What Is Cryptocurrency? A Deep Dive Into The Basics

Are you interested in cryptocurrencies? Whether you want to learn about them or get into crypto investing, you’ve reached the right spot. Cryptocurrencies are virtual currencies that leverage cryptographic techniques, blockchain technology, and distributed ledger technology to enable seamless and secure transactions.

In this article, we’ll offer deeper insights into what is cryptocurrency, its types, benefits, risks, and prospects. We’ll also provide a step-by-step guide on how to buy crypto.

What Is Cryptocurrency?

A cryptocurrency is a form of digital currency that harnesses shared ledger, blockchain, and encryption technologies to facilitate borderless transactions. It serves as a medium of exchange, a store of value, a means of payment, and a unit of account. In essence, it is an alternative to traditional money, especially for making payments on online platforms. 

However, cryptocurrencies are fundamentally different from fiat currencies. Their hallmark feature is decentralization, meaning they aren’t issued or managed by governments or central banks. 

Additionally, they lack a physical form. They exist only digitally in online databases that are distributed across a network of computers, called nodes. No central authority or server controls/hosts these databases and networks. 

Besides, blockchain-backed digital currencies are secured by cryptography. It is the practice of safeguarding, encrypting, and obscuring data using mathematical techniques and coded algorithms. Originating from the Greek word “kryptos” for “hidden”, cryptography conceals confidential information from prying eyes and third parties. It also upholds the integrity and authenticity of data. 

Moreover, blockchain networks are immutable and tamper-proof. Each block in a network possesses a distinct digital fingerprint based on its contents. It also contains the hash of the previous block. If anybody tries to alter a blockchain transaction, the hash of the corresponding block will change, disrupting the chain. As modifying the hashes of subsequent blocks is computationally impractical, the network rejects the changes to maintain the blockchain.

Lastly, a cryptocurrency doesn’t have intrinsic value. Its value depends on demand-supply dynamics, which in turn are influenced by its utility, scarcity, and community strength.

Bitcoin is the first cryptocurrency to hit the market and the largest by market cap. Ethereum is the pioneer blockchain to support smart contracts, and its native currency, Ether (ETH), is the second-largest cryptocurrency by market cap. 

How Does Cryptocurrency Work on The Blockchain?

Cryptocurrencies run on networks powered by blockchain technology. All transactions involving virtual currencies are recorded on unalterable public ledgers to ensure transparency and prevent counterfeiting. 

You can think of cryptocurrencies as peer-to-peer (P2P) systems that enable you to send and receive payments at lower costs. You can also refer to them as decentralized money, as it allows online transfer of value in a trustless environment. Most importantly, digital currencies eliminate the need for intermediaries, including central banks and third-party payment systems. 

How are cryptocurrencies created?

The coin minting process is tied to the consensus mechanism of a blockchain platform. It is an automated system that ensures network validators unanimously agree on the new and existing data on the ledger. 

• Proof-of-Work (PoW) mechanism: PoW blockchains, such as Bitcoin, generate new tokens through mining. It involves the use of sophisticated hardware and software to solve complex mathematical algorithms. Whenever a purchase/sale/transfer takes place, miners decrypt the block containing the transaction details. This process is resource-intensive and requires considerable computing power. Once the majority of nodes approve the transaction as authentic, the block is appended to the blockchain.
• Proof-of-stake (PoS) mechanism: PoS networks like Ethereum choose validators based on the amount of cryptocurrencies they lock up. These validator nodes verify transactions and add new blocks to the network. In general, the PoS system is more energy-efficient than the PoW mechanism. 

Miner/validators receive freshly minted coins, a portion of users’ transaction fees, and staking rewards as incentives. Other popular consensus algorithms include proof-of-history (e.g, Solana), proof-of-authority (e.g, VeChain), and delegated PoS (e.g, Tron). 

Cryptocurrency vs. traditional currency

Types of Cryptocurrency

While the terms coins and tokens are often used interchangeably, there are subtle differences between them.

Coins

Coins are cryptocurrency applications that operate on their own blockchains. Usually, they’re the native currencies of their networks and serve as the primary medium of exchange within their ecosystems.

