Understanding cryptocurrency: A beginner's guide to this highly volatile digital money

Cryptocurrency — or crypto, as the cool kids call it — entered the lexicon in 2009. It has since taken the world by storm.

What is cryptocurrency?

Cryptocurrency is digital money that can be held as an investment or used to purchase goods or services.

Banks or other financial institutions aren’t needed to verify or complete transactions. Cryptocurrency transactions are verified via a consensus mechanism and recorded on what is known as a blockchain. These are permanent ledgers that track and record trades and assets.

More: Energy-hungry cryptocurrency mining is growing in Iowa. Will it help or hurt the state?

Cryptocurrencies are essentially self-contained, digital payment platforms. They are typically not issued or controlled by central governments or other authorities. Instead, they’re controlled by a transparent software protocol that leverages the power of peer-to-peer networks of computers. The primary goal of cryptocurrencies is to give individuals complete control over their assets.

Cryptocurrency vs. physical money comparison

Cryptocurrency Physical money

Digital Physical

Produced by computers Government-issued

Decentralized Centralized

Bitcoin launched in 2009. It was seen as a technological breakthrough in the area of digital cash. Thousands of cryptocurrencies have launched in the years since. 

The market cap of all coins rose as high as $3 trillion during the 2021 bull market before collapsing during the 2022 “crypto winter.” The total market is worth around $2.6 trillion today. Bitcoin and ethereum dominate much of the market.

How does cryptocurrency work?

A cryptocurrency transaction is essentially an agreement between two people about the price they’re willing to pay or accept, said Julio Rivas, associate professor of finance at the Lipscomb University College of Business. 

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Show caption

A representation of Bitcoin, which doesn't actually exist in physical form.  

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For Subscribers

Understanding cryptocurrency: A beginner's guide to this highly volatile digital money

Coryanne Hicks, Hannah Alberstadt and Farran Powell | USA Today BLUEPRINT

Cryptocurrency — or crypto, as the cool kids call it — entered the lexicon in 2009. It has since taken the world by storm.

What is cryptocurrency?

Cryptocurrency is digital money that can be held as an investment or used to purchase goods or services.

Banks or other financial institutions aren’t needed to verify or complete transactions. Cryptocurrency transactions are verified via a consensus mechanism and recorded on what is known as a blockchain. These are permanent ledgers that track and record trades and assets.

More: Energy-hungry cryptocurrency mining is growing in Iowa. Will it help or hurt the state?

Cryptocurrencies are essentially self-contained, digital payment platforms. They are typically not issued or controlled by central governments or other authorities. Instead, they’re controlled by a transparent software protocol that leverages the power of peer-to-peer networks of computers. The primary goal of cryptocurrencies is to give individuals complete control over their assets.

Cryptocurrency vs. physical money comparison

Cryptocurrency Physical money

Digital Physical

Produced by computers Government-issued

Decentralized Centralized

Bitcoin launched in 2009. It was seen as a technological breakthrough in the area of digital cash. Thousands of cryptocurrencies have launched in the years since. 

The market cap of all coins rose as high as $3 trillion during the 2021 bull market before collapsing during the 2022 “crypto winter.” The total market is worth around $2.6 trillion today. Bitcoin and ethereum dominate much of the market.

How does cryptocurrency work?

A cryptocurrency transaction is essentially an agreement between two people about the price they’re willing to pay or accept, said Julio Rivas, associate professor of finance at the Lipscomb University College of Business. 

“The appeal of cryptocurrencies is that they are not controlled by any government. Therefore, people who buy or invest in them believe that the asset is not manipulated,” Rivas said.

But this scares some people. Who is in charge? Who backs this so-called currency? It also makes crypto volatile. The price depends entirely on the value each party to the transaction gives it.

When you buy cryptocurrency, you don’t get actual coins. Instead, you get two keys. Your private key is a string of letters and numbers that lets you access your crypto. It functions as a password. Your public key allows others to send you crypto.

What is a blockchain?

A blockchain is the technology on which a cryptocurrency runs. When you hear the term blockchain, you can visualize a public ledger or database. This database is updated in real time. It records every transaction using that cryptocurrency and lives on the internet in plain sight for all to see. These transactions are recorded in blocks. Each block is linked to the previous one to form a chain. 

“This structure ensures that once information is added, it cannot be altered or deleted, providing a secure and transparent way to record transactions,” said Kwamie Dunbar, associate professor of finance and director of fintech programs at Worcester Polytechnic Institute.

Different forms of blockchain technology have been developed in conjunction with different cryptocurrencies. In the case of Bitcoin, the blockchain is maintained by a group of volunteers known as miners. Miners solve complex mathematical puzzles with powerful computers. 

