How Does Cryptocurrency Work? A Beginner's Guide

Cryptocurrency is digital currency that doesn’t require a central bank or financial institution to verify transactions. Instead, this virtual currency is verified and recorded with blockchain technology, creating an unchangeable ledger that tracks trades and the purchase of digital assets. Although the first cryptocurrency emerged in 1990, the buzz surrounding cryptocurrency exchange has exploded in recent years. Despite the opportunities, market volatility reminds us to consider the risk involved in cryptocurrency trading. Whether you're interested in virtual currency for your career or to invest, understanding how cryptocurrency works is an essential first step. Learn more about cryptocurrency exchange, the crypto market, environmental impacts, and popular cryptocurrencies in the following article.

Looking to invest in these financial assets? Learn how the technology works and how to screen out risky investment opportunities in as little as four months with Duke University's online program, Decentralized Finance (DeFi): The Future of Finance.

What is cryptocurrency?

Cryptocurrency, or crypto, is a form of digital payment. Unlike traditional currency which represents physical money, cryptocurrencies are purely digital assets. Although people use it primarily for online transactions, you can sometimes use it to purchase physical assets. While traditional payment methods are regulated by central banks and the government, cryptocurrency is decentralized, meaning it isn't controlled by one central authority. 

How does cryptocurrency work?

Cryptocurrencies are based on blockchain technology, making them very secure, although it’s still up to investors to choose trustworthy exchanges. Cryptographic techniques (the process of writing and deciphering code) are used to issue, verify, and secure transactions. Through public ledgers, transactions remain traceable and unable to be counterfeited. This peer-to-peer digital asset system makes it fast, easy, and inexpensive to send and receive payments worldwide. There's no currency exchange needed, nor are there hefty fees. Transactions using these financial assets are publicly recorded, stored digitally, and transmitted via encryption, with detailed coding required for transmission and storage.

Other elements that set cryptocurrency projects apart from more traditional investments include:

• Accessibility. Crypto investing is open to anyone with internet access and a computer, smartphone, or mobile device.

• Low transaction costs. Cryptocurrency blockchain transactions cost no more than a few dollars, with many costing just pennies.

• Transaction speed. Few other institutions are faster than cryptocurrency for sending, receiving, and moving assets worldwide.

Cryptocurrency vs. traditional currency

The government produces traditional currency in paper bills and coins you can carry with you or put in a bank to use for purchases and transactions. You store cryptocurrencies in a digital wallet or, crypto wallet, requiring a private key to access. The government backs traditional currency, while cryptocurrency has no government, bank, or financial institution controls. Banks insure money kept in bank accounts against loss, while crypto has no recourse in the event of a loss. 

How does cryptocurrency price work?

Cryptocurrencies are fungible, meaning the value remains the same when bought, sold, or traded. It is not the same as non-fungible tokens (NFTs), which have fluctuating values dependent on many variables, such as the digital asset it’s attached to. The market capitalization of crypto depends on the number of coins in circulation. Although the cryptocurrency market is not heavily regulated by the US government, they are taxable assets. You’ll need to file any profit or loss with the Internal Revenue Service (IRS).

What is mining cryptocurrency and how does it work?

Cryptocurrency mining is the term used to describe the creation of cryptocurrency. Crypto transactions need to be validated, and mining performs the validation and creates new cryptocurrency through the use of. specialized hardware and software that adds transactions to the blockchain. Not all cryptocurrency comes from mining. For example, crypto that you can’t spend isn't mined. Instead, developers create the new currency through a hard fork, which creates a new chain in the blockchain. One fork follows the new path, and the other follows the old. Crypto assets you can’t mine are typically used for investments rather than purchases.

Is cryptocurrency a good investment?

Crypto investing has a lot of hype surrounding it. For novice investors, it can be easy to become overwhelmed and overextended. That’s why it’s essential to have a solid, foundational knowledge of crypto technology before investing. Whether or not cryptocurrency is a good investment depends on your goals. To guide your decision-making process, learn as much as you can about how blockchain technology works and how the crypto market operates first.

