Cryptocurrency (crypto) was first launched publicly in 2009, in the form of Bitcoin. Since that time, more than 25,000 other cryptocurrencies have been introduced, and the form of digital currency continues to garner attention. What exactly is cryptocurrency? How is it used? Read on to find out the basic facts about this digital asset.
What Is It? Cryptocurrency is a virtual currency secured by cryptography (or code) and does not rely upon a central authority, such as a bank, to maintain it. Ownership and transaction records are held in a database format referred to as a block. Records, or blocks, are linked from one to the next with a hash (or unique identifier) to form a chain and distributed across a peer-to-peer network of computers, often public. The linked blocks are called a blockchain. Data within any of the blocks cannot be changed without modifying data in subsequent blocks, which would require permission throughout the network. Since the blockchain is decentralized and open-source, transactions are recorded throughout the network, verifiable in real time and can be audited inexpensively. There is no downtime waiting for a transaction to “clear,” and no fear of counterfeiting.
Is It Physical Currency? Crypto exists in coin or token form. Tokens are intangible assets on a blockchain, while coins may be tangible, virtual or digital. Bitcoin was the first introduced and is the most commonly traded. Other cryptos, referred to as altcoins, are Ethereum, Litecoin, and Solana, among the thousands of others. All of these are categorized by their respective function and technology; there are payment coins for transactions, utility tokens for smart contracts or platform access, and stablecoins which are tied to assets, as well as less used categories like privacy or meme coins.
How Do You Acquire It? Cryptocurrencies can be bought and sold in a cryptocurrency exchange, where you swap physical currency (dollars and cents) for virtual currency units held in a digital wallet. A digital wallet can be hardware, software, or a service which stores your public and private keys for digital transactions. Private keys are used to authorize spending and public keys are used for accepting funds.
What Can You Buy with It? Cryptocurrency payment coins can be used at numerous merchants online to purchase a myriad of goods from home repair items to real estate, including gift cards that can then be used at the designated merchant.
How Is It Backed? Fiat currencies, like the U.S. dollar or euros, are backed by the strength of the economy rather than a physical commodity such as gold. Cryptocurrencies, however, are backed by the security of the blockchain, rarity of the currency, decentralization (or ease of transaction validation) and efficacy.
Is Crypto Taxed? The IRS considers cryptocurrency property, and it is subject to capital gains tax.
Is Crypto Safe? Since it is bought and sold on the internet, crypto comes with the usual risks of online purchases. When purchasing, do your research. Consider security, ease of use, assets held, and fees when selecting an exchange. Weigh your options with digital wallets, too. Hot wallets, which are connected to the internet, may allow faster trading and more convenience, but are more vulnerable to hacking, phishing and malware. Cold wallets, however, store your crypto offline in a physical digital storage device, thereby offering a higher degree of security. Beware of losing the device or damaging it, though, because you could permanently lose your funds stored on it.
Final Thoughts? Deciding on an investment takes careful thought and planning. Investing in cryptocurrencies is no different. Continue to research your options and, based on your findings, you can invest confidently as long as you make wise choices:
1. choose a storage method;
2. research coins before buying;
3. utilize a reputable exchange; and
4. always follow the usual cybersecurity rules.
REFERENCES
Investopedia (n.d.) Blockchain Facts: What Is It, How It Works, and How It Can Be Used. Retrieved from Blockchain Facts: What Is It, How It Works, and How It Can Be Used
Charles Schwab (2025) What is Cryptocurrency and How Does It Work? Retrieved from What is Cryptocurrency & How Does It Work? (2025) | Charles Schwab
The Motley Fool (2025) What Is Cold Storage in Crypto?Retrieved from What Is Cold Storage in Crypto? | The Motley Fool
Fidelity (2025) How to Store Crypto Safely Retrieved from Is bitcoin safe? | How to safely buy and store cryptocurrencies
