What Is Crypto? (Types, Benefits, and How It Works)

Cryptocurrency is digital currency that doesn’t require a financial institution like a bank to verify transactions. In recent years it has become a topic of discussion from high profile business people like Elon Musk. Yet, despite the presence of crypto it may seem mysterious. Use this guide to learn about what crypto is and how it works. 

What is cryptocurrency?

Crypto or cryptocurrency is a digital currency that operates slightly different from the traditional one. Just like physical money, such as the United States dollar or Mexico’s peso, crypto can buy goods and services. Cryptocurrency also functions as an investment in the same way that metals, like gold, work as a hedge against the ups and downs of government-issued money. However, while a centralized government issues physical money, cryptocurrency comes from a decentralized system of digital recordkeeping where it’s not regulated by an official authority. 

Read more: Cryptocurrency: What Is It and How Does It Work?

How does crypto work?

Cryptocurrency owners keep their currency in digital wallets, which are data-driven versions of money storage. Crypto owners can use it to buy products over the internet. But instead of a bank or a company, like PayPal or Visa, verifying the transaction, the blockchain records and verifies transfers of crypto. In fact, all cryptocurrency transactions are stored on the blockchain, which is a peer-to-peer ledger that is publicly visible. The currency stays secure thanks to a complex process of safeguarding called cryptography, which is where cryptocurrency gets its name. 

Read more: What Is a Cryptographer? Career Guide

Mining

A centralized authority, like a federal bank, cannot issue cryptocurrency. It must enter the market differently. One way that happens is through a process known as mining. Mining refers to using computers to solve complicated mathematical puzzles in order to receive cryptocurrency. The act of mining requires a lot of computing power, and people who mine receive crypto as a reward for their efforts. 

Buying, selling, and storing

Everything about cryptocurrency happens online. To buy, sell, or digitally store cryptocurrencies, users need a digital wallet and access to an exchange platform. There are many specific cryptocurrency exchanges, such as Coinbase, but users can also buy, sell, and store crypto through financial services outlets, such as PayPal. You can purchase crypto with traditional currencies, like the US dollar, and increasingly with ACH (automated clearing house) transfers directly from a bank. While a few exchanges allow users to buy crypto with a credit card, it is uncommon. 

Read more: Cryptocurrency: What Is It and How Does It Work?

Transacting or investing

Crypto has two primary functions. It serves as a legitimate form of payment for goods and services, in the same way traditional money does. It also has a secondary function as an investment. Both functions have their benefits and drawbacks. 

What can you do with cryptocurrency?

Cryptocurrency functions like a cross between traditional currency and stock. Some people like the anonymity of cryptocurrency, as it shields their buying and selling behavior from companies like banks and government agencies. Increasingly, users have bought crypto as an investment, with the hopes of “cashing out” their crypto wallets at a point in the future when their digital currency has increased in value. Types of crypto

Over 20,000 kinds of cryptocurrency exist today , and not all are created equal [1]. To understand the ins and outs of cryptocurrency, you need to know the functions of each product. 

Bitcoin

As the most popular cryptocurrency, Bitcoin is a leader in the space. Built on blockchain technology, it debuted in 2009 but didn't function as a legitimate form of payment until 2012, when WordPress decided to take it. Originally inexpensive, Bitcoin’s popularity has caused its price to increase since it was first launched greatly. In 2021, the cost of a single Bitcoin hit $68,000 [2,3], falling just over $20,000 in late 2022 [3]. Users are able to buy fractions of a Bitcoin that function like cents to the dollar.  

Altcoin

Altcoin refers to any cryptocurrency that is not Bitcoin. This includes popular currencies, such as Dogecoin, Ethereum, and Litecoin, as well as lesser-known options, such as Shiba Inu and Terra. 

Crypto tokens

It’s tempting to think that crypto tokens are just like crypto coins—and some people use the term interchangeably— but there are important differences. While they function in similar ways, tokens have a few important distinctions. Here are some differences between coins and tokens:

• Unlike coins, users typically cannot mine crypto tokens. 

• Crypto coins don’t have their own blockchain record, and instead, run “on top of” a blockchain used by another cryptocurrency. 

The best-known example of crypto tokens is NFTs or non-fungible tokens.

Benefits of crypto

There are several advantages of using crypto over traditional money. From its ease of use to its availability and security, cryptocurrency has become a viable alternative to traditional money by offering users new and unique features. They include: 

• Very low transactions costs. The blockchain that supports cryptocurrency replaces traditional payment processors that verify payments and transfers. By removing the middleman from the equation, crypto allows users to make purchases with much lower fees than typical currency. 

• Anyone can use it. Cryptocurrency holds a great value for people who lack access to banks Unlike setting up a bank account, which often requires several layers of identification and documentation, users need only a smartphone or access to the internet to use cryptocurrency. 

• No limits on transactions. The lack of a centralized authority means that no one can impose limits on crypto transactions. Crypto users are free to use their assets as often as they like without any restrictions on the number of purchases or withdrawals. 

