Cryptocurrency is a form of digital money designed to function as an exchange medium. In the past ten years, cryptocurrency has gained significant popularity, particularly. Bitcoin turning into the most extensively monitored substitute for traditional money. Usually, cryptocurrency exists solely in a digital format and lacks a tangible form—the image displayed here is merely an illustrator’s depiction of what digital money might look like.
Many individuals are drawn to cryptocurrency primarily because it can operate independently of a central bank, thus addressing worries related to privacy and illicit activities. Additionally, it attracts interest owing to its capacity to maintain value without being eroded by inflation caused by monetary policies that involve printing more money. Furthermore, counterfeiting is extremely challenging with this digital asset thanks to the secure blockchain technology used for managing transactions.
Cryptocurrencies have become increasingly popular in the investing community because of the substantial gains observed for certain digital tokens since their inception. In 2022, cryptocurrencies experienced notable drops when the Federal Reserve increased interest rates, disproportionately affecting high-risk assets like these. Bitcoin and Ethereum Two of the most widely followed cryptocurrencies dropped by over 70 percent from their peak values in 2022, yet rebounded in 2023 and surged dramatically in 2024. Bitcoin’s value initially surpassed $100,000. .
Below is an explanation of what cryptocurrency entails, how it functions, and the major risks associated with it.
How cryptocurrency works
Cryptocurrencies are generated, recorded, and controlled via a system known as a distributed ledger, for instance. blockchain In a distributed ledger, the flow of the digital currency is managed by computers within a decentralized network to maintain the accuracy of financial records and the ownership of cryptocurrencies. It's similar to an endlessly expanding receipt containing all the system’s transactions, which is continuously checked by every participant with access to this record.
This distributed system is common among numerous cryptocurrencies, avoiding a centralized governing body. This feature is one of the attractions of cryptocurrencies like Bitcoin—it removes government and central bank involvement from the monetary system, thereby decreasing their influence and political manipulation.
To achieve this, certain cryptocurrencies have a cap on the total number of units available. For instance, with Bitcoin, the framework is designed such that a maximum of 21 million bitcoins will ever be created.
However, how precisely does cryptocurrency originate? A significant method involves a process known as mining , using an analogy tied to the historical monetary systems backed by precious metals like gold or silver. In this scenario, powerful machines referred to as "miners" carry out complex computations and handle transaction records. As a result of their efforts, these miners receive units of the digital currency—or fractions thereof. This undertaking demands substantial computational resources and frequently considerable amounts of electrical energy.
Owners of the currency may store it in a cryptocurrency wallet , a computer app that allows them to spend or receive the currency. To make a transaction, users need a “key,” which allows them to write in the public ledger, noting the transfer of the money. This key may be tied to a specific person, but that person’s name is not immediately tied to the transaction.
So part of the appeal of cryptocurrency for many is that it can be used somewhat anonymously.
The potential for new cryptocurrency creation knows no bounds. This variety has become astounding with thousands emerging over recent years, particularly following Bitcoin's rise to widespread recognition around 2017. Among these, some of the leading digital currencies have gained prominence. Bitcoin, Dogecoin, Ethereum, Tether and XRP.
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Here is a list of the top 10 biggest cryptocurrencies:
The scale of a cryptocurrency is determined by two elements: the total number of coins in circulation and the value of each coin. By multiplying these two figures, one arrives at the overall worth of the currency. market capitalization , or the combined worth of all these coins. Therefore, when specialists discuss the biggest cryptocurrencies, they're talking about this overall valuation rather than the cost of a single coin.
Here are the leading cryptocurrencies And their estimated market capitalization, based on data from CoinMarketCap, around mid-February 2025. Keep in mind that due to the unpredictable nature of cryptocurrencies, these figures might change significantly over very brief intervals.
- Bitcoin – $1.9 trillion
- Ethereum – $330 billion
- XRP – $159 billion
- Tether – $142 billion
- Solana – $98 billion
- BNB – $94 billion
- USDC – $56 billion
- Dogecoin – $40 billion
- Cardano – $28 billion
- TRON – $20 billion
What purposes does cryptocurrency serve?
