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What Is Cryptocurrency? Here’s What You Should Know Cryptocurrencies let you buy goods and services, or trade them for profit.
Here’s more about what cryptocurrency is, how to buy it and how to protect yourself.James Royal, Ph.D., Kevin Voigt Oct 8,
The investing information provided on this page is for educational purposes only.
NerdWallet does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks or securities.
What’s inside 1.What is cryptocurrency?
2.How many cryptocurrencies are there? What are they worth?
Best cryptocurrencies by market capitalization
3.Why are cryptocurrencies so popular?
4.Are cryptocurrencies a good investment?
5.
How do I buy cryptocurrency?
6.Are cryptocurrencies legal?
7.How do I protect myself?
Should you buy cryptocurrency?
What online brokers offer cryptocurrencies?
Show More
1.What is cryptocurrency?
2.
How many cryptocurrencies are there? What are they worth?
Best cryptocurrencies by market capitalization
3.Why are cryptocurrencies so popular?
4.Are cryptocurrencies a good investment?
5.How do I buy cryptocurrency?
6.
Are cryptocurrencies legal?
7.How do I protect myself?
Should you buy cryptocurrency?
What online brokers offer cryptocurrencies?
A cryptocurrency (or “crypto”) is a digital currency that can be used to buy goods and services, but uses an online ledger with strong cryptography to secure online transactions.
Much of the interest in these unregulated currencies is to trade for profit, with speculators at times driving prices skyward.
The most popular cryptocurrency, Bitcoin, has had volatile price moves this year, reaching nearly $65,000 in April before losing nearly half its value in May.In recent weeks, the price of bitcoin was back in the $45,000 range (You can check the current price to buy Bitcoin here .)
Here are seven things to ask about cryptocurrency, and what to watch out for.
1.What is cryptocurrency? Cryptocurrency is a form of payment that can be exchanged online for goods and services.Many companies have issued their own currencies, often called tokens, and these can be traded specifically for the good or service that the company provides.Think of them as you would arcade tokens or casino chips.
You’ll need to exchange real currency for the cryptocurrency to access the good or service.
Cryptocurrencies work using a technology called blockchain.
Blockchain is a decentralized technology spread across many computers that manages and records transactions.Part of the appeal of this technology is its security.
» Learn more: What is blockchain, and how does it work?
Back to top 2.How many cryptocurrencies are there? What are they worth? More than 10,000 different cryptocurrencies are traded publicly, according to CoinMarketCap.com, a market research website.And cryptocurrencies continue to proliferate, raising money through initial coin offerings, or ICOs.The total value of all cryptocurrencies on Aug.18, 2021, was more than $1.9 trillion — down from April high of $2.2 trillion, according to CoinMarketCap.
The total value of all bitcoins, the most popular digital currency, was pegged at about $849 billion, regaining some ground from recent price lows.Still, the market value of bitcoin is down from April high of $1.2 trillion.
» Ready to invest? Here’s our picks for best Bitcoin and cryptocurrency exchanges.
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NerdWallet rating
NerdWallet’s ratings are determined by our editorial team.The scoring formula for online brokers and robo-advisors takes into account over 15 factors, including account fees and minimums, investment choices, customer support and mobile app capabilities.
NerdWallet rating
NerdWallet’s ratings are determined by our editorial team.The scoring formula for online brokers and robo-advisors takes into account over 15 factors, including account fees and minimums, investment choices, customer support and mobile app capabilities.
NerdWallet rating
NerdWallet’s ratings are determined by our editorial team.The scoring formula for online brokers and robo-advisors takes into account over 15 factors, including account fees and minimums, investment choices, customer support and mobile app capabilities.Learn More Learn More Learn More Fees 0.5% – 4.5%
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Best cryptocurrencies by market capitalization These are the 10 largest trading cryptocurrencies by market capitalization as tracked by CoinMarketCap, a cryptocurrency data and analytics provider.
Cryptocurrency
Market Capitalization
Bitcoin
$1 trillion
Ethereum
$426 billion
Cardano
$72.5 billion
Binance Coin
$71.1 billion
Tether
$68.2 billion
XRP
$50.2 billion
Solana
$48.6 billion
Polkadot
$33.4 billion
USD Coin
$32.9 billion
Dogecoin
$32.5 billion
Data current as of Oct.
8, 2021.
» Learn more: How to invest in Bitcoin
Back to top 3.Why are cryptocurrencies so popular? Cryptocurrencies appeal to their supporters for a variety of reasons.
Here are some of the most popular:
Supporters see cryptocurrencies such as Bitcoin as the currency of the future and are racing to buy them now, presumably before they become more valuable
Some supporters like the fact that cryptocurrency removes central banks from managing the money supply, since over time these banks tend to reduce the value of money via inflation
Other supporters like the technology behind cryptocurrencies, the blockchain, because it’s a decentralized processing and recording system and can be more secure than traditional payment systems
Some speculators like cryptocurrencies because they’re going up in value and have no interest in the currencies’ long-term acceptance as a way to move money
» Learn more: How to buy Ethereum
Back to top 4.Are cryptocurrencies a good investment? Cryptocurrencies may go up in value, but many investors see them as mere speculations, not real investments.The reason? Just like real currencies, cryptocurrencies generate no cash flow, so for you to profit, someone has to pay more for the currency than you did.
