Cryptocurrency Explained: Understanding the Future of Finance

Cryptocurrency is a form of digital money designed to function as an exchange medium. In the past ten years, cryptocurrency has gained significant popularity, particularly. Bitcoin turning into the most extensively monitored substitute for traditional money. Usually, cryptocurrency exists solely in digital format and lacks a tangible form—this image you see here is merely an illustrator’s depiction of what digital currency might look like.

Many individuals are drawn to cryptocurrency primarily because it can operate independently of a central bank, thus reducing worries about privacy and illicit activities. Additionally, it attracts interest owing to its capacity to maintain value without being eroded by inflation caused by monetary policies that involve printing more money. Furthermore, counterfeiting is extremely challenging with this digital asset thanks to the secure blockchain technology that oversees transactions.

Cryptocurrencies have become increasingly popular among investors because of their substantial value increase since being initially launched. In 2022, however, cryptocurrencies experienced notable drops when the Federal Reserve increased interest rates, affecting speculative assets disproportionately. Bitcoin and Ethereum Two of the most widely followed cryptocurrencies dropped by over 70 percent from their peak values in 2022, yet they rebounded in 2023 and surged dramatically in 2024. Bitcoin's value initially surpassed $100,000. .

Below is an explanation of what cryptocurrency entails, how it functions, and the major risks associated with it.

How cryptocurrency works

Cryptocurrencies are generated, recorded, and maintained using a system known as a distributed ledger like blockchain In a distributed ledger, the flow of the digital currency is managed by computers within a decentralized network to maintain the accuracy of financial records and the ownership of cryptocurrencies. Imagine this as an endlessly growing receipt containing all the system's transactions, which is continuously checked by every participant with access to the receipt.

This distributed system is common among numerous cryptocurrencies, avoiding a centralized governing body. This feature is one of the attractions of cryptocurrencies like Bitcoin—it keeps governmental bodies and central banking institutions outside of the monetary framework, thereby minimizing their involvement and political manipulations.

For this reason, certain cryptocurrencies have a capped supply of currency units. For instance, with Bitcoin, the framework is designed such that a maximum of 21 million Bitcoins will ever be minted.

However, how precisely does cryptocurrency originate? A significant method involves a process known as mining To employ an analogy tied to the historical financial system anchored in precious metals like gold or silver: powerful machines frequently referred to as "miners" execute computations and facilitate transaction confirmations within the distributed ledger. As their reward for this effort, they receive units of the digital currency, or fractions thereof. This undertaking necessitates substantial computational resources along with considerable amounts of electrical energy.

Holders of the currency might keep it stored in a cryptocurrency wallet A computer application that enables users to utilize or obtain the digital currency. For executing transactions, individuals require a "key," which permits them to record details in the shared ledger, indicating the movement of funds. Although this key might be linked to an individual, their identity isn’t directly connected with the transaction at hand.

One reason why many people find cryptocurrencies appealing is because they offer a degree of anonymity when used.

The potential for cryptocurrency creation is virtually limitless. The variety available is astounding, with thousands of new currencies emerging over recent years—particularly following Bitcoin's rise to widespread recognition around 2017. Among these, some of the most well-known digital coins include Bitcoin, Dogecoin, Ethereum, Tether and XRP.

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Top 10 Biggest Cryptocurrencies List

The scale of a cryptocurrency is determined by two elements: the total number of coins in circulation and the value of each coin. By multiplying these two figures, you obtain the overall worth of the currency. market capitalization , or the combined worth of all these coins. Therefore, when specialists discuss the biggest cryptocurrencies, they're talking about this overall valuation rather than the price of a single coin.

Here are the leading cryptocurrencies And their estimated market capitalization, based on data from CoinMarketCap, around mid-February 2025. Keep in mind that due to the unpredictable nature of cryptocurrencies, these figures might change significantly over very brief intervals.

1. Bitcoin – $1.9 trillion
2. Ethereum  – $330 billion
3. XRP – $159 billion
4. Tether – $142 billion
5. Solana – $98 billion
6. BNB – $94 billion
7. USDC – $56 billion
8. Dogecoin – $40 billion
9. Cardano – $28 billion
10. TRON –  $20 billion

What purposes does cryptocurrency serve?