Cryptocurrency examples

There are thousands of cryptocurrencies. Many aren’t worth much. But each crypto is unique.

“Think of (cryptocurrencies) as stocks. They are basically the same asset class, but they are very different from each other,” Rivas said. 

Here are some of the most well-known coins:

Bitcoin. It has a first-mover advantage and operates differently from most cryptocurrencies. It runs on a proof-of-work blockchain. This means it’s theoretically more decentralized than other cryptos. But that comes at the cost of a mammoth energy consumption bill. Some liken Bitcoin to a digital form of gold. They hope it can one day be a store of value where you can park your wealth outside the control of governments and central banks. But it remains incredibly volatile. Bitcoin’s previous all-time high was more than $68,700 in November 2021 before a precipitous fall throughout 2022. It rallied in 2023 in anticipation of the approval of spot Bitcoin exchange-traded funds. Bitcoin reached a new all-time high of more than $73,700 in March 2024. 

Ethereum. The second-biggest cryptocurrency is vastly different from Bitcoin. It’s attempting to become the base layer of a new decentralized system. Other cryptos and decentralized applications can be launched on top of ethereum. A good way to view it is as a playground for developers. Decentralized finance and non-fungible tokens are two of the most famous areas of development on ethereum. Ethereum reached its all-time high of more than $4,800 in November 2021. Its value fell in the wake of rising interest rates and the FTX failure in 2022. Ethereum exceeded $4,000 again in March 2024 but has since fallen to less than $3,500.

Litecoin. Former Google engineer Charlie Lee launched litecoin in 2011. It was inspired by Bitcoin. Lee described litecoin as “the Silver to Bitcoin’s Gold.” Bitcoin was viewed as more likely to be used as a store of value. The thesis behind litecoin was as an offshoot of Bitcoin that was more suitable for payments.

Tether. A "stablecoin," its value is pegged to a fiat currency — in this case, the U.S. dollar. One tether token will always trade for $1 — at least theoretically. Tether has been dogged by concerns over whether its tokens are really backed one-to-one with full reserves. That, combined with the emergence of rival stablecoins, has seen its market share dip in the last couple of years. But it remains the biggest stablecoin in the crypto space.

Dogecoin. A memecoin, it's an asset inspired by a meme or internet joke — in this case, a shiba inu dog named Kabosu. But that hasn’t stopped dogecoin from actively trading for real money. It reached a market cap of $88 billion in May 2021. Since then, it has fallen back down to Earth. But memecoins like Dogecoin symbolize how much speculation and volatility exists in the cryptocurrency space. 

Understanding the cryptocurrency market

The cryptocurrency market can be confusing because it is tied so symbiotically to human emotion. 

The pandemic period brought meteoric gains. But bone-crushing losses followed as the wider economy pulled back amid rising interest rates to combat inflation. Returns in 2022 highlighted that nothing within crypto was immune to immense losses. The year was a cautionary tale of the risks inherent in the space. Multiple cryptocurrency companies filed for bankruptcy, including FTX, whose founder was convicted of stealing $8 billion from customers.

Some argue, however, that cryptocurrency is nothing if not resilient. And 2023 and 2024 appear to be evidence of this.

Exchange-traded funds for cryptocurrency have spurred demand, and some large cryptocurrencies have reached or neared all-time highs.

“The recent introduction of cryptocurrency ETFs marks a significant evolution, allowing retirement plans and individual investors to gain exposure to cryptocurrencies without directly purchasing or holding them,” Dunbar said

What the future holds for crypto, though, is anyone’s guess.

Pros and cons of cryptocurrency

There are many other pros and cons to consider before wading into crypto’s murky waters. Here are some of the key benefits and drawbacks.

Pros Cons

Ease and speed of transactions Transactions are pseudonymous, not anonymous, leaving a digital trail

Available to anyone with an internet connection Popular with criminal networks

No central authority means no risk of a single point of failure Industry is rife with scams and fraud

Inflation protection thanks to hard caps Has become centralized with large holdings in top addresses

Transparent transaction history Requires an extremely high amount of electricity

As secure as your private key Cryptocurrency is unrecoverable if you lose your private key

Can be highly profitable Value can go to zero at any moment

Is cryptocurrency a safe investment?

Cryptocurrency is a risk-on investment. There are countless examples of investors losing it all by investing in crypto. 

Cryptocurrency volatility also is dangerous. Many coins have no intrinsic value and will almost certainly go to zero someday. There are also many scams in the space. So if you invest in crypto, you must be vigilant. 