• Bitcoin (BTC): It is the first cryptocurrency developed by a pseudonymous individual/group known as Satoshi Nakamoto in 2009. Currently, it is the largest digital currency with a market cap of over $1 trillion. While you can find 100+ forks of Bitcoin’s source code, its prominent hard forks/variants include Bitcoin Cash and Bitcoin Satoshi Vision.
• Altcoins: An alternative coin, or altcoin, serves as an umbrella term for all cryptocurrencies other than Bitcoin. Ether (ETH), the native currency of the Ethereum blockchain, is the pioneer altcoin and the second-largest crypto by market cap. Ethereum is also the first network to support smart contracts for building and deploying decentralized apps and non-fungible tokens.

Tokens

Tokens are built on existing blockchains. They’re programmable and powered by smart contracts or self-executing lines of code that function as per pre-defined rules.

• Utility tokens: These digital assets enable users to access specific products or services on a platform or within a blockchain ecosystem. Examples of utility tokens include Uniswap (UNI), Chainlink (LINK), and Filecoin (FIL). 
• Governance tokens: They grant decision-making rights to holders, enabling them to vote on policy updates and key proposals surrounding a platform’s future. Shib ecosystem’s BONE and Decentraland’s MANA are examples of governance tokens.
• Stablecoins: These tokens are designed to maintain a steady value and offer protection against crypto volatility. Typically, their values are tied to stable assets like commodities, fiat currencies, or financial instruments. USD Coin and USDT (Tether), pegged to the US Dollar, are widely used for merchant payments, global remittances, and borderless transactions. They help you enjoy the stability of traditional money while making international transfers.
• Security tokens: They represent ownership rights in financial assets, including equities, bonds, and stock indices, on a blockchain. Top companies like Tesla, NVIDIA, and Microsoft issue tokenized shares.

How to Buy Cryptocurrency?

Step 1: Choose a cryptocurrency exchange or broker

If you want to buy cryptocurrencies, select a broker or digital asset exchange based on your needs. Usually, brokers offer a simpler interface, limited coin selection, lower fees, and fewer functionalities, making them suitable for beginners. Some platforms, like Robinhood, also allow you to trade other financial assets, like stocks, exchange-traded funds (ETFs), and derivatives.

Conversely, cryptocurrency exchanges offer advanced charting tools and a wider range of offerings, including more coins and trading pairs. They also have sophisticated matching engines and an intuitive interface, enabling you to trade directly with other buyers/sellers. Most crypto exchanges facilitate spot, margin, and derivatives trading. However, they may charge higher fees and are more complex to navigate. Hence, they’re best-suited for active and experienced traders.

Step 2: Create an account

Once you’ve chosen a broker/exchange, open an account using your e-mail, phone number, Google ID, Apple ID, or Telegram ID. Most platforms offer attractive welcome packages to users who register using a referral code. 

Step 3: Complete know-your-customer (KYC) verification

After you finish signing up, verify your identity. To complete the KYC process, you need to submit identity and address proofs along with a selfie. Once the platform reviews and approves your documents, your identity verification is complete. 

Step 4: Fund your account

Before you start cryptocurrency trading, you must make your first deposit. You can either deposit fiat or cryptocurrencies. You can also transfer funds into your account from an external digital wallet. 

Step 5: Buy and trade cryptocurrencies

If you don’t have funds to make a deposit, you can buy cryptocurrencies through the platform using various payment methods. These include bank transfers, credit/debit cards, Google/Apple Pay, and third-party payment services like Skrill, Neteller, and Banxa. Some cryptocurrency exchanges also provide a P2P marketplace, where you can buy and sell crypto directly from other traders.

Once your account has a sufficient balance, you’re ready to start trading cryptocurrencies. Based on your goals and preferences, you can either choose to go long (buy) or go short (sell) in the cryptocurrency market. 

While most cryptocurrency exchanges don’t levy deposit fees, you must incur charges for buying, selling, and withdrawing crypto assets. Trading fees and withdrawal charges vary across platforms. They also differ based on your chosen coin, network, asset balance, and trading volumes.

How to Store Cryptocurrency Safely?

• Hot/online wallets: They’re software-based crypto wallets that are connected to the internet. They offer greater convenience, especially for frequent trading, and enable faster transactions. You can access these wallets anytime, anywhere, from your desktop, laptop, phone, or tablet. 

However, they are highly susceptible to cyber attacks. Therefore, store only the minimum amount required for trading in your hot wallets. Examples of popular hot wallets include Metamask, Phantom, and Binance wallet.

• Cold/offline wallets: They’re hardware-based and safer, as they store your crypto offline. However, they’re vulnerable to physical damage. To eliminate this risk, you need to back up your private key and recovery phrase is a secure location. Examples of top offline wallets include Trezor and Ledger. Besides, many exchanges have designed multi-signature cold storage to protect users’ digital assets.

