Explanation: What Exactly Is a Cryptocurrency?

Cryptocurrencies are decentralized virtual currencies that enable digital payments without traditional banking systems. Data such as the sender, recipient, and transaction amount are encrypted and stored on a blockchain. This provides both high anonymity and transparency. Cryptocurrencies can be exchanged and traded, and some, like Bitcoin and Ethereum, are already accepted as payment methods.

There are many different cryptocurrencies. Some are backed by innovative projects, while others are joke currencies without a specific purpose (meme-coins). The most well-known cryptocurrencies include Bitcoin, Ether (Ethereum), Solana, Tether, Dogecoin, and XRP. Currently, the top cryptocurrencies by market capitalization are Bitcoin, Ether, and Tether. However, this does not necessarily mean these are the best for investment or offer the highest returns. The crypto market is an emerging and highly volatile space. It is impossible to predict which cryptocurrencies will prove themselves and gain real-world adoption in the long term.

Overview: What Cryptocurrencies Exist?

There are thousands of cryptocurrencies worldwide. The exact number is unknown. The ten largest cryptocurrencies by current market capitalization (as of 07/2024) are:

Purpose: Why Were Cryptocurrencies Invented?

The original idea behind the first cryptocurrency, Bitcoin, was to create a payment system without banks or financial institutions. The presumed Bitcoin creator, known by the pseudonym Satoshi Nakamoto, launched the Bitcoin protocol in 2007 to promote greater anonymity and bypass regulation by central banks. Intermediaries profiting from transfers and payments were also meant to be bypassed. This aimed to make transactions faster, cheaper, more anonymous, and secure from manipulation.

Another reason is the global accessibility of cryptocurrencies. Anyone with internet access and an email address can participate in trading. There’s no need for a bank account, which especially benefits people in developing countries lacking banking infrastructure. Unlike traditional currency systems, banks and financial service providers can deny access to services, such as opening accounts—cryptocurrencies, however, are not subject to such control.

Currently, only a few cryptocurrencies are accepted as payment methods, and real-world use cases are still limited. Therefore, most coins and tokens are primarily used as investments until broader adoption and application are achieved.

What Differentiates Cryptocurrencies from Traditional Currencies?

Unlike fiat money, which is printed by central banks, cryptocurrencies are generated by computer networks. They are not regulated or issued by a central authority but through a decentralized network of computers. Cryptocurrencies exist purely in digital form, whereas traditional currencies can be used as physical cash. No exchange fees apply within a single cryptocurrency, but fees may arise when trading different cryptocurrencies on crypto exchanges.

Transactions with cryptocurrencies also offer a higher level of anonymity than card payments. When paying with a credit or debit card, the sender and recipient names, amount, and bank are visible. In contrast, a cryptocurrency transaction only logs the encrypted wallet addresses on the blockchain. While these addresses are traceable, they must be decrypted to reveal user identities—only involved parties have the key. Verification is performed by the network, checking if the coins or tokens are available and not double-spent. In comparison, banks verify fiat transactions by checking account balances.

Both cryptocurrencies and traditional currencies share basic functions: medium of exchange, unit of account, and store of value. However, cryptocurrencies have not yet fully achieved these functions. They are still limited as a payment method and remain controversial as a store of value. Currently, cryptocurrencies are considered more of an investment asset than a fully established currency.

How Does a Cryptocurrency Work?

Most cryptocurrencies are based on blockchain technology. A blockchain is a digital ledger that records all transactions of a specific cryptocurrency. These transactions are maintained and verified by all users who hold the cryptocurrency. As a result, every participant has a copy of the blockchain, making it easy to detect any attempted alterations. Any tampered version is rejected by the network.

Verified transactions are confirmed by the network and added to the blockchain. Cryptocurrencies use a decentralized peer-to-peer network, where all participants are directly linked and have equal authority.

For example, if someone wants to send coins or tokens to another person, the transaction is initiated to the recipient’s digital wallet. The network validates the request. Once verified, the transaction is recorded on the blockchain and considered complete. All participants then receive the updated version of the digital ledger to maintain the correct transaction sequence.

How to Obtain Cryptocurrencies?

There are several ways to acquire cryptocurrencies: buying through a crypto exchange or broker, or generating them via mining.

Most cryptocurrencies can be bought with euros or US dollars on crypto exchanges. Users create an account, deposit money, and purchase digital assets, which are then stored in a digital wallet (usually provided by the platform).

For lesser-known coins, trading typically occurs against major currencies like Bitcoin. One does not need a whole Bitcoin—fractions of a coin (up to eight decimal places) can also be bought.

What Is Crypto Mining?

Crypto mining is the process of verifying transactions and adding new blocks to the blockchain. Miners are rewarded with cryptocurrencies. Bitcoin mining was especially popular, but private miners were pushed out over time due to competition and resource demands.

Technically, anyone with a computer and internet can mine, but high performance is key. Bitcoin mining involves solving complex mathematical problems. The faster the processor, the more successful the mining. Today, mining is largely done by industrial operations with high-powered machines operating non-stop.

How Risky Are Cryptocurrencies?

Cryptocurrency prices are highly volatile. While they offer high return potential, the risk of losses is equally significant. Investing in crypto is risky and generally not suitable as a core part of one’s portfolio, such as for retirement savings. Predicting crypto market performance is nearly impossible.

What Are the Advantages of Cryptocurrencies?

The crypto market is still young and viewed with skepticism by many. However, these new currencies offer advantages that make them appealing to investors.

What Influences the Price of Cryptocurrencies?

Since cryptocurrencies operate independently of banks and governments, their prices tend to react less to economic or political events than traditional currencies. These factors influence crypto prices:

Note: This article is intended for general understanding of cryptocurrencies and blockchain technology. It does not constitute investment, financial, or tax advice.

Frequently Asked Questions About Cryptocurrencies

Here you’ll find answers to additional questions about cryptocurrencies. For more details on blockchain or specific cryptocurrencies, check out our dedicated guides.

How many cryptocurrencies are there?

According to investing.com, there were nearly 8,500 actively listed cryptocurrencies worldwide as of April 2024. Some sources estimate over 20,000 total, including private tokens and inactive or unlisted cryptocurrencies. The exact number is difficult to determine.

What was the first cryptocurrency?

Bitcoin was the first cryptocurrency, developed by a person or group under the pseudonym Satoshi Nakamoto. The Bitcoin domain was registered in 2008, and the first transaction occurred in 2009.

Are cryptocurrencies real money?

Cryptocurrencies are an alternative to traditional currencies like the euro or US dollar. Some are accepted as payment, but full integration into the payment ecosystem has not yet occurred. Currently, cryptocurrencies resemble investment products like stocks, as their prices fluctuate and are subject to speculation.

What’s the difference between coins and tokens?

The terms “coin” and “token” are often used interchangeably, but they differ. A coin typically refers to a digital currency used for transactions (like Bitcoin), whereas a token can represent a broader range of digital assets, including access or voting rights.

Are cryptocurrencies subject to taxes?

Buying cryptocurrencies is tax-free. Taxes apply when they're sold for profit or exchanged into fiat currencies. Profits must be reported as miscellaneous income and are taxed at the personal income tax rate. However, holding crypto for over a year before selling may exempt the gain from tax (as of July 2024).