{"id":143807,"date":"2020-07-14T18:20:28","date_gmt":"2020-07-14T15:20:28","guid":{"rendered":"http:\/\/www.etoro.com\/?page_id=143807"},"modified":"2025-11-03T14:27:02","modified_gmt":"2025-11-03T12:27:02","slug":"what-is-cryptocurrency","status":"publish","type":"page","link":"https:\/\/www.etoro.com\/en-us\/crypto\/what-is-cryptocurrency\/","title":{"rendered":"What Is Crypto and How Does It Work?"},"content":{"rendered":"\n

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\u2019s only half the story.<\/p>\n\n\n\n\n\n\n

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Cryptocurrency is a digital or virtual currency based on a distributed network<\/strong> called a blockchain<\/a>. Crypto transactions are secured using cryptography, an encryption technique that ensures that only the sender of a cryptoasset and its intended recipient can access it.<\/p>\n\n\n\n

Cryptos are not issued by a central authority<\/strong> in the same way that fiat currencies are. Instead, crypto uses a decentralized<\/e-tip> system to record transactions and issue new units. Crypto utilizes a peer-to-peer system<\/strong>, meaning that anyone in the world can send and receive payments, as long as they have access to the internet.<\/p>\n\n\n\n

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Despite their price volatility<\/e-tip><\/strong>, at their core, cryptos are secure, decentralized digital currencies that offer an alternative to traditional, government-backed fiat currencies.<\/p>\n\n\n\n

What is cryptocurrency mining?<\/h2>\n\n\n\n

Crypto mining is one of the most widely known, but least understood, means of generating crypto. There are three primary ways for cryptos to be obtained<\/strong>: as a reward for work completed on a blockchain; by purchasing them from a crypto exchange<\/e-tip>; or through mining.<\/p>\n\n\n\n

To avoid using third parties, users are tasked with validating and adding transactions to the blockchain<\/strong>. Some blockchains, referred to as Proof of Work (POW)<\/e-tip> networks, use a system of \u201cmining\u201d to make sure that the system is fully decentralized. <\/p>\n\n\n\n

Those interested in undertaking this work are called validators. Validators use computer resources to solve complex mathematical problems. The first person \u2014 or computer \u2014 to achieve the correct answer will automatically be eligible to validate the next block of transactions. Validators are called miners because the process leads to the creation of new coins<\/strong>, which are distributed to the successful individuals as a reward.<\/p>\n\n\n\n

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Tip: <\/strong>Investors interested in purchasing and owning cryptoassets could consider buying them from exchanges or trading platforms<\/a>.<\/p>\n<\/div><\/div>\n\n\n\n

Understanding the cryptocurrency market<\/h2>\n\n\n\n

The crypto market is split into two distinct sections: crypto coins and crypto tokens<\/strong>. Cryptos were not originally created to be used as investment vehicles. In 2009, Bitcoin was launched as a potential replacement for government-issued fiat currencies. <\/p>\n\n\n\n

Thousands of cryptos have been launched since then, with more being created every day. Most have a primary purpose<\/strong>, aside from acting as a potential investment opportunity.<\/p>\n\n\n\n

Coins are native to their blockchains <\/strong>and are primarily used as a method of payment, making them more closely aligned with traditional currencies. Tokens are created on existing blockchains and are treated more like assets<\/e-tip>. Let\u2019s take Ethereum as an example: ETH<\/a> is the coin native to the Ethereum blockchain, whereas ApeCoin (APE) is a token hosted on Ethereum.<\/p>\n\n\n\n

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Tip:<\/strong> As Bitcoin was the first crypto, all other cryptos are referred to as \u201caltcoins\u201d.<\/p>\n<\/div><\/div>\n\n\n\n

Different types of cryptocurrencies<\/h2>\n\n\n\n

As cryptos continue to grow in popularity<\/strong>, it is important for potential investors to understand the different types and what they\u2019re used for.<\/p>\n\n\n\n

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Token Type<\/strong><\/th>Function<\/strong><\/th><\/tr><\/thead>
Utility<\/strong><\/td>Utility tokens serve specific functions on their blockchains<\/strong>, enabling users to perform actions on a network or decentralized application (dApp).<\/td><\/tr>
Security<\/strong><\/td>Security tokens represent ownership of an asset<\/strong>. Security tokens can be sold by companies to raise capital.<\/td><\/tr>
Payment<\/strong><\/td>Payment tokens usually have their own blockchains<\/strong> and rarely serve an additional purpose outside of use in transactions.<\/td><\/tr>
Governance<\/strong><\/td>Governance tokens represent voting rights on a blockchain<\/strong>. Holders of these tokens are able to vote on the direction that a blockchain project takes, helping to decentralize the decision-making.<\/td><\/tr><\/tbody><\/table><\/div><\/div><\/figure>\n\n\n\n

