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When you think of money, you probably think of the bills in your wallet or the balance in your bank account. Lately, however, cryptocurrency is aiming to be the new way to pay. But what is it?
Here’s the short answer: Cryptocurrency is a form of digital currency that you can use to pay for things online and at select brick-and-mortar merchants that accept crypto. You can also invest in crypto in a portfolio.
Just as there are different currency types, there are also various cryptocurrencies, including Bitcoin, Ethereum, and even Dogecoin. While they work differently, there’s a common tie: crypto isn’t issued by a central bank or regulated the same way.
As investment trends go, cryptocurrency is one of the most talked-about. But how does cryptocurrency work exactly, and should you buy in? Our crypto for beginners guide should give you a clear answer.
What is cryptocurrency?
Cryptocurrency is “a type of digital currency that generally exists only electronically,” as defined by the Federal Trade Commission.¹ In other words, you can’t hold cryptocurrency in your hands unless you use a service that allows you to exchange a digital token for a physical token.
You can get cryptocurrency by purchasing it through an exchange using real currency like U.S. dollars. It’s then stored in a crypto wallet or a crypto savings account until you’re ready to use it.
Cryptocurrency can be used to send payments to individuals or businesses. Major companies, including Apple, Disney, and Expedia, allow you to make certain purchases with crypto.² You can also use crypto as an investment in your portfolio, just like you would stocks or bonds.
This is a simplified explanation of cryptocurrency. Understanding how crypto works can be a little more complicated.
How are cryptocurrencies created?
The process of creating a cryptocurrency can be confusing (and there’s more than one way to do it), but we’ll break it down to the core idea — a “crypto for beginners” understanding.
Cryptocurrencies like Bitcoin are created through a process called “mining,” which involves solving complex mathematical problems on super powerful computers (much more powerful than the laptop, phone, or tablet you’re reading this on).
This mining is a way to make sure ongoing crypto transactions are valid. Those who are mining solve these complex mathematical problems to verify various Bitcoin (or other crypto) transfers and digital storage. Their reward for solving the problem is the creation of new crypto.³
The first cryptocurrency was created back in 2009 when Satoshi Nakamoto (a pseudonym for a programmer or group of programmers) released the initial Bitcoin software globally.⁴
Comparing cryptocurrency to traditional currency
The main things to know about how cryptocurrency differs from traditional money centers on regulation and value.¹ Specifically:
- Cryptocurrency isn’t government-regulated. Hard currency, aka bills and coins, are issued by the U.S. Treasury and are backed and regulated by the government. Crypto, on the other hand, has no central issuer. That means cryptocurrency isn’t covered by FDIC protections either. Note that the Securities and Exchange Commission (SEC) has some regulation authority, and regulations for crypto are constantly evolving.
- Crypto’s value isn’t fixed. If you have 10 $1 bills in your wallet, each one is worth one dollar; their value doesn’t change. Cryptocurrency values, however, can fluctuate from minute to minute since they’re driven by supply and demand.
How does cryptocurrency work?
Cryptocurrency is a complex subject – and how it works requires an understanding of blockchain technology. To help crypto beginners, here’s how you can use crypto:
How cryptocurrency works as a payment method
When you purchase cryptocurrency, you’re trading real currency for digital tokens. These tokens are stored in your cryptocurrency wallet offline or on an exchange. You can use the tokens in your wallet to pay individuals or businesses.
How cryptocurrency works as an investment
The premise of investing in cryptocurrency and turning a profit is simple: You purchase cryptocurrency at one price and then exchange it for a higher price, similar to the way you might buy a particular stock at a low price only to sell it for more later on.
The difference is that cryptocurrency investments are mainly speculative. There are no physical assets to own, and you’re counting on being able to sell your cryptocurrency for more than what you paid for it. Given the volatility of cryptocurrency valuations, it can be a riskier investment than stocks.
How many cryptocurrencies are there?
As of this year, there are roughly 23,000 cryptocurrencies.⁵ Cryptocurrencies can be classified as coins or tokens based on how they work:
- A crypto coin is native to a particular blockchain and defined by the network protocol.
- A crypto token is built on a specific blockchain but defined by a project or contract.
If that sounds too technical, here’s a simpler explanation: the difference between tokens and coins is largely in how they’re developed.
With that in mind, here are some of the most popular cryptocurrencies, as measured by their market capitalization or value:⁶
- Bitcoin
- Ethereum
- Tether
- Binance Coin
- Solana
- USDC
- XRP
- Dogecoin
- Toncoin
- Cardano
This list of top cryptocurrencies can change as they increase or decrease in value – and demonstrates the high risk involved in investing.
Alternative methods for investing in cryptocurrency
Investing directly in cryptocurrency is a popular method for getting into crypto, but there are other paths you can take. Here are a few options to explore:
- Exchange-traded funds (ETFs): Investing in an exchange-traded fund (ETF) means investing in several companies exploring blockchain, which forms the basis of crypto. Rather than invest in one type of crypto, you’re instead investing in the success of several companies in the crypto industry. You can now also invest in spot Bitcoin ETFs (ETFs directly invested in bitcoins), which give you a regulated way to invest in Bitcoin.
- Crypto futures: Another complex investment option is crypto futures, which essentially allows you to gamble on the future price of cryptocurrency.
- Crypto exchange: Rather than investing in crypto, you can trade directly via a cryptocurrency exchange. Like stock trading, you would want to buy low and sell high.
Ways to enter the cryptocurrency market with less than $100
Are you wondering how buying cryptocurrency as an investment works, especially if you have limited funds to invest? You’ll need two things:
- Currency to purchase crypto (you can get started with $100!)
- A place to complete the purchase
In terms of where to buy cryptocurrency, you have two options:
- You can go through an exchange, which requires creating a crypto wallet.
- You can invest in cryptocurrency through an online brokerage that offers it as a trading option alongside stocks, mutual funds, bonds, and other securities.
Online brokerage
Choosing a brokerage could make sense if you’re hoping to buy cryptocurrency with $100 or less. Depending on the brokerage, you can purchase fractional amounts of a particular crypto. Just remember any trading fees you’ll pay and any caps on how large of a crypto position you can hold in your brokerage account.
Cryptocurrency exchange
If you want to get into cryptocurrency through an exchange, consider which types of cryptocurrency an exchange offers, the fees you’ll pay, and how easily you can sell your crypto investments. Also, note which type of currency is required to purchase crypto. With Bitcoin, for example, you can invest using U.S. dollars, but other types of crypto may require you to exchange real currency for cryptocurrency before you can buy in.
Weighing your options
Comparing brokerage options to cryptocurrency exchanges can help you decide which one is the best place for your $100 investment. And you may decide to split the difference and make investments through both. Again, pay attention to the fees you might pay and the type of cryptocurrencies you’ll have access to for investing.
Investing can be risky
Investing in cryptocurrency doesn’t take a lot of money to get started. You can start with $100 or less to test the waters before deciding if you want to add more crypto to your portfolio.
However, there is a lot of inherent risk involved. If you’re risk averse, you might instead want to consider starting with the lower but steady gains offered by a high-yield savings account.