That’s what’s called “the greater fool” theory of investment.Contrast that to a well-managed business, which increases its value over time by growing the profitability and cash flow of the operation.
“ For those who see cryptocurrencies such as bitcoin as the currency of the future, it should be noted that a currency needs stability.” Some notable voices in the investment community have advised would-be investors to steer clear of them.Of particular note, legendary investor Warren Buffett compared Bitcoin to paper checks: “It’s a very effective way of transmitting money and you can do it anonymously and all that.
A check is a way of transmitting money too.Are checks worth a whole lot of money? Just because they can transmit money?”
» Learn more: Is Bitcoin safe?
For those who see cryptocurrencies such as Bitcoin as the currency of the future, it should be noted that a currency needs stability so that merchants and consumers can determine what a fair price is for goods.Bitcoin and other cryptocurrencies have been anything but stable through much of their history.For example, while Bitcoin traded at close to $20,000 in December 2017, its value then dropped to as low as about $3,200 a year later.By December 2020, it was trading at record levels again.
This price volatility creates a conundrum.If bitcoins might be worth a lot more in the future, people are less likely to spend and circulate them today, making them less viable as a currency.Why spend a bitcoin when it could be worth three times the value next year?
Back to top 5.
How do I buy cryptocurrency? While some cryptocurrencies, including Bitcoin, are available for purchase with U.S.dollars, others require that you pay with bitcoins or another cryptocurrency.
To buy cryptocurrencies, you’ll need a “wallet,” an online app that can hold your currency.Generally, you create an account on an exchange, and then you can transfer real money to buy cryptocurrencies such as Bitcoin or Ethereum.
Here’s more on how to invest in Bitcoin .
Coinbase is one popular cryptocurrency trading exchange where you can create both a wallet and buy and sell Bitcoin and other cryptocurrencies.Also, a growing number of online brokers offer cryptocurrencies, such as eToro , Tradestation and Sofi Active Investing.Robinhood offers free cryptocurrency trades (Robinhood Crypto is available in most, but not all, U.S.states).
» Learn more: Bitcoin wallet: How to choose the best for you.
Back to top 6.Are cryptocurrencies legal? There’s no question that they’re legal in the United States, though China has essentially banned their use, and ultimately whether they’re legal depends on each individual country.Also be sure to consider how to protect yourself from fraudsters who see cryptocurrencies as an opportunity to bilk investors.
As always, buyer beware.
» Beyond Bitcoin: What are altcoins, and how do they work?
Back to top 7.How do I protect myself? If you’re looking to buy a cryptocurrency in an ICO, read the fine print in the company’s prospectus for this information:
Who owns the company? An identifiable and well-known owner is a positive sign.
Are there other major investors who are investing in it? It’s a good sign if other well-known investors want a piece of the currency.
Will you own a stake in the company or just currency or tokens? This distinction is important.Owning a stake means you get to participate in its earnings (you’re an owner), while buying tokens simply means you’re entitled to use them, like chips in a casino.
Is the currency already developed, or is the company looking to raise money to develop it? The further along the product, the less risky it is.
It can take a lot of work to comb through a prospectus; the more detail it has, the better your chances it’s legitimate.But even legitimacy doesn’t mean the currency will succeed.
That’s an entirely separate question, and that requires a lot of market savvy.
But beyond those concerns, just having cryptocurrency exposes you to the risk of theft, as hackers try to penetrate the computer networks that maintain your assets.One high-profile exchange declared bankruptcy in 2014 after hackers stole hundreds of millions of dollars in bitcoins.
Those aren’t typical risks for investing in stocks and funds on major U.S.exchanges.
Should you buy cryptocurrency? Cryptocurrency is an incredibly speculative and volatile buy.
Stock trading of established companies is generally less risky than investing in cryptocurrencies such as Bitcoin.
Back to top What online brokers offer cryptocurrencies? Of the online brokerages and cryptocurrency exchanges that NerdWallet reviews, the following current offer cryptocurrencies.
Available for:
Learn more
Binance.US
Access to buy and sell more than 50 cryptocurrencies.
Read review
Coinbase
Access to buy and sell more than 50 cryptocurrencies.
Read review
eToro
Trading platform with access to 18 cryptocurrencies.
Read review
Gemini
Ability to buy and sell 40 cryptocurrencies.
Read review
Robinhood
Seven cryptocurrencies including Bitcoin, Bitcoin Cash and Ethereum.
Read review
SoFi Active Investing
Offers 20 cryptocurrencies for trading including Bitcoin, Ethereum and Litecoin.
Read review
TradeStation
Offers trading for five cryptocurrencies, including Bitcoin, Bitcoin Cash and Ethereum.
Read review
Webull
Offers four cryptocurrencies for trading: Bitcoin, Bitcoin Cash, Ethereum and Litecoin.
Read review
Disclosure: The author held no positions in the aforementioned securities at the original time of publication.
About the authors: James F.Royal, Ph.D., is a former NerdWallet writer.His work has also been featured in the Washington Post, New York Times and the Associated Press.Read more
Kevin Voigt is a former investing writer for NerdWallet.He has covered financial issues for more than 20 years, including for The Wall Street Journal and CNN.com.
Read more
On a similar note…Retirement Calculator How to Invest in Stocks What is an IRA? Guide to Individual Retirement Accounts Index Funds: How to Invest and Best Funds to Choose Dive even deeper in Investing Best Online Brokers for Stock Trading by Kevin Voigt Read more
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