Cryptocurrency serves numerous purposes, yet this varies based on its intended use. Although "cryptocurrency" often brings up visions of financial transactions, it's better understood as a token granting access to certain activities—similar to how tokens work at a video arcade. You purchase these tokens and insert them into machines, thereby enabling yourself to participate in games.

Bitcoin aims to facilitate the transfer of funds, thereby allowing cryptocurrency to operate as a form of currency. However, despite this capability, only a limited number of retailers actually accept it as such, and surprisingly, it operates at a slower pace than many other payment systems.

Similarly, the cryptocurrency Ethereum permits individuals to generate "self-executing agreements," which are essentially pacts that automatically come into effect when their conditions are fulfilled. The crypto token known as the Internet Computer enables users to develop applications, sites, and various online services. These digital assets differ significantly from Dogecoin , which was designed essentially to mock the absurdity surrounding Bitcoin.

Although these digital currencies might possess practical applications (or they might not), their primary function often lies in speculative activities. Traders oscillate the values of these tokens up and down, aiming to gain profits from those who are also frequently buying and selling these assets.

Even though the coins might allow a user to execute a specific function, numerous purchasers are solely focused on reselling them for financial gain. To many people, this is actually the primary application of digital currencies.

Can you convert crypto to cash?

Cryptocurrencies can be readily exchanged for standard currencies like dollars or euros. If you hold the currency itself, You can convert it through an exchange into regular money. Or transfer it into another cryptocurrency instead. Usually, you'll have to pay a substantial fee for these transactions though.

However, you might also possess cryptocurrency via a payment platform like PayPal. CashApp , and you might effortlessly exchange it for cash. Additionally, you could potentially utilize a Bitcoin ATM to access dollars.

Individuals holding cryptocurrency through Bitcoin futures have the ability to easily liquidate their holdings whenever the market is active; however, you should seek out the best options. the top brokers for cryptocurrencies if you’re trading regularly.

However, if you require immediate access to your funds, you must accept the price offered by the market at that moment, which could be significantly lower than what you originally invested. Cryptocurrency tends to experience higher fluctuations compared to other risky investments. Additionally, significant transaction costs are typically involved when entering or exiting the market. there will be tax consequences as a result of this action .

Biggest risks of cryptocurrency

Even though supporters present compelling arguments for digital currencies like Bitcoin, these systems come with significant risks, particularly in their current form. This does not imply that you cannot profit from reselling them at a higher cost than your purchase price. Nonetheless, certain disadvantages render Bitcoin and similar currencies nearly ineffective as proper mediums of exchange.

Bitcoin and other cryptocurrencies face genuine critics, among them some of the globe's leading investors like the multibillionaire Warren Buffett. Buffett has referred to Bitcoin as "likely rat poison squared." while his long-time business associate Charlie Munger has described cryptocurrency trading as 'simply dementia.' Buffett said In 2022, he stated that he would not purchase all the Bitcoin in existence for $25 because, unlike stocks, real estate, and farmland, it does not generate any value for its holders.

Several major hazards associated with cryptocurrencies encompass the subsequent problems.

Extracting the currency is costly and harmful to the environment.

A major drawback of cryptocurrencies is that they are "mined" using computer systems. This mining process incurs costs due to the considerable amount of energy required to generate coins. As miners use and cover these energy expenses to operate their setups, this leads to notable levels of pollution and waste production.

If Bitcoin were a country, it would consume more energy than Poland (with a population of 36.8 million) by the end of 2024, based on data from the Cambridge Bitcoin Electricity Consumption Index. Regarding carbon emissions, it would rank 61st globally.

This extensive usage has sparked criticism from individuals who view cryptocurrencies as an unnecessary drain on energy resources during a critical environmental crisis.

The supply of certain cryptocurrencies is set to be limited.

Supporters of Bitcoin highlight the limited supply of coins as advantageous because they argue this ensures the currency won’t lose value due to actions from central banks, such as printing more money. Nevertheless, capping the overall quantity could make cryptocurrencies behave similarly to a gold standard system. This limitation might subject economies using them extensively to severe deflationary traps which can have damaging effects.