Popular cryptocurrencies<\/h2>\n\n\n\n

In terms of popularity, the two largest cryptos are <\/strong>Bitcoin<\/strong><\/a> and <\/strong>Ethereum<\/strong><\/a>, though there are plenty of other cryptos for investors to consider. Cryptos are ranked according to their market capitalization<\/e-tip>, and the most popular cryptos change all the time.<\/p>\n\n\n\n

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Popular cryptos offer a variety of different coin and token types<\/strong>, including Layer 1 blockchain and Layer 2 blockchain cryptocurrencies, and Stablecoins. <\/p>\n\n\n\n

As of February 2025, the most popular<\/strong> cryptos (based on market capitalization) were:<\/p>\n\n\n\n

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  1. Bitcoin<\/strong><\/a>: <\/strong>$2,088.86bn<\/li>\n\n\n\n
  2. Ethereum<\/strong><\/a>:<\/strong> $387.15bn<\/li>\n\n\n\n
  3. Ripple<\/strong><\/a>:<\/strong> $179.26bn<\/li>\n\n\n\n
  4. Tether:<\/strong> $139.4bn<\/li>\n\n\n\n
  5. Solana<\/strong><\/a>:<\/strong> $117.38bn<\/li>\n<\/ol>\n\n\n\n

    How to buy cryptocurrency<\/h2>\n\n\n\n

    Investors who want to purchase and own cryptos have several options available to them. For some, the best option is to use a trading platform<\/a>. Here, investors can trade fractional shares <\/strong>of their chosen cryptos and set Stop-Losses<\/a> and Take-Profits<\/a> to help negate market volatility.<\/p>\n\n\n\n

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    There are other alternatives available. Some investors prefer purchasing their cryptos on crypto exchanges <\/strong>and then transferring them to their cryptocurrency wallets<\/e-tip><\/strong> for safekeeping.<\/p>\n\n\n\n

    Some investors, rather than buying the underlying asset, choose to invest in blockchain stocks or ETFs (Exchange-Traded Funds)<\/e-tip><\/strong>. Although this is an indirect investment, the value of the asset could potentially follow the price movements of the general crypto market, but perhaps with less volatility. It is also possible to invest in ETFs that track and replicate the price of Bitcoin<\/strong>.<\/p>\n\n\n\n

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    Tip:<\/strong> Regardless of how you buy them, it\u2019s important to do thorough research before you start trading and investing in cryptocurrencies.<\/p>\n<\/div><\/div>\n\n\n\n

    Final thoughts<\/h2>\n\n\n\n

    Cryptos can seem like a daunting proposition at first. Whether you fully understand the notion of blockchain or not, cryptos themselves are a relatively uncomplicated<\/strong> asset to understand.<\/p>\n\n\n\n

    Despite their price volatility, at their core, cryptos are secure, decentralized digital currencies that offer an alternative to traditional, government-backed fiat currencies<\/strong>. Once you understand that, you could be ready to start investing.<\/p>\n\n\n\n

    Head over to the eToro Academy<\/a> to learn more about cryptocurrencies and the blockchain.<\/p>\n\n\n\n\n\n

    FAQs<\/h2>\n\n\n\n
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    How does cryptocurrency work?<\/dt>
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    Cryptos run on a blockchain<\/a>. Blockchains act as distributed public ledgers, recording all transactions conducted with the crypto in question. Cryptos are decentralized, and although anonymous, all transactions can be viewed and verified at all times.<\/p>\n<\/dd><\/div>\n\n\n\n

    Why is crypto important?<\/dt>
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    Many crypto investors consider cryptos to be an important step in the history of finance. Crypto can be used to make direct and secure payments globally, and \u2014 as long as the individual in question has a mobile phone and an internet connection \u2014 provides universal access to finance.<\/p>\n\n\n\n

    For some, the decentralization of finance is important, with crypto offering greater transparency<\/a>, anonymity and less third-party interference than traditional alternatives.<\/p>\n<\/dd><\/div>\n\n\n\n

    Why are cryptos so volatile?<\/dt>
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    Crypto is an incredibly volatile asset class<\/a>, meaning that the value of individual cryptos, as well as the overall crypto market capitalization, can fluctuate greatly. <\/p>\n\n\n\n

    Most cryptos, such as Cardano (ADA<\/a>) and Solana (SOL), have a limited supply of available coins and tokens. Therefore, when demand for a particular crypto increases, so does the price. <\/p>\n\n\n\n

    Crypto is also very speculative. When a new project is launched, or news about an existing project breaks, investors jump onto the trend to try to turn a profit. Once the news dies down, or the metaphorical bubble bursts, the price often falls to reflect this.<\/p>\n<\/dd><\/div>\n<\/dl>\n\n\n\n\t\t