When you think of money, you probably think of the bills in your wallet or the balance in your bank account. Yet — lately — it seems 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. You can also invest in crypto in a portfolio.
It goes by different names, including Bitcoin, Ethereum and yes, Dogecoin. While they work differently there’s a common tie: Crypto isn’t issued or regulated by any central authority, including the federal government.
As investment trends go, cryptocurrency is arguably one of the hottest. But how does cryptocurrency work exactly and should you buy in?
Here’s more on how to invest in cryptocurrency, even if you only have $100 to get started.
What is Cryptocurrency?
According to the Federal Trade Commission, cryptocurrency is “a type of digital currency that generally only exists electronically.” 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. 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 to businesses. Up until recently, for example, Tesla accepted bitcoin as a form of payment from car buyers. You can also use crypto as an investment in your portfolio just like you would stocks or bonds.
The main things to know about how cryptocurrency differs from traditional money center on regulation and value. Specifically:
- Cryptocurrency isn’t government-regulated. Hard currency, i.e. bills and coins, are issued by the U.S. Mint and are backed and regulated by the government. Crypto, on the other hand, has no central issuer or regulating authority. That means cryptocurrency isn’t covered by FDIC protections either.
- Crypto’s value isn’t fixed. If you have 10 $1 bills in your wallet, then each one is worth one dollar; their value doesn’t change. Cryptocurrency values, however, can fluctuate minute to minute since they’re driven by supply and demand.
This is a simplified answer to what is cryptocurrency. In terms of how crypto works, that’s a little more complicated.
How Does Cryptocurrency Work?
Understanding how cryptocurrency works starts with understanding where crypto comes from.
Crypto is created through a process called mining. This process involves creating a new set of transactions that are added to a blockchain, which is what cryptocurrency runs on.
Blockchain is a decentralized ledger of transactions that take place across a peer-to-peer network. When someone initiates a new transaction, say making a purchase with cryptocurrency, that transaction is validated through the peer-to-peer network and a new block is added to the chain.
The actual mining of cryptocurrency is done using computers running software to process transactions and produce new blocks. This process can be time-consuming and it can consume large amounts of energy resources.
So how does cryptocurrency work as a payment method?
Again, when you purchase cryptocurrency you’re trading real currency for digital tokens. These tokens are stored in your cryptocurrency wallet at an exchange. You can then use the tokens in your wallet to make payments to individuals or businesses.
Now, how does cryptocurrency work as an investment?
If you’re interested in how to invest in cryptocurrency or how you turn a profit, the premise is simple: You purchase cryptocurrency at one price, then exchange it at a higher price. This is similar to the way you might buy into a particular stock at a low price only to sell it high later on.
The difference is that cryptocurrency investments are largely 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 how volatile cryptocurrency valuations can be, it can be a riskier investment than stocks.
How Many Cryptocurrencies Are There?
As of 2021, there are more than 10,000 types of cryptocurrency in existence. 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:
- Bitcoin: $686 billion
- Ethereum: $307 billion
- Tether: $58 billion
- Binance Coin: $55 billion
- Cardano: $51 billion
- Dogecoin: $48 billion
- XRP: $41 billion
- Polkadot: $24 billion
- Internet Computer: $15 billion
- Bitcoin Cash: $14 billion
These numbers are current as of May 2021. But it’s important to remember that cryptocurrency values can fluctuate, sometimes drastically. For example, at one point Bitcoin had a market capitalization of $1.2 trillion, roughly twice where it is now. So the list of top cryptocurrencies can change as they increase or decrease in value.
How to Get Into Cryptocurrency With Under $100
Wondering how to buy cryptocurrency as an investment?
You’ll need two things:
- Currency to purchase crypto
- 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 you to create 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.
Choosing a brokerage could make sense if you’re wondering how to buy cryptocurrency with $100 or less. Depending on the brokerage, you might be able to purchase fractional amounts of a particular crypto. This is the same as buying fractional shares of stock. Just be sure to keep in mind any trading fees you’ll pay and any caps on how large of a crypto position you can hold in your brokerage account.
If you want to know how to get into cryptocurrency through an exchange, start with some research first. Specifically, consider which types of cryptocurrency an exchange offers, the fees you’ll pay, and how easily you can sell your crypto investments. Also, take note of 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.
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, just pay attention to the fees you might pay and the type of cryptocurrencies you’ll have access to for investing.
The Bottom Line
If you’re comfortable with the risk involved, investing in cryptocurrency could be a smart play. Success hinges on being able to sell the crypto you purchase at a profit. The upside is that it doesn’t take a lot of money to get started with cryptocurrency investing. So you can start with $100 or less to test the waters before deciding if you want to add more crypto to your portfolio.
