Crypto Explained: A Beginner's Guide to Investing in Cryptocurrency

Cryptocurrency is digital money that exists only as entries on a shared electronic ledger, with no central bank or government issuing it. Investing in crypto means buying these tokens, or financial products that track them, in the hope that their value rises. Most beginners start by buying Bitcoin or Ether on a crypto exchange or brokerage app. Some choose an exchange-traded fund instead and skip holding the coins directly. Whichever route you take, you are buying an asset with no earnings, interest or physical backing behind it. Its price depends on what other buyers are willing to pay, so it can move sharply in either direction.

What cryptocurrency is and how it works

Unlike a bank balance, which is a record kept by the bank, a cryptocurrency balance is recorded on a public ledger that thousands of independent computers maintain together. Transfers go directly from one party to another without a broker or bank in the middle, and the network records them on that shared ledger.

Blockchain: the shared ledger

That ledger is called a blockchain: a distributed database where transactions are grouped into blocks, each linked to the one before it. Every participating computer (a node) holds a copy and checks new entries against the network’s rules. Changing an old transaction would mean rewriting every later block on most copies at once, which makes the record hard to tamper with.

Ownership is controlled by cryptographic keys. A public key, or the address derived from it, works like an account number that others can send funds to. A private key is the secret that authorizes spending. Whoever holds the private key controls the coins.

How new coins are created

Networks need a way to agree on which transactions are valid and to issue new coins. Bitcoin uses mining (proof of work): computers with specialized chips race to solve a mathematical puzzle, and the first to solve it adds the next block and earns newly created bitcoin. The process uses large amounts of electricity, which has drawn environmental criticism.

Ethereum switched from mining to proof of stake in September 2022 in an upgrade known as the Merge. Validators lock up (“stake”) their own coins as collateral for the right to confirm transactions and lose part of that stake if they break the rules.

Bitcoin, Ethereum and altcoins

Bitcoin is the original and best-known cryptocurrency, described in a 2008 white paper by the pseudonymous Satoshi Nakamoto, whose identity has never been confirmed, and launched in January 2009. Its supply is capped at 21 million coins, and new issuance shrinks over time on a fixed schedule. That scarcity is central to how many holders think about it.

Ethereum is a blockchain platform rather than just a currency. Its native token, Ether (ETH), pays for activity on the network, and the platform runs smart contracts: programs that execute automatically when set conditions are met. Many other tokens and applications are built on top of it. Unlike Bitcoin, Ether has no fixed maximum supply.

Altcoins are all cryptocurrencies other than Bitcoin. They differ in how they are created, how transactions are verified, how fast the network is and what the token is used for. Some are large, established networks; others are thinly traded projects that can lose most of their value or disappear. Stablecoins are tokens designed to hold a steady value, usually one US dollar, typically backed by reserves the issuer says it holds.

Ways to invest in crypto

• Crypto exchanges. Dedicated platforms such as Coinbase, Kraken, Gemini, Bitstamp and Binance let you buy, sell and often withdraw coins to your own wallet. They usually offer the widest choice of tokens.
• Payment and brokerage apps. Apps such as Cash App and some stock brokers let you buy crypto alongside other assets. Selection is usually narrower, and some do not let you move coins off the platform, so you own a claim on the app rather than coins you control.
• Crypto ETFs and trusts. A cryptocurrency exchange-traded fund trades on a stock exchange and tracks one coin or a basket of them. The ProShares Bitcoin Strategy ETF, the first US Bitcoin futures ETF, began trading in October 2021. US regulators approved spot Bitcoin ETFs, which hold actual bitcoin, in January 2024. ETFs fit into ordinary brokerage and retirement accounts, but they charge an annual expense ratio and you cannot use the coins on the blockchain.
• Futures and other derivatives. Contracts such as CME’s Bitcoin futures let traders bet on price moves, often with leverage. Leverage magnifies both gains and losses, and positions can be liquidated if the price moves against you.
• Crypto-related stocks. Shares of companies tied to the industry, such as listed exchanges or mining firms, give indirect exposure. Their prices reflect the business itself as well as crypto prices.