Key concepts include decentralization, self-custody of crypto assets, and the difference between a centralized exchange (CEX) and a decentralized exchange (DEX). You can also read each cryptocurrency's white papers to learn more about the crypto project developers' goals and details. It's essential to define your goals, weigh the benefits and risks, and understand how the industry works.

Interested in learning more about how blockchain technology works? In as little as eight hours, you'll learn key technical aspects of blockchain, such as decentralization and consensus algorithms, as well as the strengths and weaknesses of cryptocurrency through the online course Blockchain and Cryptocurrency Explained.

What are the advantages of cryptocurrency?

When it comes to cryptocurrency as a medium of exchange, there are some advantages to it versus traditional currency. One advantage being privacy. Although cryptocurrency payments are on public record and anyone can look up transaction information and see the contents of a crypto wallet, you don't need to provide any personal information. This mix of privacy and transparency makes it easy to reduce fraudulent activities like identity theft while also proving transactions were carried out correctly. And no matter what happens to the government, your investment is secure. 

Another advantage of cryptocurrency is that it’s global, so there’s no need to figure or pay foreign exchange rates, although cryptocurrency isn’t legal in some countries. You also don’t need to worry about bank account restrictions, such as ATM withdrawal limits. 

Types of cryptocurrency 

Cryptocurrency is available as coins or tokens. The difference between them is that tokens are assets that exist on a blockchain, while coins can be virtual, digital, or tangible. Coins are more like traditional money; a digital coin has its own blockchain. Conversely, a token is created on an existing blockchain and can be used as currency or to represent asset ownership. The first cryptocurrency introduced was Bitcoin, the most commonly traded one. Ethereum is the second most valuable cryptocurrency and can be used for complex transactions. Other more common cryptocurrencies, called altcoins, include Cardano, Solana, and XRP. 

Types of cryptocurrency investments

People often invest in crypto in a few different ways: as a personal hobby, a wealth-building strategy, or as part of their profession. The crypto investment buzz has made hobby-level investing popular, particularly among younger investors. Here are two approaches to cryptocurrency investments:

1. Short-term crypto investment (cryptocurrency trading)

As 2022's crypto crash demonstrated, the crypto market is volatile and unpredictable. Trading is a popular short-term crypto investment strategy that requires you to buy and sell based on when you expect prices to increase or decrease. Many short-term traders watch average prices over a period to get a feel for how they're trending. Having technical analysis skills, which use past patterns and prices for the crypto investment you're considering, is an essential skill to master.

Read more: How to Trade Cryptocurrency: A Practical Guide for Beginners

2. Long-term crypto investment

If you approach crypto investment as a long-term strategy, the ups and downs will likely be less concerning since short-term fluctuations will impact your strategy differently. Consider how much Bitcoin has appreciated since launching in 2009. The value increased by approximately 12,000 percent. Ethereum, which hit the market in 2015, has appreciated at an even higher rate that exceeds 92,000 percent [1].

While both values have fluctuated wildly in the short term, investors who approached them as long-term investments reaped the rewards. Additionally, some experts expect emerging technologies, new regulations, and more widespread adoption to fuel the growth of the cryptocurrency industry.

Read more: How to Buy Cryptocurrency

What to do before you make an investment in cryptocurrency

If you're ready to get started, begin with the following three considerations. You can use the first three steps here to map out your goals, protect your investments, and manage your risk level smartly. Then, continue to the next section to walk through how to invest and explore popular cryptocurrencies in today's market.

Is cryptocurrency safe?

