What is cryptocurrency?

 Cryptocurrency is a kind of digital currency that is intended to act as a medium of exchange. Cryptocurrency has become popular in the last decade, in particular, with Bitcoin becoming the most widely tracked alternative currency. Typically, cryptocurrency is electronic-only and does not have a physical form – that graphic at the top of the page is just an artist’s vision of digital currency.

Cryptocurrency appeals to many people because of its ability to be managed without a central bank and therefore concerns around secrecy and subterfuge. It appeals because of its ability to hold value and not be inflated away by central banks that want to print money. It’s also very difficult to counterfeit due to the blockchain ledger system that manages the currency.

Cryptocurrencies have gained popularity in the investment world due to the significant appreciation seen by some coins since they were first introduced. More recently, cryptocurrencies have seen significant declines as the Federal Reserve raises interest rates, which has impacted the most speculative investments particularly hard. Bitcoin and Ethereum, two of the most popular coins, have each fallen by more than 70 percent from their all-time highs as of June 2022.

How cryptocurrency works

Cryptocurrencies are produced, tracked and managed through what’s called a distributed ledger such as blockchain. In a distributed ledger, the currency’s movement is processed by computers in a decentralized network, to ensure the integrity of the financial data and ownership of the cryptocurrency. Think of it like a giant never-ending receipt of all the system’s transactions that is being constantly verified by everyone who can see the receipt.

This ecentralized system is typical of many cryptocurrencies, which eschew a central authority. That’s part of the appeal of cryptocurrencies such as Bitcoin – it keeps governments and central banks out of the currency system, reducing their interference and political maneuvering.

To this end, in some cryptocurrencies, the number of units of currency is limited. In the case of Bitcoin, the system is organized so that no more than 21 million bitcoins can be issued.

But how exactly does cryptocurrency come to exist? The key way is through what’s called mining, to use a metaphor related to the old monetary system based on gold or silver. Powerful computers, often known as miners, perform calculations and process transactions on the ledger. By doing so, they earn a unit of the currency, or at least a part of a unit. It requires a lot of expensive processing power and often a lot of electricity to perform these calculations.

Owners of the currency may store it in a cryptocurrency wallet, a computer app that allows them to spend or receive the currency. To make a transaction, users need a “key,” which allows them to write in the public ledger, noting the transfer of the money. This key may be tied to a specific person, but that person’s name is not immediately tied to the transaction.

So part of the appeal of cryptocurrency for many is that it can be used somewhat anonymously.

There’s literally no limit to the number of cryptocurrencies that could be created. The range of them is astonishing, and literally thousands of currencies popped up in the last few years, especially as Bitcoin soared into mainstream popularity in 2017. Some of the most popular cryptos include Bitcoin, Dogecoin, Ethereum, Tether and XRP.

What are the largest cryptocurrencies?

The size of a cryptocurrency depends on two factors: how many coins are in existence and the price of those coins. Multiply these two numbers together and you get the currency’s market capitalization, or the total value of all those coins. So when experts talk about the largest cryptocurrencies, this is the figure they’re referring to – not the price of an individual coin.

1. Here are the top cryptocurrencies and their approximate market cap, according to CoinMarketCap, as of June 2022:Bitcoin – $388 billion
2. Ethereum – $132 billion
3. Tether – $67 billion
4. USD Coin – $56 billion
5. Binance Coin – $36 billion
6. Cardano – $16 billion
7. XRP – $16 billion
8. Solana – $13 billion
9. Dogecoin – $8 billion
10. Polkadot – $7 billion

What is cryptocurrency used for?

A cryptocurrency can be used for a variety of different things, but it depends on what it was created for. While the term cryptocurrency conjures images of a payment system, it’s more useful to think of it as a token that enables you to do some action, like a token in a video arcade. You buy some tokens and feed them to the machine, and it allows you to play the game.

For example, Bitcoin’s purpose is to send money, enabling the crypto to function as a currency. But while it can function that way, very few merchants actually accept it as currency, and it’s actually relatively slow compared to other payment networks (see more below).

Similarly, the cryptocurrency Ethereum allows users to create “smart contracts,” a kind of contract that self-executes once its terms have been met. The cryptocurrency Internet Computer allows users to create apps, websites and other web-based services. Those digital currencies stand in contrast to Dogecoin, which was created literally to spoof the silliness around Bitcoin.

While these cryptocurrencies may have real-world use cases (or not), one of the biggest uses for them is as a means of speculation. Speculators drive the prices of these coins back and forth, hoping to make a profit from others who are similarly trading in and out of the assets.

Although the coins may enable a user to perform a certain action, many buyers are only interested in flipping them for a profit. For many, that’s the real use case for cryptocurrencies.

Can you convert crypto to cash?

Cryptocurrencies can be relatively easily converted into regular currency such as dollars or euros. If you own the currency directly, you can trade it via an exchange into fiat currency or into another cryptocurrency. Typically you’ll pay a significant fee to move in and out, however.

But you may also own crypto through a payment app such as PayPal or CashApp, and you can easily trade it for dollars. You may even be able to use a Bitcoin ATM to access dollars.

Those who own crypto via Bitcoin futures can readily sell their positions into the market when it’s open, though you’ll want to look for the best brokers for crypto if you’re trading regularly.

But if you need to access your money immediately, you’ll have to take whatever price the market offers at that time, and it may be a lot less than what you’ve paid for it. The volatility in crypto is even greater than for other high-risk assets. On top of that, there are often substantial fees for moving in and out of the market and you’ll face tax implications from doing so.

What are the risks of crypto?

While proponents have a good story to tell about digital currencies such as Bitcoin, these currencies are not without serious risks, at least as currently configured. That doesn’t mean you can’t make money on them by selling it to someone else at a higher price than you paid. However, some drawbacks do make Bitcoin and other currencies virtually useless as a currency, a means of exchange.

Bitcoin and other cryptos have real detractors, including some of the world’s top investors, such as multi-billionaire Warren Buffett. Buffett has called Bitcoin “probably rat poison squared,” while his longtime business partner Charlie Munger has said cryptocurrency trading is “just dementia.” Buffett recently said that he wouldn’t buy all the Bitcoin in the world for $25 because, unlike stocks, real estate and farmland, it doesn’t produce anything for its owners.