The Des Moines Register

The Des Moines Register

What do you want to find?

most recent stories

ISU Women's Basketball 

Iowa State women's basketball pregame injury report for TCU game

ISU Basketball 

Three takeaways from Iowa State men's road loss to BYU

columnists 

Jesse Jackson's profile grew with his advocacy for Iowa farmers

ISU Basketball 

Hines: Iowa State basketball still searching for its best on the road

Iowa View 

Leave cigarette tax alone, keep Iowa small businesses competitive

ISU Basketball 

Iowa State men's basketball falls at BYU

editorials 

Three-strikes proposal would hurt Iowa more than it'd help

Grocery Stores 

Looking for healthier meals? Hy-Vee adding new Dietitian Dishes

Show caption

A representation of Bitcoin, which doesn't actually exist in physical form.  

Bob Montgomery/USA TODAY NETWORK

For Subscribers

Understanding cryptocurrency: A beginner's guide to this highly volatile digital money

Coryanne Hicks, Hannah Alberstadt and Farran Powell | USA Today BLUEPRINT

Cryptocurrency — or crypto, as the cool kids call it — entered the lexicon in 2009. It has since taken the world by storm.

What is cryptocurrency?

Cryptocurrency is digital money that can be held as an investment or used to purchase goods or services.

Banks or other financial institutions aren’t needed to verify or complete transactions. Cryptocurrency transactions are verified via a consensus mechanism and recorded on what is known as a blockchain. These are permanent ledgers that track and record trades and assets.

More: Energy-hungry cryptocurrency mining is growing in Iowa. Will it help or hurt the state?

Cryptocurrencies are essentially self-contained, digital payment platforms. They are typically not issued or controlled by central governments or other authorities. Instead, they’re controlled by a transparent software protocol that leverages the power of peer-to-peer networks of computers. The primary goal of cryptocurrencies is to give individuals complete control over their assets.

Cryptocurrency vs. physical money comparison

Cryptocurrency Physical money

Digital Physical

Produced by computers Government-issued

Decentralized Centralized

Bitcoin launched in 2009. It was seen as a technological breakthrough in the area of digital cash. Thousands of cryptocurrencies have launched in the years since. 

The market cap of all coins rose as high as $3 trillion during the 2021 bull market before collapsing during the 2022 “crypto winter.” The total market is worth around $2.6 trillion today. Bitcoin and ethereum dominate much of the market.

How does cryptocurrency work?

A cryptocurrency transaction is essentially an agreement between two people about the price they’re willing to pay or accept, said Julio Rivas, associate professor of finance at the Lipscomb University College of Business. 

“The appeal of cryptocurrencies is that they are not controlled by any government. Therefore, people who buy or invest in them believe that the asset is not manipulated,” Rivas said.

But this scares some people. Who is in charge? Who backs this so-called currency? It also makes crypto volatile. The price depends entirely on the value each party to the transaction gives it.

When you buy cryptocurrency, you don’t get actual coins. Instead, you get two keys. Your private key is a string of letters and numbers that lets you access your crypto. It functions as a password. Your public key allows others to send you crypto.

What is a blockchain?

A blockchain is the technology on which a cryptocurrency runs. When you hear the term blockchain, you can visualize a public ledger or database. This database is updated in real time. It records every transaction using that cryptocurrency and lives on the internet in plain sight for all to see. These transactions are recorded in blocks. Each block is linked to the previous one to form a chain. 

“This structure ensures that once information is added, it cannot be altered or deleted, providing a secure and transparent way to record transactions,” said Kwamie Dunbar, associate professor of finance and director of fintech programs at Worcester Polytechnic Institute.

Different forms of blockchain technology have been developed in conjunction with different cryptocurrencies. In the case of Bitcoin, the blockchain is maintained by a group of volunteers known as miners. Miners solve complex mathematical puzzles with powerful computers. 

Cryptocurrency examples

There are thousands of cryptocurrencies. Many aren’t worth much. But each crypto is unique.

“Think of (cryptocurrencies) as stocks. They are basically the same asset class, but they are very different from each other,” Rivas said. 

Here are some of the most well-known coins:

Bitcoin. It has a first-mover advantage and operates differently from most cryptocurrencies. It runs on a proof-of-work blockchain. This means it’s theoretically more decentralized than other cryptos. But that comes at the cost of a mammoth energy consumption bill. Some liken Bitcoin to a digital form of gold. They hope it can one day be a store of value where you can park your wealth outside the control of governments and central banks. But it remains incredibly volatile. Bitcoin’s previous all-time high was more than $68,700 in November 2021 before a precipitous fall throughout 2022. It rallied in 2023 in anticipation of the approval of spot Bitcoin exchange-traded funds. Bitcoin reached a new all-time high of more than $73,700 in March 2024. 