Cryptocurrency can serve numerous purposes, yet this hinges on its intended use. Although the phrase "cryptocurrency" often brings to mind transactions, it's better viewed as a token granting access to certain activities—similar to how tokens function at a video arcade. You purchase these tokens and insert them into machines to gain the ability to play games.
For instance, one of Bitcoin’s aims is to facilitate monetary transactions, thereby allowing it to operate as a form of currency. However, despite this capability, only a limited number of retailers genuinely embrace it as a means of payment. Additionally, when comparing transaction speeds with those of alternative payment systems, Bitcoin comes across as rather sluggish.
Similarly, the cryptocurrency Ethereum allows users to create “smart contracts,” a kind of contract that self-executes once its terms have been met. The cryptocurrency Internet Computer allows users to create apps, websites and other web-based services. Those digital currencies stand in contrast to Dogecoin , which was developed essentially to mock the absurdity surrounding Bitcoin.
While these cryptocurrencies may have real-world use cases (or not), one of the biggest uses for them is as a means of speculation. Speculators drive the prices of these coins back and forth, hoping to make a profit from others who are similarly trading in and out of the assets.
Even though the coins might allow a user to execute a specific function, numerous purchasers are solely focused on reselling them for financial gain. To many, this is actually the primary purpose of cryptocurrencies.
Is it possible to exchange cryptocurrency for cash?
Cryptocurrencies can be readily exchanged for standard currencies like dollars or euros. If you hold the currency directly, you can trade it via an exchange into fiat currency or into another cryptocurrency. Typically you’ll pay a significant fee to move in and out, however.
But you may also own crypto through a payment app such as PayPal or CashApp , and you might effortlessly exchange it for dollars. You could potentially also utilize a Bitcoin ATM to access dollars.
Individuals holding cryptocurrency through Bitcoin futures can easily liquidate their holdings during trading hours, although you should seek out top cryptocurrency brokers if you’re trading regularly.
But if you need to access your money immediately, you’ll have to take whatever price the market offers at that time, and it may be a lot less than what you’ve paid for it. The volatility in crypto is even greater than for other high-risk assets. On top of that, there are often substantial fees for moving in and out of the market, and you’ll face tax implications from doing so .
Biggest risks of cryptocurrency
While proponents have a good story to tell about digital currencies such as Bitcoin, these currencies are not without serious risks, at least as currently configured. That doesn’t mean you can’t make money by selling them to someone else at a higher price than you paid. However, some drawbacks do make Bitcoin and other currencies virtually useless as a currency, a means of exchange.
Bitcoin and other cryptos have real detractors, including some of the world’s top investors, such as multi-billionaire Warren Buffett. Buffett has referred to Bitcoin as "likely rat poison squared." while his long-time business partner Charlie Munger has stated that cryptocurrency trading is 'simply madness.' Buffett said In 2022, he stated that he wouldn't purchase all the Bitcoin in existence for $25 since, unlike stocks, real estate, and farmland, it fails to generate value for its holders.
Several major hazards associated with cryptocurrencies encompass the subsequent problems.
Extracting the currency is costly and detrimental to the environment.
One of the most significant negatives to cryptocurrency is that it is “mined” by computers. Mining isn’t free, of course, and requires substantial amounts of energy to create a coin. While miners consume and pay for energy to run their rigs, it also creates significant pollution and waste.
If Bitcoin were a nation, it would use more electricity than Poland (a nation of 36.8 million people) as of late 2024, according to the Cambridge Bitcoin Electricity Index. In terms of greenhouse gas emissions, it would place 61st.
This extensive usage has sparked criticism from individuals who view cryptocurrencies as an unnecessary drain on energy resources during a time when we face significant environmental challenges.
The supply of certain cryptocurrencies is set to be limited.