How to buy crypto, step by step

For a direct purchase on an exchange or app, the process generally runs like this:

1. Pick a platform. Check that it is licensed or registered where you live, which coins it supports, its trading and withdrawal fees, and whether you can move coins to your own wallet.
2. Open and verify your account. Regulated platforms require identity verification (KYC, “know your customer”), usually a government ID and proof of address.
3. Secure the account. Use a unique password and turn on two-factor authentication with an authenticator app rather than SMS where possible.
4. Fund it. Deposit money by bank transfer, debit card or another supported method. Card deposits often cost more than bank transfers.
5. Place an order. A market order buys at the current price; a limit order buys only at your price or better. Check the total cost, including any spread between the buy and sell price, before confirming.
6. Decide where to keep it. Leave it on the platform or move it to a wallet you control (see below).
7. Keep records. Save the date, amount, price and fees for every purchase and sale. You will need them for taxes and to work out your gains.

Storing crypto: hot wallets, cold storage and custody

A wallet stores the keys that control your coins, not the coins themselves, which always stay on the blockchain.

• Custodial accounts. When you leave coins on an exchange, the exchange holds the keys. This is convenient but exposes you to that company’s security, solvency and honesty. Crypto platforms are not banks, and balances are generally not protected by deposit insurance. When an exchange is hacked, freezes withdrawals or goes bankrupt, customers may become unsecured creditors; the FTX collapse in 2022 left customers unable to withdraw.
• Hot wallets. Software wallets on a phone or computer stay connected to the internet. They make managing tokens easy, but being online exposes them more to hacking and malware.
• Cold storage. Hardware wallets and other offline methods keep private keys away from the internet, which reduces theft risk at the cost of convenience.

With any self-custody wallet you receive a recovery phrase, a list of words that can restore your keys. Anyone who sees it can take your funds, and if you lose it along with the device, the coins cannot be recovered. No legitimate support agent will ever ask for it.

Risks to understand before investing

Volatility

Crypto prices can swing by large percentages within days or weeks, and the short-term direction and the monthly trend often disagree.

Scams and initial coin offerings

An initial coin offering (ICO) is the crypto counterpart of a stock IPO: a project sells newly created tokens to raise money. ICOs have been a frequent channel for fraud, and the SEC has brought enforcement actions against offerings it considered unregistered securities. Be wary of guaranteed returns, pressure to act quickly, celebrity endorsements and anyone offering to “manage” your crypto. Transactions on a blockchain generally cannot be reversed.

Regulation and taxes

Rules differ by country and are still changing. In the United States, the IRS treats cryptocurrency as property, so selling, swapping one coin for another or spending crypto can trigger a taxable capital gain or loss. Other countries tax crypto differently, so check the rules where you live.

Choosing what to buy and how much

There is no single best crypto to invest in; the answer depends on what you want the money to do and how much loss you can tolerate. A few principles help beginners:

• Size the position. Invest only an amount you could lose entirely without affecting rent, debt payments or your emergency fund.
• Consider spreading purchases. Dollar-cost averaging means buying a fixed amount on a regular schedule instead of all at once. For example, $100 a month for 12 months instead of $1,200 on one day reduces the impact of buying at a single peak, though it cannot prevent losses if prices fall over the whole period.
• Know the fees. Trading fees, spreads, withdrawal fees and fund expense ratios all reduce returns, especially on small, frequent purchases.
• Avoid leverage at the start. Borrowed exposure can wipe out an account on a move that an unleveraged holder could simply wait out.

Key terms

• Decentralized finance (DeFi): Financial applications such as lending, borrowing and trading that run on blockchains through smart contracts instead of banks or brokers. Smart-contract bugs and hacks are real risks.
• Token: A unit of value issued on a blockchain. Many tokens are built on existing networks such as Ethereum rather than having their own chain.
• Gas fee: The fee paid to a network’s validators or miners to process a transaction. It rises when the network is busy.
• Market capitalization: A coin’s price multiplied by its circulating supply, used to compare the size of different cryptocurrencies.

BitcoinBTC$65,064EthereumETH$1,823SolanaSOL$71.71

Editorial credits