Cryptocurrency Basics: Pros, Cons and How It Works

Cryptocurrency (or “crypto”) is digital currency, such as Bitcoin, that is used as a payment method or investment. Cryptocurrencies are named for the cryptography that lets people use them securely without the need for a government or bank.

Here are a few examples:

• Bitcoin was initially developed as a form of payment that isn't controlled by a central bank. Financial institutions have traditionally been needed to check that a payment went through. But Bitcoin does this automatically, without that central authority.

• Ethereum uses the same underlying technology as Bitcoin. However, it can be used to pay for transactions on the Ethereum blockchain, as well as peer-to-peer payments. This network enables entire financial ecosystems to operate without a central authority. (Think insurance without the insurance company, or real estate titling without the title company.)

• Many altcoins (smaller cryptocurrencies) try to capitalize on other use cases for blockchain tech.

• Meme coins, a subcategory of altcoins, are joke cryptocurrencies that represent internet memes. Some meme coins, such as Dogecoin, have risen to large market caps, despite having no real use cases.

• Stablecoins have been around for years, but recently rose to the fore with the passage of the GENIUS Act. Stablecoin prices aren't meant to fluctuate; they're pegged to assets like the U.S. dollar. They're meant to deliver many of the benefits of crypto without the big, chaotic price swings.

» Get started: Learn now to buy cryptocurrency

People invest in cryptocurrencies for the same reason anyone invests in anything. They hope its value will rise, netting them a profit.

If demand for Bitcoin grows, for example, the interplay of supply and demand could push up its value. If people began using Bitcoin for payments on a huge scale, demand for Bitcoin would go up. This, in turn, would increase its dollar price. If you'd bought Bitcoin before that increase, you could sell it for more dollars than you bought it for.

The same principles apply to Ethereum. "Ether" is the currency of the Ethereum blockchain. Developers can build decentralized finance (or "DeFi") apps on that network without the need for a financial institution. They must use Ether to build and run apps on Ethereum. In theory, the more that is built on the Ethereum blockchain, the higher the demand for Ether.

However, it's important to note that to some, cryptocurrencies aren't investments at all. Many Bitcoin enthusiasts hail it as a much better currency system than our current one. They'd prefer we spend and accept it as everyday payment. One common refrain — "one Bitcoin is one Bitcoin" — underscores the view that Bitcoin shouldn't be measured in dollars. Rather, it should be measured by the value it brings as a new monetary system.

Cryptocurrencies are based on a technology known as blockchain, a tamper-resistant transaction record. Blockchains solve a problem with past efforts to create digital money: preventing double-spending^[0]

Individual cryptocurrency units are called coins or tokens, depending on how they're used. Some are intended to be units of exchange for goods and services. Others are stores of value. Some can be used in specific programs such as games and financial products.

» Storing crypto? These are the top crypto wallets

One way cryptocurrencies are made is through a process known as mining, which is used by Bitcoin. Bitcoin mining is an energy-intensive process where computers solve puzzles to validate payments. As a reward, the owners of those computers can receive newly created cryptocurrency. Other cryptocurrencies use different methods, such as proof of stake, to create tokens. Many have a significantly lighter environmental impact.

For most people, the easiest way to get cryptocurrency is to buy it, either from an exchange or another user.

It’s important to remember that Bitcoin is different from cryptocurrency in general. Bitcoin is the oldest and most valuable cryptocurrency, but the market is large. There are thousands of cryptocurrencies today. Some coins have valuations in the trillions of dollars. Others, however, are obscure and almost worthless.

If you want to get into crypto, consider starting with a well-established one. These coins typically have the largest market capitalizations.

But thoughtfully selecting your cryptocurrency is no guarantee of success in such a volatile space. Sometimes, an issue in the deeply interconnected crypto industry can spill out and have broad effects on prices. When crypto exchange FTX collapsed in November 2022, the price of Bitcoin fell more than 20% over the next two months.

Whether or not cryptocurrency is a security is a bit of a gray area right now. To back up a little, generally, a "security" in finance is anything that represents a value and can be traded. Stocks are securities because they represent ownership in a public company. Bonds are securities because they represent a debt owed to the bondholder. And both of these securities can be traded on public markets.

Cryptocurrency inspires passionate opinions across the spectrum of investors. Some people believe it is a transformational technology, while others worry it's a fad. Here are a few reasons why:

Cryptocurrency pros

• Cryptocurrency is a volatile investment. But in the long term, many coins have risen in value considerably. Bitcoin's price has increased roughly tenfold over the last five years, despite several bull and bear markets over that time. It topped $100,000 for the first time in December 2024. Though it fell significantly in the following months, it again surpassed the six-figure level again on May 8, 2025. By July, it had hit yet another all-time high of $120,000.

• Some supporters like that cryptocurrency removes central banks from managing the money supply. Over time, these banks tend to reduce the value of money via inflation.

• Some people in communities that have been underserved by the traditional financial system see crypto as a foothold. Pew Research Center data from 2021 found that Asian, Black and Hispanic people "are more likely than White adults to say they have ever invested in, traded or used a cryptocurrency^[0]

  Pew Research Center. 16% of Americans Say They Have Ever Invested in, Traded or Used Cryptocurrency. Accessed Apr 19, 2022.