Supporters of Bitcoin highlight the limited supply of coins as advantageous, arguing that this ensures the currency won’t be debased, say by actions from central banks. Nevertheless, capping the overall quantity could make cryptocurrencies behave similarly to a gold standard, which might subject economies to harmful deflationary cycles should they be widely adopted.
During economic booms, when funds circulate abundantly, issues might not surface. However, during hard times, both individuals and companies tend to save cash as protection from volatility and potential unemployment. This act of saving can impede the circulation of money within the economy, possibly resulting in a damaging downward price spiral. In extreme cases, people refrain from purchasing since they anticipate prices will drop further down the line, which could push the economy towards disaster.
This issue is precisely why contemporary nations have shifted away from the gold standard towards fiat currency. Unshackled from the gold standard, Central banks can boost the flow of money through the economy during difficult periods. , even if consumers and businesses stockpile it, causing the economy to avoid grinding to a halt.
An unstable currency is impractical.
The limited number of coins, speculative mania and a good story have combined to make the price of Bitcoin and other digital currencies volatile. That may be fine if you’re looking to trade them, but it makes them useless as currency. Currency is valuable only if consumers can rely on it to retain purchasing power.
Picture dining at an eatery where your entrée could set you back $10 today yet cost you double tomorrow. Naturally, you'd want to limit spending solely on cheaper days. However, this approach wouldn't work for entire economies. They require a consistent means of exchange to ensure stability and enable fair trades between parties who must also comprehend the worth of their exchanges.
To the degree that Bitcoin and other cryptos benefit traders—by being volatile—they become unsuitable as proper currencies.
Rules and entry to cryptocurrency may differ.
Cryptocurrencies can be impacted by governmental rules, potentially harming certain digital coins; however, these regulations might also provide benefits based on their extent.
Government regulations have the potential to severely limit the effectiveness of cryptocurrencies, particularly through measures such as complete or quasi-total prohibitions. For instance, when China chose this route, it rendered many cryptocurrencies nearly worthless within its borders and subjected violators to possible legal penalties based on local legislation.
Recently, the possibility of Donald Trump's re-election has come into focus and with it, pro-crypto administration has caused crypto prices to soar, pushing Bitcoin to a recent all-time high of nearly $110,000.
Even with backing from the Trump administration, crypto regulation varies Across various government entities and from one state to another, classification and definition of cryptocurrencies differ significantly. The Securities and Exchange Commission, the Commodity Futures Trading Commission, and the Internal Revenue Service each adopt distinct approaches to categorizing digital currencies.
Certain states, including New York, impose strict regulations on cryptocurrency businesses. In contrast, some states like Wyoming are more supportive of cryptocurrencies and are even developing their specific frameworks. stablecoin while also attempting to lure cryptocurrency-related enterprises.
Despite their differences, governmental regulations might contribute to establishing a fairer competitive environment that is less prone to deception and misconduct. In such an arrangement, stakeholders within the marketplace could foster increased confidence in the system and possess well-defined legal options should anything adverse occur. This type of oversight aids in curbing the chaotic character often associated with cryptocurrencies, thereby enhancing safety for individuals aiming to utilize them ethically.
Other drawbacks
Cryptocurrencies also come with additional disadvantages, such as inadequate security measures for digital wallets used to store funds, their involvement in illicit activities, and slower transaction processing speeds when contrasted with the nearly instantaneous service provided by conventional systems like Visa and MasterCard.
Furthermore, since the IRS classifies Bitcoin as an asset rather than a currency, each Bitcoin transaction holds the possibility of generate a reportable capital gain This implies that you should include it in your tax return. Should you use bitcoins valued higher than what you originally bought them for, you will be liable for taxes.
Bottom line
Although cryptocurrency does offer certain advantages, it comes with significant downsides that currently prevent it from being utilized effectively as a currency. Given its volatility and multiple risks, investors should likely adopt a careful strategy when dealing with cryptocurrencies. Should you decide to try it merely for exploration purposes, maintain a modest investment level and only use funds that you are prepared to potentially lose.
— Note: Pawonation.com’s Brian Baker and Logan Jacoby were involved in updating this tale.
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