurrencies, but there are many others.
• Investing in cryptocurrency can be extremely risky, and the underlying technology is very new.

It’s important for investors 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, there are a lot of risks involved with crypto investing, and you need to be mindful of scams. 

What is cryptocurrency?

Cryptocurrency is a type of decentralized digital currency that investors can buy and sell 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. In fact, no single person, company, or government controls a crypto’s blockchain. Instead, it’s run by a decentralized network of computers worldwide. Anyone with advanced technology skills and coding experience can create a cryptocurrency.

The lack of a central authority can also make cryptocurrencies more secure. “It’s hack-proof because 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. It’s hard to avoid some jargon when discussing cryptos, but the concepts can be relatively easy to understand. 

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. They’re 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.” 

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. 

Public transactions under pseudonymous 

Cryptocurrencies have another defining feature. 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. 

“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.

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

Types of cryptocurrencies

According to CoinMarketCap, there were more than 25,149 different cryptocurrencies with a global market value of about $1.16 trillion as of May 30, 2023. Some of the most popular cryptocurrencies include:

• Bitcoin
• Dogecoin
• Ether
• Litecoin
• Tether
• Binance coin
• Dai
• TRON
• Cronos
• USD coin
• Bitcoin cash

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