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• Other advocates like the blockchain technology behind cryptocurrencies, because it’s a decentralized processing and recording system and can be more secure than traditional payment systems. It may also provide a cheaper way to send money internationally. Many traditional money transfer services charge substantial fees.

• Some cryptocurrencies offer their owners the opportunity to earn passive income through a process called staking. Crypto staking involves using your cryptocurrencies to help verify transactions on a blockchain protocol. Though staking has its risks, it can allow you to grow your crypto holdings without buying more.

Cryptocurrency cons

• Many cryptocurrency projects are untested, and blockchain technology in general has yet to gain wide adoption. If the underlying idea behind cryptocurrency does not reach its potential, long-term investors may never see the returns they hoped for.

• For shorter-term crypto investors, there are other risks. Its prices tend to change rapidly, and while that means that many people have made money quickly by buying in at the right time, many others have lost money by doing so just before a crypto crash.

• Those wild shifts in value may also cut against the basic ideas behind the projects that cryptocurrencies were created to support. For example, people may be less likely to use Bitcoin as a payment system if they are not sure what it will be worth the next day.

• The environmental impact of Bitcoin and other projects that use similar mining protocols is significant. A comparison by the University of Cambridge, for instance, said worldwide Bitcoin mining consumes more than twice as much power as all U.S. residential lighting^[0]

  Cambridge Centre for Alternative Finance. Cambridge Bitcoin Electricity Consumption Index - Comparisons. Accessed Jun 15, 2022.

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  . Some cryptocurrencies use different technology that demands less energy.

• Governments around the world have not yet fully reckoned with how to handle cryptocurrency, so regulatory changes and crackdowns have the potential to affect the market in unpredictable ways.

• Many cryptocurrency networks charge a fee for any transaction, including buying or selling crypto as an investor. These can vary wildly, and high fees can cut into returns. Bitcoin transaction fees, for example, have varied between less than 50 cents and more than $100 per transaction over the last year, during periods of exceptionally low or high transaction activity.

There’s no question that cryptocurrencies are legal in the U.S. Ultimately whether they’re legal worldwide depends on each individual country.

The question of whether cryptocurrencies are legally allowed, however, is only one part of the legal question. Other things to consider include how crypto is taxed and what you can buy with cryptocurrency.

• Legal tender: You might call them cryptocurrencies, but they differ from traditional currencies in one important way: there's no requirement in most places that they be accepted as "legal tender." The U.S. dollar, by contrast, must be accepted for "all debts, public and private." Countries around the world are taking various approaches to cryptocurrency. For now, only one country, El Salvador, accepts Bitcoin as legal tender. In the U.S., what you can buy with cryptocurrency depends on the preferences of the seller.

• Crypto taxes: Again, the term "currency" is a bit of a red herring when it comes to taxes in the U.S. Cryptocurrencies are taxed as property, rather than currency. That means that when you sell them, you'll pay tax on the capital gains, or the difference between the price of the purchase and sale. And if you're given crypto as payment — or as a reward for an activity such as mining — you'll be taxed on the value at the time you received them.

» Learn more: Understanding crypto and taxes

Cryptocurrency is a relatively risky investment, no matter which way you slice it. Generally speaking, high-risk investments should make up a small part of your overall portfolio — one common guideline is no more than 10%. You may want to look first to shore up your retirement savings, pay off debt or invest in less-volatile funds made up of stocks and bonds.

There are other ways to manage risk within your crypto portfolio, such as by diversifying the range of cryptocurrencies that you buy. Crypto assets may rise and fall at different rates, and over different time periods, so by investing in several different products you can insulate yourself — to some degree — from losses in one of your holdings.

Perhaps the most important thing when investing in anything is to do your homework. This is particularly important when it comes to cryptocurrencies, which are often linked to a specific technological product that is being developed or rolled out. When you buy a stock, it is linked to a company that is subject to well-defined financial reporting requirements, which can give you a sense of its prospects.

With cryptocurrencies, on the other hand, discerning which projects are viable can be more challenging. If you have a financial advisor who is familiar with cryptocurrency, it may be worth asking for input.

For beginning investors, it can also be worthwhile to examine how widely a cryptocurrency is being used. Most reputable crypto projects have publicly available metrics showing data such as how many transactions are being carried out on their platforms. If use of a cryptocurrency is growing, that may be a sign that it is establishing itself in the market. Cryptocurrencies also generally make "white papers" available to explain how they'll work and how they intend to distribute tokens.

If you're looking to invest in less established crypto products, here are some additional questions to consider:

• Who’s heading the project? An identifiable and well-known leader is a positive sign.

• Are there other major investors who are investing in it? It’s a good sign if other well-known investors want a piece of the currency.

• Will you own a portion in the company or just currency or tokens? This distinction is important. Being a part owner means you get to participate in its earnings (you’re an owner), while buying tokens simply means you're entitled to use them, like chips in a casino.

• Is the currency already developed, or is the company looking to raise money to develop it? The further along the product, the less risky it is.

It can take a lot of work to comb through a prospectus; the more detail it has, the better your chances it’s legitimate. But even legitimacy doesn’t mean the currency will succeed. That’s an entirely separate question, and that requires a lot of market savvy. Be sure to consider how to protect yourself from fraudsters who see cryptocurrencies as an opportunity to bilk investors.