Cryptocurrencies are digital currencies created by cryptographic means using blockchain technology. Similarly to traditional currencies they can be used for buying products and services.
The creation and the transfer of cryptocurrencies is decentralized meaning there is not one central control body that oversees the creation, distribution or the amount available on the market.
What is the point of crypto?
The first widely known cryptocurrency was Bitcoin, which still is the most popular in terms of how much value is stored in it. One of the main reasons it was created is to allow anyone make financial transfers without a need of a central authority, relying instead on blockchain technology.
A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution. - Excerpt form the original paper guiding the development of Bitcoin
Another issue the original developers identified was that the transactions with traditional financial institutions are non-reversible:
Commerce on the Internet has come to rely almost exclusively on financial institutions serving as trusted third parties to process electronic payments. While the system works well enough for most transactions, it still suffers from the inherent weaknesses of the trust based model. Completely non-reversible transactions are not really possible, since financial institutions cannot avoid mediating disputes. - Excerpt form the original paper guiding the development of Bitcoin
Digital currencies seek to solve these problems through various means involving cryptography and other technology solutions like the blockchain technology.
What is the benefit of buying cryptocurrencies?
The inherent benefit of digital currencies is that you can store them independent of state actors. The promise of them is that transfer cryptocurrencies quickly and at low prices.
How to use cryptocurrencies
In order to enjoy any of the benefits of digital currencies you need to get a hold of them
- Get them (see below)
- Store them
- Transfer them
How to get cryptocurrencies
You can get a hold of digital currencies or get exposure on them in several forms:
Owning them directly
A surefire way to own cryptocurrencies is actually buying them, which you can do on services called cryptocurrency exchanges. These companies allow you to create an account on their website, transfer fiat money (i.e. USD or any other "normal" currency) to this account and exchange this money to one or more of the digital currencies they have available. From the user perspective this process looks a lot like any traditional currency exchange.
Requiring much more technical knowledge, preparation and actually computing power (i.e. fast computers) you can help to maintain the blockchain of your choice (i.e. Bitcoin or Ethereum) for which in return you are awarded with cryptocurrencies.
Initial coin offerings
Also requiring some technical savvy is a way when you buy coins before they are actually available. The coins are transferred to your wallet when the blockchain is started. This process resembles initial public offerings of stocks.
Other ways getting exposure into digital currencies
If you want to invest in them though or speculate on their price changes you can also look into other ways of investing into cryptocurrencies (below).
Several online brokers offer cryptocurrencies as CFDs. This allows you to invest in them using a regulated and familiar environment (i.e. your favorite online broker which is a regulated financial institution) without having to deal with the technicalities. On the other hand, as you don't directly own the digital currency in this scenario you can't use them for transactions.
Several Exchange Traded Funds are available which have various level of cryptocurrency exposure. This allows you to choose one that fits your investment strategy and style.
You can also invest in cryptocurrencies via futures and options.
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How to store cryptocurrencies
The default and most secure way of storing your coins is in things called digital wallets. Each cryptocurrency blockchain has their own wallet which is a set of cryptographic information that identifies a destination to which only you have access.
Setting up a wallet requires some research and some technical savvy on your end which might lead you to keep your coins on the medium of exchange.
On a cryptocurrency exchange
If you acquired your bitcoin or other virtual currency on a crypto exchange you can actually keep it there.
The benefit is that you have a lot of control over your currencies there, i.e. you have the power to send any amount to another party or make some other payment.
The downside is that you don't have direct access to the wallet behind it, meaning the exchange will stay as a mediator. "Physically" the exchange has your coins, similarly to a bank or other financial institution. If the system of the exchange is not available or goes bankrupt users will have a hard time accessing their coins.
There are several terms and a specific jargon used in relation to digital currencies. This is due to the fact that their creation and their distribution is very technologically driven and its usage is very different to normal (also known as "fiat") currencies.
On the cryptocurrency terminology page you'll get to know some of the most important phrases you will come across when learning about cryptocurrencies.
Our cryptocurrency reviews section offers you a selection of the top exchanges with unbiased opinion and rating based on our thorough methodology.