What is cryptocurrency? Decoding digital currency

Bitcoin? Ethereum? Do you feel like you need a decryption key when it comes to cryptocurrency? You're not alone.

In the simplest terms, cryptocurrency is a digital currency. Typically, it takes the form of tokens or “coins” that only exist electronically. Unlike physical currencies, many don’t depend on the U.S. Mint, banks or third parties like credit card companies to create new units and verify transactions. 

Certain cryptocurrencies can be used to buy everyday goods and services, and the list is expanding as the adoption of crypto grows. Many people also invest in cryptocurrencies as they would in other assets, such as stocks or precious metals. 

If you’ve been following cryptocurrency in the news, you might have heard of blockchain, too. When you buy or sell crypto, it’s recorded in a “block,” which is linked to a “chain” of previous transactions. In other words, a blockchain is a ledger that records transactions in digital code and is shared openly across countless websites and institutions. You can think of it as a digital checkbook that’s stretched across a global network of computers or a virtual registry where you write down everything you spend money on every day.

With blockchain, every crypto user has a copy of this registry, creating a single, shared record book. When a new transaction occurs, software logs it, and every blockchain copy is updated with the latest information. This keeps all records identical, accurate and everyone can see every transaction over the entire history of the blockchain. 

Many different types of cryptos exist — some are immensely well known, while others have little to no following or trading volume. These are among the most established:

Launched in 2009, Bitcoin is the world’s first and largest cryptocurrency by market capitalization (or total market value). As an investment, Bitcoin is highly volatile, sharply dropping and climbing in price with little warning, but it’s finite with only 21 million Bitcoin that will ever be in circulation. Despite Bitcoin’s popularity, no one knows who created it, since its programmer(s) goes by the pseudonym Satoshi Nakamoto. 

Maybe you’ve seen Ethereum in recent headlines, in a meme or with the recent blitz around non-fungible tokens (NFTs). Most NFTs are hosted on the magical sounding Ethereum, a blockchain platform with its own cryptocurrency, called Ether (ETH) or Ethereum.

Because of the unpredictable nature of cryptocurrencies, Stablecoin was introduced to offer price stability by fixing its market value to an external reference like the U.S. dollar or gold, for example. Stablecoins also utilize computer-driven mechanisms of buying and selling to maintain a consistent value.

After tweets from Tesla founder Elon Musk and rapper Snoop Dogg in spring 2021, Dogecoin (which started as a joke) surged in market value to nearly $50 billion. Shortly afterward, it was valued among the top five most-valuable cryptocurrencies, and while a single coin is worth only a few dimes, its active online community on Reddit keeps it in the headlines.

This term simply refers to cryptocurrencies other than Bitcoin. Stablecoin is just one example of an altcoin, but there are more than 4,500 different cryptocurrencies in circulation. Some others worth mentioning include mining-based cryptocurrencies and security and utility tokens.

In the past, cash transactions helped us buy and sell in real-time. Most everyday transactions such as debit, credit and digital payment apps like Venmo don’t give us that same benefit of instantaneous transition of value. Some people use cryptocurrency for quick, turn-key, cashless payments that avoid transaction fees since it’s frictionless like cash, settling on the chain in real-time. 

The first thing to know is that not all cryptocurrencies are mined — some are issued or tied to physical assets. Bitcoin, however, does enter circulation as payment for mining (at least until all 21 million of it is issued). So, what does that mean? Bitcoin is mined by using sophisticated computers to solve highly complicated math problems. Bitcoin miners are paid for working as auditors — receiving a Bitcoin payment in exchange for verifying “blocks” of legitimate transactions.

If you're hoping to make everyday purchases using crypto, you might need to wait a bit before it goes mainstream as a payment option. Although you can use cryptocurrency to make some purchases, it’s not a commonplace payment method as of now, since only a handful of retailers currently accept it. So, you might need to move to El Salvador, where it is an official currency, if you're looking for it to be more widely accepted. 

Some investors find crypto to be an intriguing opportunity because of its growth potential. If cryptocurrency ever becomes a mainstream method of paying for things, its price could soar to new heights. 

Learn more: Understanding cryptocurrency — What it is and how it works

As an investor, you never want to put all your eggs in one basket, so to speak. Especially not one as volatile as cryptocurrency. Its newness makes its risk less understood and more difficult to compare in relation to other investments. 

If you're investing in crypto, you may want to consider balancing it out with other types of investments in your portfolio. By creating a diversified portfolio, you stand a better chance of seeing better returns without exceeding your desired risk.

As a digital currency, crypto isn’t widely accepted yet. But its blockchain technology, which verifies transactions, has the potential to change the way we handle money and do business. For now, cryptocurrency is mostly an investment opportunity, but one that’s quite volatile. Is blockchain the future of financial technology? Many investors argue that it is. But the question is whether that future is now.