Cryptocurrency Basics (And Why Bitcoin is Still Around)

Cryptocurrencies let you buy goods and services, use apps and games or trade them for profit.

Here's more about what cryptocurrency is and how it works.

What is cryptocurrency ?

Cryptocurrency (or “crypto”) is a digital currency, such as Bitcoin, that is used as an alternative payment method or speculative investment. Cryptocurrencies get their name from the cryptographic techniques that let people spend them securely without the need for a central government or bank.

Here are a few examples:

Bitcoin was initially developed primarily to be a form of payment that isn't controlled or distributed by a central bank. While financial institutions have traditionally been necessary to verify that a payment has been processed successfully, Bitcoin accomplishes this securely, without that central authority.

Ethereum uses the same underlying technology as Bitcoin, but instead of strictly peer-to-peer payments, the cryptocurrency is used to pay for transactions on the Ethereum network. This network, built on the Ethereum blockchain, enables entire financial ecosystems to operate without a central authority. To visualize this, think insurance without the insurance company, or real estate titling without the title company.

Scores of altcoins (broadly defined as any cryptocurrency other than Bitcoin) arose to capitalize on the various — and at times promising — use cases for blockchain technology.

It’s important to remember that Bitcoin is different from cryptocurrency in general. While Bitcoin is the first and most valuable cryptocurrency, the market is large.

There are more than two million different cryptocurrencies in existence, according to CoinMarketCap.com, a market research website. And while some cryptocurrencies have total market valuations in the hundreds of billions of dollars, others are obscure and essentially worthless.

If you’re thinking about getting into cryptocurrency, it can be helpful to start with one that is commonly traded and relatively well-established in the market. These coins typically have the largest market capitalizations.

Thoughtfully selecting your cryptocurrency, however, is no guarantee of success in such a volatile space. Sometimes, an issue in the deeply interconnected crypto industry can spill out and have broad implications on asset values.

For instance, in November of 2022 the market took a major hit as the cryptocurrency exchange FTX struggled to deal with liquidity issues amid a spike in withdrawals. As the fallout spread, cryptocurrencies both large and small saw their values plummet.

For beginning investors, it can also be worthwhile to examine how widely a cryptocurrency is being used. Most reputable crypto projects have publicly available metrics showing data such as how many transactions are being carried out on their platforms. If use of a cryptocurrency is growing, that may be a sign that it is establishing itself in the market. Cryptocurrencies also generally make "white papers" available to explain how they'll work and how they intend to distribute tokens.

If you're looking to invest in less established crypto products, here are some additional questions to consider:

Who’s heading the project? An identifiable and well-known leader is a positive sign.

Are there other major investors who are investing in it? It’s a good sign if other well-known investors want a piece of the currency.

Will you own a portion in the company or just currency or tokens? This distinction is important. Being a part owner means you get to participate in its earnings (you’re an owner), while buying tokens simply means you're entitled to use them, like chips in a casino.

Is the currency already developed, or is the company looking to raise money to develop it? The further along the product, the less risky it is.

It can take a lot of work to comb through a prospectus; the more detail it has, the better your chances it’s legitimate. But even legitimacy doesn’t mean the currency will succeed. That’s an entirely separate question, and that requires a lot of market savvy. Be sure to consider how to protect yourself from fraudsters who see cryptocurrencies as an opportunity to bilk investors.