What is cryptocurrency?

Cryptocurrencies (often called “crypto”) are digital assets that run on blockchain networks, which record and verify transactions without a central authority like a bank. People often use crypto to send or receive value directly (peer-to-peer payments), but many crypto networks also support other uses—like smart contracts (self-executing code) that can power services such as lending, trading, and digital collectibles. Bitcoin, the largest cryptocurrency by market capitalization, is created through a process called mining, which uses computer power to solve complicated math problems that ultimately produce a fixed supply of virtual coins. While some cryptocurrencies are created in the same way, others do not have a fixed supply and may be created through different methods, such as an “agreement” method.

Unlike the US dollar, cryptocurrencies have no physical form, aren’t stored in a central place, and aren’t governed by a central authority such as the Federal Reserve.

The blockchain is vital to crypto’s decentralized nature. Every crypto transaction is recorded in the blockchain—a public ledger available to other users—and a new “block” is added to the chain with the most recent transactions. In Bitcoin, blocks occur roughly every 10 minutes, but it varies from cryptocurrency to cryptocurrency. There are thousands of copies of the blockchain file on computers around the world, making it extremely hard to alter.

In traditional payment systems, a trusted intermediary (like a bank or card network) verifies and processes transactions. By contrast, in cryptocurrencies, a distributed network of nodes validates transactions and records them on a shared blockchain ledger.

Although there are tens of thousands of cryptocurrencies, a small portion account for the majority of the market. They can generally be grouped into one of three broad buckets (with key examples):

1. Digital currencies:

• Bitcoin was the first cryptocurrency and launched in 2009. It is considered the most liquid crypto. Bitcoin is a digital cryptocurrency that lets people send value directly to each other without a bank or other trusted middleman, using cryptographic software and a distributed network to validate transactions. Bitcoin has a hard cap of 21 million coins, so new supply becomes increasingly scarce over time.

2.  Smart contract platforms:

• Ethereum is the second most liquid cryptocurrency. The Ethereum network is a decentralized cloud-based software that creates a virtual computer that allows third parties to create applications (called smart contracts) that run on the “computer.” Developers use ether, the currency of the network, to pay the network for the processing power and data storage their applications require.
• Solana is a public blockchain designed to support fast, low-cost transactions and scalable decentralized applications. Its native token, SOL, is used to pay network transaction fees and can be “staked” (delegated or locked up with a validator) to help secure the network and earn rewards.¹

3.  Applications:

• Tether is a dollar-pegged stablecoin designed to maintain a value close to $1. As the leading “stablecoin,” tether generally has very little volatility, but it can deviate from $1 during periods of market stress.
• USD Coin is an open source, smart contract based stablecoin which tracks the US dollar.

There are a few ways to gain exposure to cryptocurrencies:

• Directly buying them from an exchange or receiving them as rewards from certain credit cards or e-commerce sites. Prices can be volatile.
• Products such as exchange-traded products (ETPs), trusts, futures, and mutual funds that track cryptocurrencies or groups of cryptocurrencies. Because these products track crypto prices, which are volatile, the prices of these products may also be volatile. Additionally, these products might not track cryptocurrency prices, which trade 24/7, as closely as intended and may therefore diverge from the underlying crypto price.
• Equity ETFs that invest in companies participating in the cryptocurrency market, for example: mining, marketing, consulting, payments equipment, financial services, and other blockchain-related businesses. Crypto-related equity ETFs have high correlation with Bitcoin.
• Stocks of companies that generate most of their money from products related to cryptocurrency or whose stock valuations are related to cryptocurrency such as Digital Asset Treasury Companies (DATs). These companies make money from cryptocurrency, market with cryptocurrency, or support crypto businesses. Their performance tends to move with the market but will also have company-specific drivers.   

Cryptocurrency investing presents unique risks and is characterized by significant volatility, with prices experiencing dramatic swings. Additionally, the decentralized nature and lack of central governance in cryptocurrencies mean that there is limited recourse if assets are lost or stolen, and unforeseen technological risks may emerge.

Risks unique to cryptocurrencies include but are not limited to:

Following the hype of crypto can seem exciting but proceed with caution. Before getting started, investors should get educated and consider how and whether cryptocurrency exposure fits into their portfolio in a way that aligns with their risk tolerance and financial goals.

Article Footnotes:

¹ https://solana.com/staking

CRC# 5177303  02/2026