What is cryptocurrency and how does it work?

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April 16, 2025

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Thus, a fiat currency is converted to Bitcoin (or another cryptocurrency), transferred across borders, and subsequently converted to the destination fiat currency without third-party involvement. In the United States in July 2023, courts ruled that cryptocurrencies are considered securities when purchased by institutional buyers but not by retail investors purchased on exchanges. The legal status of cryptocurrencies creates implications for their use in daily transactions and trading. In June 2019, the Financial Action Task Force (FATF) recommended that wire transfers of cryptocurrencies should be subject to the requirements of its Travel Rule, which requires AML compliance. “The Department of Justice is not a digital assets regulator,” the memo said.

As its name indicates, a blockchain is essentially a set of connected blocks of information on an online ledger. Each block contains a set of transactions that have been https://hortax.org/ independently verified by each validator on a network. These crypto coins have their own blockchains which use proof of work mining or proof of stake in some form.

Cryptocurrencies are clearly growing in terms of size, scale and types of offerings, which altogether indicates the growing importance and influence they have on the traditional financial system. Cryptocurrencies have become a popular tool with criminals for nefarious activities such as money laundering and illicit purchases. The case of Dread Pirate Roberts, who ran a marketplace to sell drugs on the dark web, is already well known.

Is Cryptocurrency a Safe Investment?

The first cryptocurrency was Bitcoin, which was founded in 2009 and remains the best known today. Much of the interest in cryptocurrencies is to trade for profit, with speculators at times driving prices skyward. Platforms that buy and sell bitcoin may be unregulated, can be hacked, may stop operating, and some have failed. Some brokerage platforms—like Robinhood, Webull and eToro—let you invest in crypto.

Cryptocurrencies use cryptography to encrypt sensitive information, including the private keys – long alphanumeric strings of characters – of crypto holders.
And while some cryptocurrencies have total market valuations in the hundreds of billions of dollars, others are obscure and essentially worthless.
The question of whether cryptocurrencies are legally allowed, however, is only one part of the legal question.
Transactions including bonds, stocks, and other financial assets could eventually be traded using the technology.
While decentralized exchanges and peer-to-peer transactions may be right for some investors, many choose to use centralized services to offload their holdings.

The only way to guarantee there will always be individuals willing to invest their time and computers in a blockchain’s validation system is to introduce incentives to do so. Both methods ensure the integrity and security of cryptocurrencies by distributing the verification process across multiple participants. So to the extent that Bitcoin and other cryptocurrencies are great for traders — that is, they’re volatile — they’re terrible as a currency. When money flows freely in an economy during a boom, no problems may arise. But when times get tough, consumers and businesses often hoard money to provide a buffer against instability and job loss. By hoarding, they slow the movement of money through the economy, potentially leading to a destructive deflationary spiral.

How to Acquire Cryptocurrencies

Nothing contained herein shall constitute a solicitation, recommendation, endorsement, or offer by Crypto.com to invest, buy, or sell any coins, tokens, or other crypto assets. Returns on the buying and selling of crypto assets may be subject to tax, including capital gains tax, in your jurisdiction. Any descriptions of Crypto.com products or features are merely for illustrative purposes and do not constitute an endorsement, invitation, or solicitation. Ethereum’s blockchain supports a wide range of applications, from financial services and supply chain management to gaming and identity verification.

For instance, there will be only 21 million bitcoins created, of which more than 18 million are already in circulation. This deflationary-based system is the complete opposite of what we have in traditional finance, where governments have the license to print an infinite number of fiat notes and inadvertently devalue their currencies. With the help of a cryptographic technique, private keys are encrypted to create wallet addresses, which can be likened to bank account numbers.

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. Thoughtfully selecting your cryptocurrency, however, is no guarantee of success in such a volatile space. Sometimes, an issue in the deeply interconnected crypto industry can spill out and have broad implications on asset values. For most people, the easiest way to get cryptocurrency is to buy it, either from an exchange or another user. People invest in cryptocurrencies for the same reason anyone invests in anything.

Darknet markets

A Polytechnic University of Catalonia thesis in 2021 used a broader description, including not only alternative versions of bitcoin but every cryptocurrency other than bitcoin. Cryptocurrencies promise to make transferring funds directly between two parties easier without needing a trusted third party like a bank or a credit card company. Such decentralized transfers are secured by the use of public keys and private keys and different forms of incentive systems, such as proof of work or proof of stake. Although cryptocurrencies are considered a form of money, the Internal Revenue Service (IRS) treats them as financial assets or property for tax purposes.

Non-fungible tokens (NFTs) represent unique digital items like collectibles or art that can’t be replaced with something else. For example, an artist could create a digital painting of a castle and sell it as an NFT on a platform like OpenSea. Memecoins are internet-based currencies created for community-driven causes or fun. For example, Dogecoin (DOGE) began as a joke of the well-known “Doge” meme, which featured a Shiba Inu dog. Instead of one person or bank keeping this record, millions of people worldwide have copies of this notebook.

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What is cryptocurrency and how does it work?