During periods of economic prosperity, when money circulates abundantly, issues might not surface. However, when conditions deteriorate, both individuals and companies frequently stockpile cash as protection from volatility and potential unemployment. This act of holding onto funds can impede the circulation of money within the economy, possibly resulting in a harmful deflationary cycle. In extreme cases, people refrain from making purchases anticipating lower prices in the future, which could drive the economy towards collapse.

This issue is precisely why contemporary nations have shifted away from the gold standard towards fiat currency. Unshackled from the constraints of the gold standard, Central banks can inject more funds into the economy during difficult periods. even if consumers and companies stockpile it, causing the economy to avoid grinding to a halt.

An unstable currency is impractical.

The constrained supply of coins, along with speculative frenzy and an engaging narrative, has led to significant fluctuations in the prices of Bitcoin and other cryptocurrencies. While this might suit those interested in trading, it renders them unsuitable for everyday use as money. For a medium of exchange to hold value, people must trust that it will maintain its purchasing power over time.

Consider dining at an eatery where your entrée priced at $10 today could cost you $20 tomorrow. While you may opt to dine out solely on cheaper days, this approach doesn’t work for entire economies. Economies require a consistent medium of exchange to ensure stability, allowing individuals to swap goods and services with clarity regarding their worth.

To the degree that Bitcoin and other cryptos benefit traders—by being volatile—they become problematic as currencies.

Rules and entry to cryptocurrencies may differ.

Cryptocurrencies can be impacted by governmental rules, potentially undermining certain digital coins' growth; however, they might also benefit from these rules based on how extensive the regulatory measures are.

Government regulations have the potential to severely limit the effectiveness of cryptocurrencies, particularly if they include total or near-total prohibitions. Such an approach, as seen with China’s decision, can render a cryptocurrency practically worthless within that nation’s borders, and may also expose individuals to legal penalties, based on local legislation.

Recently, Donald Trump’s re-election and the prospect of a pro-crypto administration has caused crypto prices to soar, pushing Bitcoin to a recent all-time high of nearly $110,000.

Even with backing from the Trump administration, crypto regulation varies Across various government bodies and from one state to another, classification and definition of cryptocurrencies differ significantly. The Securities and Exchange Commission, the Commodity Futures Trading Commission, and the Internal Revenue Service each adopt distinct approaches when categorizing digital currencies.

Certain states, including New York, impose strict regulations on cryptocurrency firms. In contrast, some states like Wyoming are more welcoming to cryptocurrencies and are even developing their specific frameworks. stablecoin while aiming to lure cryptocurrency-related enterprises.

Despite their differences, governmental regulations might contribute to establishing a fairer environment that is less prone to deceit and misconduct. In such an arrangement, stakeholders within the marketplace could potentially cultivate increased confidence in the system and possess well-defined legal options should anything untoward occur. This type of oversight aids in curbing the "lawless frontier" aspect of cryptocurrencies, rendering them safer for individuals aiming to utilize them with integrity.

Other drawbacks

Cryptocurrencies also come with several disadvantages, such as inadequate protection for digital wallets used to store funds, their involvement in illegal activities, and slower transaction processing speeds when contrasted with the nearly instant services provided by conventional systems like Visa and MasterCard.

Furthermore, since the IRS has classified Bitcoin as an asset rather than a currency, each Bitcoin transaction carries the possibility of generate a reportable capital gain This means you have to include it in your tax return. If you use bitcoins valued higher than what you originally bought them for, you will be liable for taxes.

Bottom line

Although cryptocurrency does offer certain advantages, it comes with significant downsides that currently prevent it from being used effectively as a currency. Given its unpredictability and multiple risks, investors should likely proceed with caution when dealing with cryptocurrencies. Should you wish to experiment with them simply to understand their workings, ensure your investment amount remains minimal and only use funds you could comfortably part with.

— Note: 5.180.24.3’s Brian Baker and Logan Jacoby were involved in updating this tale.