Not all cryptocurrencies are created equally, and you'll have to do your own research into individual coins and tokens before making investments, especially if they are new. As for the technology itself, popular cryptocurrencies like Bitcoin and Ethereum rely on the blockchain to record and process transactions securely, which is widely regarded as an extremely secure platform. Criticisms of crypto include price instability and environmental concerns. According to a study by Statista, the average level of energy consumption for a single Bitcoin transaction could be the equivalent of hundreds of thousands of VISA card transactions.

Familiarizing yourself with blockchain technology can help you build a better understanding of how cryptocurrency works so you can make the best choices for yourself. Before investing, you might consider enrolling in a free online course like Princeton University's Bitcoin and Cryptocurrency Technologies.

1. Define your investment goals

Why are you investing in cryptocurrency? What are your client’s or employer’s goals? If you're solely looking to make a lot of money quickly, this might not be the right investment. Many investors have come before you looking to get rich quickly, and many end up with significant losses. Additionally, most coins and tokens pay the largest gains to those who hold onto them for the long term.

The tolerance for risk and the reasons behind the investment can help guide your choices. For example, if you believe in the technology or you're looking for an investment with the potential for stable long-term value, cryptocurrencies could be a suitable option. As with any investment, you must remain aware of the risks and avoid putting more money into crypto investments than you can afford to lose.

2. Analyze the state of the crypto industry

If you ask established crypto experts for advice, many will suggest starting small and taking time to develop a feeling for how the world of crypto trading and digital currency works. For example, there are many different cryptocurrencies and blockchain technologies to consider.

Additionally, there are other ways to get in on cryptocurrency. Examples include crypto funds and futures, which allow you to essentially bet on the price swings of coins and altcoins like Bitcoin and Ethereum. Blockchain exchange-traded funds (ETFs) are another investing option. They let you invest in a bundle of companies that use blockchain technology in their business operations.

3. Calculate your risks

Risk is a natural part of investing. Because of the volatility of cryptocurrencies, it comes with a substantial amount of risk that you must be aware of and understand to best manage. For example, if you’re looking to invest in the short term, you might create a set of rules to sell when the price drops by a certain percentage. As a long-term investor, you might decide that you won’t sell despite price drops.

Another way to manage your risk, particularly when you’re new to crypto investments, is to set aside a portion of investable funds. For example, if you have $100 to invest, start investing a small percentage of that money in crypto. Doing so gives you time to get a feel for how the market works while actively participating. It also gives you a bankroll on reserve to work with on future trades.

Taking time to watch the performance of the cryptocurrency you're considering before investing can help increase your chances of success. Doing your homework now can help minimize risk. On the other hand, jumping in too quickly because you’re afraid you’ll miss out can lead to significant losses. Regardless of the strategy, it is wise to consider investing only what you are willing to lose.

Getting started with cryptocurrency

To get started with cryptocurrency, you’ll need to choose a broker or crypto exchange. An exchange is an online platform where you can trade cryptocurrencies. Brokers use interfaces that interact with exchanges. An exchange allows you to trade without a third party. Should you decide to use an exchange, you’ll need to find buyers for your cryptocurrency. A broker can do that for you. Here are the first steps you'll need to take:

1. Create and fund your account.

When you’ve selected a broker or exchange, the next step is to open an account. You’ll want to keep a form of identification nearby since some platforms require it. Once you verify your identity, you can fund your account. Depending on your funding method, you may need to wait a few days for it to clear into your crypto account.

2. Buy crypto.

You can make your first cryptocurrency purchase when your account is set up and verified. You’ll find many options. You can purchase as much or as little as you’d like. When you’ve selected the one you want to start with, you’ll need to enter the ticker symbol and the amount you wish to purchase.

3. Select a storage method.

Most often, you’ll store cryptocurrency in a crypto wallet. When you purchase from a broker, you might not have an option regarding how you store your crypto. However, you can choose between a hot or cold wallet when purchasing through an exchange.

• Hot wallets: A hot wallet is a crypto wallet that offers online storage that you can access from a computer, phone, or tablet. A hot wallet has a security risk because it’s stored on the internet and is more susceptible to cyber-attacks. 