What Can You Use Cryptocurrency For?

• Payment mode: Cryptocurrencies can be used for both physical purchases and online transactions at crypto-supported merchant outlets. While they aren’t a widely accepted means of payment globally, many countries are gradually embracing their usage for day-to-day transactions. 

In 2021, El Salvador became the first nation to accept Bitcoin as legal tender. Countries like Portugal, Malta, Switzerland, Hong Kong, and Germany are also known for their crypto-friendly policies.

• Investment avenue: If you’re willing to add some speculative assets with high profit potential to your portfolio, cryptocurrencies are your best bet. Their high price volatility can lead to significant losses, but it also creates opportunities for making substantial profits. 

Benefits of Using Cryptocurrency

• Privacy and transparency: Though blockchain records are publicly verifiable, they don’t contain investors’ personal details. Therefore, the probability of identity theft is lower, while 100% transparency is maintained.
• Cross-border payments: You can use cryptocurrencies to buy goods and services from any country without worrying about exchange rates and associated fees. Virtual currencies also help you manage bank account restrictions, like ATM withdrawal limits.
• Divisibility: Cryptocurrencies are divisible, and many exchanges support fractional investing. Some platforms also allow you to buy coins for as little as $1. Therefore, you can gain exposure to the cryptocurrency market without assuming significant risk. This property of digital currencies also makes high-value coins such as BTC, ETH, and XRP accessible to all.
• Decentralized system: Cryptocurrencies and blockchain networks aren’t controlled by a central authority. Hence, they’re less susceptible to manipulations. Moreover, your crypto assets will remain safe even during political upheavals.
• Equality: Regardless of your location, you can buy and sell cryptocurrencies as long as you’ve a device with internet access. This way, virtual currencies play a pivotal role in fostering financial inclusion and free trade. Blockchain-based currencies are also a boon for investors based in locations with strict government controls or inflation problems.
• Stability: With stablecoins like USD Coin and Tether (USDT), you can enjoy the stability of traditional money while making international transfers. They’re pegged to fiat currencies like the US Dollar to maintain a steady value and offer protection against crypto volatility. They’re widely used for merchant payments, global remittances, and borderless transactions.

Risks of Using Cryptocurrency

• Volatility: Cryptocurrencies are highly volatile and can cause heavy losses for investors. For example, the BTC price plummeted by over 33% and fell below $80,000 on November 24, 2025. It had reached a record high of $125,000 on October 6.
• Non-recoverability: If you lose your private key or access to the location where you store it, you can’t recover your assets. Similarly, if you make mistakes while copying deposit/withdrawal addresses, recovering your digital currencies is daunting. 

• Scams: The cryptocurrency industry is marred by various scams. These include rug pulls, Ponzi schemes, and fake websites that trick innocent users into investing their money.

Moreover, scammers often pose as famous personalities or billionaires and promise sky-high returns to trap people. They use messaging apps to spread rumours about celebs promoting specific cryptocurrencies. 

• Regulatory risks: Cryptocurrencies are banned partially or fully in many jurisdictions. Even the laws governing cryptocurrency transactions and taxation are ambiguous. Also, many exchanges are facing regulatory challenges in multiple countries. Hence, any crackdown or unfavourable policy changes can put your crypto investments at risk.
• Counterparty risks: Traders rely on exchanges and third-party custodians to manage their assets. In the event of any security breach or closure of an exchange/custodial service, users may incur asset losses. 

• Smart contract risks: NFTs and decentralized finance (DeFi) protocols are governed by intelligent contracts. Immutable bugs or programming errors can cause dApps to malfunction, lock funds permanently, or result in asset theft/losses.
• Market manipulation: Crypto whales, entities holding large amounts of digital currencies, can significantly impact the prices and liquidity of cryptocurrencies. They often hoard cryptocurrencies in dormant accounts, removing tokens from active circulation. This perceived scarcity triggers a sharp rise in crypto prices. Contrarily, when whales engage in coordinated selling, a cryptocurrency’s price can fall drastically.

How to Avoid Cryptocurrency Scams and Frauds?