• Sends funds locally and internationally. Because crypto only exists online, it’s easy to transfer money anywhere. 

• 24/7 access to your money. Crypto doesn’t keep bankers’ hours. The publicly available record is viewable all the time, and users do not have to wait for access to their funds. 

• Private and secure. The technology that powers cryptocurrency—the blockchain—ensures users stay anonymous. And advanced cryptography practices ensure that digital currency is safe from thieves. Bitcoin has never been hacked to date; however, scamming and fraud are common in the crypto space as with all currencies. 

• Decentralized. Cryptocurrencies do not need a government or company to record transactions, issue new currency, or record investments. No bad economic policy or bank breakup can directly affect their value.

What to be mindful of in crypto

Despite having several benefits, cryptocurrency has its share of drawbacks. The things to keep in mind stem from how new it is and may clear up with time. Others are intrinsic and are part of the complexity inherent in crypto. Here are some factors to consider when using cryptocurrency: 

• High risk. Because they are largely unregulated, cryptocurrencies come with a notable degree of risk for investors. They are not guaranteed by any government and are subject to a hard-to-anticipate demand cycle. 

• Not everyone understands it. The open nature of cryptocurrency means that many users and investors may not act in the same way that sophisticated financial players who play the stock market behave. Until cryptocurrencies become better understood, their true value will remain unknown. 

• Value is tied to online speculations. On its own, digital currency has no value. Crypto is not bound to anything with inherent physical value, like gold. Its value completely depends on the market—in other words, people's opinions of how valuable it is or isn't. 

Where to buy cryptocurrency

If you’re interested in obtaining crypto, you need to find specialized online locations that cater to crypto users and traders. 

Traditional brokers

Many long-standing institutions have begun to offer consumers the option of buying crypto. These platforms also allow users to purchase other financial products, such as stocks and bonds. Traditional brokers tend to offer low trading costs but fewer crypto-specific options than cryptocurrency exchanges. 

Cryptocurrency exchanges

For years, digital exchanges were the only places to buy and store cryptocurrency. But, as interest in crypto continues to rise, many digital exchanges have emerged to allow users to buy, sell, or trade them. Some, like Coinbase, offer rewards similar to a savings account at a traditional bank, such as a 2 percent APY (annual percentage yield) on the total value of the digital holding kept in the exchange. Be sure to read the fine print, however, as exchanges include asset-based fees. 

Common crypto terms you should know

Before you begin to buy or trade cryptocurrency, you should familiarize yourself with terms you’ll likely hear and read about. 

What are the skills you need to trade crypto?

Anyone can trade crypto, but to become successful, you’ll need a solid understanding of the crypto market and what causes it to move. In addition to forecasting and identifying trends, you’ll need to know about established products like Bitcoin and Ethereum as well as new, up-and-coming coins, crypto tokens, and more. You’ll also want to know how to use the tools of the trade, understand the benefits of different digital exchanges, and be familiar with traditional investment strategies. 

What courses can help with crypto investments?

Several courses are available to help you learn all about cryptocurrency and develop the skills you need to trade crypto successfully. They include: 

Becoming an employed professional crypto trader

If you want to become a crypto trader, you must reliably make money by buying and selling crypto products, such as cryptocurrency and crypto tokens. You will be considered a professional if you consistently use a trading platform to make money. If you want to become employed as a crypto trader with a brokerage house, you’ll need to prove your worth by demonstrating a knowledge of the market, tools, and strategies that lead to long-term success. 

Non-trading crypto jobs: current and future roles

You can also get a job in the crypto industry without buying and selling products. As cryptocurrency continues to gain popularity, it has created more jobs. Some roles include:

• Web developers

• UX engineers

• Project managers

• Marketers

If you’re serious about getting into crypto’s technical side, earning a degree that involves coursework in blockchain is a great way to start. 

Novice investors interested in crypto often want professional guidance from knowledgeable financial analysts who can reliably stay on top of market trends and forecast the future of digital currencies. 

Do you need a degree to trade crypto?

You won’t need any formal education to trade crypto. However, if you’re serious about becoming a professionally employed trader, earning a degree can vastly improve your chances of landing a job. Many companies hiring in the crypto space require a degree in business, finance, or computer science, depending on which position you’d like. 

If you want to trade crypto, many companies prefer that you hold a degree in finance. For building crypto applications and platforms, you’ll need at least a degree in computer science. If you want to work for a brokerage firm analyzing crypto, a degree in data science can help. 

Cryptocurrency career outlook

In 2021, the number of crypto-related jobs posted on LinkedIn grew by 395 percent over the previous year [4]. The industry has more than doubled in size in a single year—most of which occurred during a pandemic. As the market for crypto continues to heat up, people with knowledge and experience in the field should continue to be in high demand. 

Get started

To learn more about crypto, many options are available on Coursera. By taking online courses, you can develop your skills and understanding of this complex field from your own home. 

Start laying a solid foundation by taking the Blockchain and Cryptocurrency Explained course offered by the University of Michigan.