Cryptocurrencies let you buy goods and services, use apps and games or trade them for profit. Here’s more about what cryptocurrency is and how it works.
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What is cryptocurrency?
Cryptocurrency (or “crypto”) is a class of digital assets created using cryptographic techniques that enable people to buy, sell or trade them securely.
Unlike traditional fiat currencies controlled by national governments, cryptocurrencies can circulate without a monetary authority such as a central bank.
How does cryptocurrency work?
Bitcoin and most other cryptocurrencies are supported by a technology known as the blockchain, which maintains a tamper-resistant record of transactions and keeps track of who owns what. The use of blockchains addressed a problem faced by previous efforts to create purely digital currencies: preventing people from making copies of their holdings and attempting to spend it twice
Individual units of cryptocurrencies can be referred to as coins or tokens, depending on how they are used. Some are intended to be units of exchange for goods and services, others are stores of value, and some can be used to participate in specific software programs such as games and financial products.
How are cryptocurrencies created?
One common way cryptocurrencies are created is through a process known as mining, which is used by Bitcoin. Bitcoin mining can be an energy-intensive process in which computers solve complex puzzles in order to verify the authenticity of transactions on the network. As a reward, the owners of those computers can receive newly created cryptocurrency. Other cryptocurrencies use different methods to create and distribute tokens, and many have a significantly lighter environmental impact.
How to choose a cryptocurrency
It’s important to remember that Bitcoin is different from cryptocurrency in general. While Bitcoin is the first and most valuable cryptocurrency, the market is large.
More than 21,000 different cryptocurrencies are traded publicly, according to CoinMarketCap.com, a market research website. And while some cryptocurrencies have total market valuations in the hundreds of billions of dollars, others are obscure and essentially worthless.
If you’re thinking about getting into cryptocurrency, it can be helpful to start with one that is commonly traded and relatively well established in the market.
NerdWallet has created guides to some widely circulated cryptocurrencies, including Bitcoin and some altcoins, or Bitcoin alternatives:
Bitcoin is the first and most valuable cryptocurrency.
Ethereum is commonly used to carry out financial transactions more complex than those supported by Bitcoin.
Cardano is a competitor to Ethereum led by one of its co-founders.
Litecoin is an adaptation of Bitcoin intended to make payments easier.
Solana is another competitor to Ethereum that emphasizes speed and cost-effectiveness.
Dogecoin began as a joke but has grown to be among the most valuable cryptocurrencies.
Shiba Inu is another dog-themed token with more complex mechanics.
Stablecoins are a class of cryptocurrencies whose values are designed to stay stable relative to real-world assets such as the dollar.
» Learn more: How to invest in Bitcoin
Thoughtfully selecting your cryptocurrency, however, 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 implications on asset values.
For instance, in November of 2022 the market took a major hit as the cryptocurrency exchange FTX struggled to deal with liquidity issues amid a spike in withdrawals. As the fallout spread, cryptocurrencies both large and small saw their values plummet.