• Research a crypto project’s official website, whitepaper, team, community, and credibility before investing. Usually, authentic projects show active development and have strong communities backing them. 
• Avoid projects or schemes that promise high returns that sound unrealistic and too good to be true.
• Choose reputable exchanges and digital wallets for trading and storing crypto assets. Binance, Bybit, and Coinbase are renowned centralized exchanges, while Trust Wallet is the best multi-chain wallet.
• Enable multi-factor authentication, set a strong password, and keep recovery phrases offline.
• Never share private keys or seed phrases with anyone.
• Beware of fake URLs, bogus websites, phishing e-mails, spurious links, malware, and ransomware.
• Don’t blindly follow unsolicited advice or offers received through messaging apps, social media, or emails. 
• Preserve most digital assets in cold storage and keep only the amount needed for trading in hot wallets.
• Use advanced tools like VS Code, Etherscan, Foundry, and Dune to detect smart contract bugs. 

Is Cryptocurrency Legal and Safe?

Cryptocurrencies are powered by blockchain technology. While the underlying cryptography and technology are highly secure, trading and storing virtual currencies safely is challenging. Hackers often target hot wallets where traders store cryptocurrencies for executing various transactions.

For example, in February 2025, the North Korea-based Lazarus group hacked one of Bybit’s suppliers to modify crypto wallet addresses. Over 401,000 ETH tokens were being sent to these addresses, enabling the hackers to pull off a $1.5 billion crypto heist. Though the exchange replenished the stolen tokens, the incident raises serious questions about the safety of crypto investments. Moreover, many cryptocurrency exchanges have fallen prey to such large-scale hacks in the past.

Many platforms have implemented robust security measures like two-factor authentication, multi-signature cold storage, anti-phishing code, and proof-of-reserves. Some have even established insurance funds to compensate traders who incur losses due to platform issues. However, none is infallible, and hacking incidents are a testament to this fact. 

Besides, cryptocurrencies carry inherent risks. Lack of legal protection makes it tougher to retrieve your assets in the event of losses or untoward happenings. 

Lastly, not all countries are pro-crypto, with many banning its usage outright. Additionally, many exchanges don’t possess the required regulatory licenses and don’t comply with KYC/AML laws. 

Overall, cryptocurrencies are highly risky investments, involving technical and legal complexities. Thus, the onus of safeguarding your assets largely depends on you. Understanding the nitty-gritty of crypto trading, doing your own research, and applying due diligence are essential.

The Future of Cryptocurrency in the Global Economy

• Asset tokenization: RWAs are physical or digital assets such as stocks, bonds, and real estate that exist outside the digital realm. Asset tokenization refers to the process of converting RWAs into virtual tokens that reside on a blockchain. It facilitates fractional ownership of high-value assets, making them accessible to a larger number of users. It also imparts greater liquidity to otherwise illiquid assets.

Moreover, the inherent transparency of blockchain technology boosts investor confidence by minimizing ownership conflicts and exposure to fraud. Furthermore, it democratizes financial markets and reduces asset management costs by eliminating the need for paperwork, intermediaries, and legal services. 

• Metaverse and blockchain gaming: Metaverses are immersive digital arenas or 3D gaming environments where you can interact with other users/players as an avatar. From art museums and virtual company headquarters to tokenized land parcels and collectible shops, these metaverses mirror the real world. They also host numerous events such as music festivals, auctions, conferences, and social gatherings. 

You require digital currencies to buy in-world/in-game items such as tickets, NFTs, and accessories. You’ll also receive rewards for play-to-win (P2W) and play-to-earn (P2E) games in cryptocurrencies. Additionally, most metaverses and blockchain games issue their own cryptocurrencies that can be traded on exchanges. In general, cryptocurrencies play a key role in driving these virtual economies.

• AI integration: Many exchange platforms leverage AI to provide live market analytics, trading bots, token insights, and advanced automations. They also use AI and machine learning algorithms to detect cyber fraud, suspicious activities, smart contract bugs, and bot attacks.
• Web3 and DeFi: Cryptocurrencies form the backbone of Web3 and decentralized applications. Web3 is the next-gen internet, focusing on decentralized systems, user control, digital ownership, and privacy. Decentralized finance protocols are one of the primary applications of Web3, offering staking, lending, borrowing, yield-farming, and liquidity mining services. 

Conclusion

Cryptocurrencies are transforming global payment systems by enabling faster, safer, and decentralized financial transactions. They also process transactions without traditional intermediaries or middlemen. Moreover, many cryptocurrency firms, such as Nu Holdings and Strategy Inc., have grown phenomenally over the last few years. The number of merchants accepting cryptocurrency payments is also steadily increasing. On the whole, the future of the crypto industry appears encouraging, and cryptocurrencies are here to stay.

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