Ethereum. The second-biggest cryptocurrency is vastly different from Bitcoin. It’s attempting to become the base layer of a new decentralized system. Other cryptos and decentralized applications can be launched on top of ethereum. A good way to view it is as a playground for developers. Decentralized finance and non-fungible tokens are two of the most famous areas of development on ethereum. Ethereum reached its all-time high of more than $4,800 in November 2021. Its value fell in the wake of rising interest rates and the FTX failure in 2022. Ethereum exceeded $4,000 again in March 2024 but has since fallen to less than $3,500.

Litecoin. Former Google engineer Charlie Lee launched litecoin in 2011. It was inspired by Bitcoin. Lee described litecoin as “the Silver to Bitcoin’s Gold.” Bitcoin was viewed as more likely to be used as a store of value. The thesis behind litecoin was as an offshoot of Bitcoin that was more suitable for payments.

Tether. A "stablecoin," its value is pegged to a fiat currency — in this case, the U.S. dollar. One tether token will always trade for $1 — at least theoretically. Tether has been dogged by concerns over whether its tokens are really backed one-to-one with full reserves. That, combined with the emergence of rival stablecoins, has seen its market share dip in the last couple of years. But it remains the biggest stablecoin in the crypto space.

Dogecoin. A memecoin, it's an asset inspired by a meme or internet joke — in this case, a shiba inu dog named Kabosu. But that hasn’t stopped dogecoin from actively trading for real money. It reached a market cap of $88 billion in May 2021. Since then, it has fallen back down to Earth. But memecoins like Dogecoin symbolize how much speculation and volatility exists in the cryptocurrency space. 

Understanding the cryptocurrency market

The cryptocurrency market can be confusing because it is tied so symbiotically to human emotion. 

The pandemic period brought meteoric gains. But bone-crushing losses followed as the wider economy pulled back amid rising interest rates to combat inflation. Returns in 2022 highlighted that nothing within crypto was immune to immense losses. The year was a cautionary tale of the risks inherent in the space. Multiple cryptocurrency companies filed for bankruptcy, including FTX, whose founder was convicted of stealing $8 billion from customers.

Some argue, however, that cryptocurrency is nothing if not resilient. And 2023 and 2024 appear to be evidence of this.

Exchange-traded funds for cryptocurrency have spurred demand, and some large cryptocurrencies have reached or neared all-time highs.

“The recent introduction of cryptocurrency ETFs marks a significant evolution, allowing retirement plans and individual investors to gain exposure to cryptocurrencies without directly purchasing or holding them,” Dunbar said.

What the future holds for crypto, though, is anyone’s guess.

Pros and cons of cryptocurrency

There are many other pros and cons to consider before wading into crypto’s murky waters. Here are some of the key benefits and drawbacks.

Pros Cons

Ease and speed of transactions Transactions are pseudonymous, not anonymous, leaving a digital trail

Available to anyone with an internet connection Popular with criminal networks

No central authority means no risk of a single point of failure Industry is rife with scams and fraud

Inflation protection thanks to hard caps Has become centralized with large holdings in top addresses

Transparent transaction history Requires an extremely high amount of electricity

As secure as your private key Cryptocurrency is unrecoverable if you lose your private key

Can be highly profitable Value can go to zero at any moment

Is cryptocurrency a safe investment?

Cryptocurrency is a risk-on investment. There are countless examples of investors losing it all by investing in crypto. 

Cryptocurrency volatility also is dangerous. Many coins have no intrinsic value and will almost certainly go to zero someday. There are also many scams in the space. So if you invest in crypto, you must be vigilant. 

Is cryptocurrency legal?

Cryptocurrency’s legal status is uncertain. Most nations allow the purchase and sale of digital assets by investors. But the rules beyond that — legislation regarding companies, mining and securities laws, for example — vary. 

Some countries, such as China, have banned crypto activity of any kind.

What can you buy with cryptocurrency?

You likely can’t stroll into your local cafe and buy an iced latte with crypto. But some companies, including Virgin Galactic, AMC and Microsoft, accept payments in crypto for certain products.

What is market capitalization in cryptocurrency?

Market capitalization in cryptocurrency is a specific cryptocurrency’s total value. It’s calculated by multiplying a coin’s price by the number of coins in circulation. For example, a coin trading at $100 with 50 million coins in circulation has a market cap of $5 billion.

The total market cap of the cryptocurrency industry combines the market caps of all the cryptocurrencies trading on the market.