Cryptocurrencies (or “crypto”) is a digital asset that can circulate without the need for a central monetary authority such as a government or bank. Instead, cryptocurrencies are created using cryptographic techniques that enable people to buy, sell or trade them securely.
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. The creation 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.
One common way cryptocurrencies are created is through a process known as mining, which is used by Bitcoin. Cryptocurrency 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 cryptocurrencies. 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.
It’s important to remember that Bitcoin is different from other cryptocurrencies in general. While Bitcoin is the first and most valuable cryptocurrency, the market is large.
More than 19,500 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 May 26, 2022, was about $1.2 trillion, having fallen substantially from an all-time high above $2.9 trillion late in 2021.
While some of these have total market valuations in the hundreds of billions of dollars, others are obscure and essentially worthless.
Best cryptocurrencies by market capitalization
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 (though that’s no guarantee of success in such a volatile space).
Daily Nubs has created guides to some widely circulated cryptocurrencies, including Bitcoin and some altcoins, or Bitcoin alternatives:
Bitcoin is the first and most valuable cryptocurrency.
Ethereumis 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.
Stablecoins are a class of cryptocurrencies whose values are designed to stay stable relative to real-world assets such as the dollar.
Is cryptocurrency a good investment?
Cryptocurrency is a relatively risky investment, no matter which way you slice it. Generally speaking, high-risk investments should make up a small part of your overall portfolio — one common guideline is no more than 10%. You may want to look first to shore up your retirement savings, pay off debt or invest in less-volatile funds made up of stocks and bonds.
There are other ways to manage risk within your crypto portfolio, such as by diversifying the range of cryptocurrencies that you buy. Crypto assets may rise and fall at different rates, and over different time periods, so by investing in several different products you can insulate yourself — to some degree — from losses in one of your holdings.
Perhaps the most important thing when investing in anything is to do your homework. This is particularly important when it comes to cryptocurrencies, which are often linked to a specific technological product that is being developed or rolled out. When you buy a stock, it is linked to a company that is subject to well-defined financial reporting requirements, which can give you a sense of its prospects.
Cryptocurrencies, on the other hand, are more loosely regulated in the U.S., so discerning which projects are viable can be even more challenging. If you have a financial advisor who is familiar with cryptocurrency, it may be worth asking for input.
For beginning investors, it can also be worthwhile to examine how widely a cryptocurrency is being used. Most reputable crypto projects have publicly available metrics showing data such as how many transactions are being carried out on their platforms. If use of a cryptocurrency is growing, that may be a sign that it is establishing itself in the market. Cryptocurrencies also generally make “white papers” available to explain how they’ll work and how they intend to distribute tokens.
If you’re looking to invest in less established crypto products, here are some additional questions to consider:
Who’s heading the project? An identifiable and well-known leader 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 portion in the company or just currency or tokens? This distinction is important. Being a part owner 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.