• Cold wallets: A cold wallet doesn’t connect to the internet. You can store your cryptocurrency in an external drive, such as a USB device. You’ll receive a keycode to keep in a safe place. Should you lose the keycode, you may lose access to your crypto wallet and cryptocurrency.

8 cryptocurrencies to watch

There are thousands of different cryptocurrencies out there. Bitcoin’s success led to a flood of new coins—called altcoins—and tokens emerging. Due to the volatile nature of cryptocurrency, it's best to seek professional investment advice and become very familiar with the crypto industry before deciding to invest. The following are examples of cryptocurrencies with a higher market cap and therefore tend to be more stable. Market capitalization figures are current as of April 3, 2025 [2]:

1. Bitcoin (BTC)

Market cap: $1.63 trillion

Considered by many as the gold standard of cryptocurrency, Bitcoin runs on a blockchain and requires solving cryptographic puzzles, which keeps it a secure coin. The price of Bitcoin as of April 2025 is $82,413 USD.

2. Ethereum (ETH)

Market cap: $215.67 billion

This coin, considered an altcoin by some, is another popular option. Its developers aim to create a globally accessible, decentralized roster of financial products and applications that run without fraud or third-party interference.

3. Tether (USDT)

Market cap: $144.17 billion

Tether was the first stablecoin, a type of crypto tied to the value of the United States dollar. That backing can help level some of the dramatic fluctuations and make it easier to convert your holdings into dollars.

4. USD Coin (USDC)

Market cap: $60.91 billion

The Ethereum blockchain powers this cryptocurrency. It's a stablecoin that, like Tether, is backed by the US dollar.

5. XRP (XRP)

Market cap: $119.25 billion

XRP is the native coin of the Ripple exchange and payment settlement platform. You can use XRP to trade, invest, make purchases via Ripple, or exchange for other cryptocurrencies.

6. Cardano (ADA)

Market cap: $22.61 billion

You can use Cardano (ADA) to get rewards for holding it (called staking), making cryptocurrency transactions on the Cardano exchange, or investing. When you hold ADA, you hold a stake in the Cardano blockchain network.

7. Solana (SOL)

Market cap: $59.30 billion

This relatively new crypto emerged in 2021. It has a unique blockchain and was developed to support decentralized applications and finance.

8. Avalanche (AVAX)

Market cap: $59.30 billion

The blockchain platform Avalanche calls its native currency used for transactions on the network AVAX. Avalanche is an Ethereum competitor known for its speed and efficiency, thanks in large part to its use of proof-of-stake (PoS) to verify and authenticate information.

Considering a career in cryptocurrency?

Hobby investing isn’t the only way to work with cryptocurrency. You’ll also find various cryptocurrency-related jobs, including some careers that don't work directly with the investment side but with clients who do. Examples include business development representatives and marketing managers.

In positions like these, you may work with crypto companies and organizations that work with cryptocurrency to help create awareness and build their customer base. Additional examples include:

• Financial analyst. As a financial analyst or advisor, you would recommend investments and create investment strategies for a roster of clients.

• Data scientists. A data scientist working with cryptocurrency might be tasked with forecasting changes in the price of digital coins. This is another in-demand role, mainly because the technology is still new, and people with analytical skills are needed to work with engineers.

• Machine learning engineer. You might help create digital applications that provide secure access to exchanges and investing platforms as a crypto machine learning engineer.

Keep building your cryptocurrency expertise

Beginners can gain a solid foundation of knowledge in FinTech, crypto, and blockchain technology in the self-paced, online course Blockchain and Cryptocurrency Explained by the University of Michigan.

If you already have some experience, you could take your skills to the next level with an intermediate Specialization like Decentralized Finance (DeFi): The Future of Finance. 

Or, become an expert in this space and gain access to a wide range of programs offered by industry leaders through a Coursera Plus subscription.

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