1. Cryptocurrency definition
Cryptocurrencies are digital assets created using computer networking software that enables secure trading and ownership.
Bitcoin and most other cryptocurrencies are supported by a technology known as blockchain, which maintains a tamper-resistant record of transactions and keeps track of who owns what. Public blockchains are usually decentralized, which means they operate without a central authority such as a bank or government.
The term cryptocurrencies comes from the cryptographic processes that developers have put in place to guard against fraud. These innovations addressed a problem faced by previous efforts to create purely digital currencies: how to prevent people from making copies of their holdings and attempting to spend them 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 are mostly designed to help run computer networks that carry out more complex financial transactions.
One common way cryptocurrencies are created is through a process known as mining, which is used by 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.
For most people, the easiest way to get cryptocurrency is to buy it, either from an exchange or another user.
2. How to buy cryptocurrency
Buying cryptocurrencies involves four basic steps:
1. Decide where to buy it
There are many ways to buy cryptocurrency, though the most accessible method for beginners is likely to be a centralized exchange. Centralized exchanges act as a third party overseeing transactions to give customers confidence that they are getting what they pay for. These exchanges typically sell crypto at market rates, and they make money on fees for various aspects of their services.
If you're more accustomed to traditional brokerage accounts, there are a few online brokers that offer access to cryptocurrencies as well as stocks. Of the online brokers reviewed by NerdWallet, these include Robinhood, Webull, SoFi Active Investing and TradeStation. If you're looking for an exchange that operates solely within the cryptocurrency world, look for pure-play crypto exchanges. These platforms, such as Coinbase, Gemini and Kraken, won't give you access to core assets like stocks and bonds, but they typically have a much better selection of cryptocurrencies, and more on-platform crypto storage options.
» Investing in cryptocurrency? Here are our picks for best cryptocurrency exchanges and platforms.
Though centralized exchanges are relatively easy to use, they also can be an attractive target for hackers given the volume of crypto that flows through them.
For more advanced users, there are decentralized exchanges whose fees can be lower than those charged by centralized platforms. Those can be more difficult to use and demand more technical know-how, but they may also offer some security benefits because there is no single target for a cyberattack. Cryptocurrencies can also be traded through peer-to-peer transactions.
2. Choose how you'll pay
While there are thousands of cryptocurrencies being traded around the world, you'll find that the most popular options are widely available for purchase in fiat currencies such as the U.S. dollar. If you're a first-time buyer, you'll very likely have to use regular money to buy cryptocurrency.
If you're a more experienced investor, you may want to trade some of your existing crypto holdings for another type of cryptocurrency — for instance Bitcoin for Ethereum.
3. Add value to your account
Depending on how you choose to pay, you may have to fund your account before purchasing any crypto. If you're using fiat currency, most exchanges allow debit and bank transfers. Some also allow you to fund a purchase with your credit card, though this can be a risky move with a volatile asset like cryptocurrency because interest costs can deepen your losses if your investments decline in value.
If you already own cryptocurrency, you can transfer it into your account from a digital wallet or another platform, then use it to trade. Just be sure to verify that your crypto exchange allows trading between the assets you're looking at. Not all cryptocurrencies can be directly traded for one another, and some platforms have more trading pairs than others.
Another thing to note is that exchanges’ fees vary depending on what you're buying and how you're buying it, so review these details carefully.
4. Select a cryptocurrency
There are many options for cryptocurrency investors, though there are none that are likely to be right for everyone. Before you buy, ask yourself what your goals are for this investment. Are you hoping it will increase in value? Are you interested in carrying out transactions using cryptocurrency? Are you interested in using the underlying technology via decentralized apps? These may help you make your decision.
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.
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.
Stablecoins are a class of cryptocurrencies whose values are designed to stay stable relative to real-world assets such as the dollar.
3. Best cryptocurrencies by market capitalization
More than 17,000 different cryptocurrencies are traded publicly, according to CoinMarketCap.com, a market research website. And cryptocurrencies continue to proliferate. The total value of all cryptocurrencies on Feb. 7, 2022, was about $1.7 trillion, having fallen substantially from an all-time high above $2.9 trillion late in 2021.
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