Home » How does cryptocurrency work? A guide to investing in bitcoin, ethereum and more

How does cryptocurrency work? A guide to investing in bitcoin, ethereum and more

How big is the global crypto market?

In early November 2021, the cryptocurrency market cap reached an all-time high of $3 trillion (all figures in US dollars), a fivefold increase since November 2020. As of early May 2022, it was worth approximately $1.6 trillion. The sector is dominated by bitcoin (about 41%) and ethereum (about 19%), but investors can choose from thousands of cryptocurrencies, with new ones being launched daily.

Among investors, the crypto market’s runaway growth, coupled with FOMO-inducing stories of huge returns, has sparked a mixture of caution and curiosity. Digital currencies are becoming more mainstream, but their complexity, unpredictability and other risks keep them firmly in speculative territory.

Investing in cryptocurrency is not for everyone. This asset class is highly volatile, with dramatic highs and lows, so it’s best to limit crypto to a small percentage of the “explore” portion of a core-and-explore portfolio – and avoid investing in what you can’t afford to lose.

What is Bitcoin?

Bitcoin is the largest cryptocurrency. It was also the first, launched in 2009 with the aim of creating a digital, decentralized peer-to-peer payment system based on blockchain technology. A blockchain is a distributed ledger that is shared across a network of computers. It is used to securely, transparently and permanently record transactions, including buying and selling cryptocurrencies, without the involvement of banks or brokers.

A popular blockchain analogy, originated by William Mougayar in 2016, is that of a Google doc: there’s a single version of the file, it’s distributed (rather than transferred) to multiple parties, and everyone it’s linked to. shared, can access it at the same time .

Over the past decade, bitcoin’s value has skyrocketed from a fraction of a cent to a high of $68,000 (on November 10, 2021), and thousands of other digital coins have joined the burgeoning cryptosphere.

Different types of crypto

Bitcoin: Still the most popular cryptocurrency, bitcoin has the largest user base and, due to its hard cap of 21 million coins, built-in scarcity. So far, 90% of bitcoins have been mined. Altcoins: Every cryptocurrency besides bitcoin is an altcoin, short for ‘alternative currency’. Altcoins include ether, cardano, avalanche, polkadot, solana and many, many more. Stablecoins: Stablecoins are cryptocurrencies whose value is linked to that of a real-world asset. Examples include tether, binance and USD coins, all pegged to the US dollar.

How are cryptocurrencies used?

At the moment, people mainly buy cryptocurrencies as an investment asset or as a hedge against inflation. Most of us don’t pay for genuine products and services with crypto – not yet anyway. That could soon change as more and more companies, credit card companies and financial institutions start accepting and even investing in cryptocurrencies. Ultimately, digital currencies could replace conventional money and national currencies altogether.

For certain purchases, crypto is already the right choice. For example, if you want to buy a non-fungible token (NFT) such as a digital artwork, you may need to pay in cryptocurrency (e.g. spend SOL in NFT marketplaces built on the Solana platform). And if you plan on hanging out in the metaverse, you’ll need money, for example to equip your avatar or buy virtual real estate. On many metaverse platforms, this means you need your digital wallet.

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