The world of cryptocurrency spins fast. Use our crypto guide to master the basics, learn about crypto innovations, and consider the many ways you can invest in crypto now.
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Cryptocurrency, often called “crypto,” is any type of decentralized, digital currency that’s based on cryptography. Those three terms are key to understanding the thousands of types of crypto being traded today.
Decentralized means that cryptocurrency isn’t issued by a central authority like a government or bank, the way the dollar, euro, yen, and other fiat currencies are. Instead, cryptocurrencies are created, exchanged, and overseen by a distributed peer-to-peer network.
Crypto is digital, meaning two things. First, with a couple of exceptions, the value of most crypto is not pegged to a fiat currency like the dollar or euro, nor is it determined by a precious metal like gold. And though people may refer to crypto in physical terms (e.g., as coins), crypto is generated and traded in only a digital format.
Cryptography refers to the mathematical technique used to secure each unit of cryptocurrency and ensure it can’t be copied.
Most crypto exists on a blockchain platform. Blockchain is the digital ledger that records most crypto transactions. This use of blockchain technology as a foundational element for cryptocurrency began in 2009, in tandem with the launch of Bitcoin. But blockchain technology is evolving rapidly, and a range of other industries are exploring its potential applications as well.
Today there are thousands of cryptocurrencies, and while many are designed to provide some new feature or function on a given blockchain platform, most are founded on similar principles to those that established Bitcoin. Crypto is secured by a peer-to-peer network, and users can trade or transfer value — globally and almost instantly, 24/7 — without relying on a middleman like a bank or payment processor.
Cryptocurrencies are considered secure because they employ a “trustless” system of verification for all transactions. This means that users don’t have to rely on a third party to verify transactions: the system itself is self-governing.
As of November 2021, estimates of the number of cryptocurrency you can trade range from about 6,000 coins to over 10,000, with a total market capitalization of over $2 trillion. Currently, the biggest cryptocurrencies by market capitalization are Bitcoin, Ethereum, Binance Coin, Tether and Solana. Cryptocurrencies are generally stored in digital wallets, commonly a blockchain wallet, which allows users to manage and trade different crypto.
The widespread use of blockchain technology as the underlying platform for most forms of crypto began in 2009, when an innovative use of blockchain enabled the successful launch of Bitcoin. For that reason, many people think of blockchain and cryptocurrency as synonymous, when in fact blockchain technology has a wide variety of applications.
Blockchain is a digital, append-only ledger that can be used to track or record almost any type of asset, from goods and services to patents, smart contracts, and more. It’s transparent, meaning the transactions on a public blockchain are accessible to anyone, and unlike a physical system of record keeping, the record of transactions is designed to be permanent and immutable.
The reason blockchain records are theoretically unchangeable is because the system is built from blocks of data that are chained together in chronological order (hence the name blockchain) so that all transactions are visible to everyone on the network. Blockchain technology relies on cryptography to secure these transactions and, in the case of many types of crypto, to mine coins and tokens.
A blockchain runs on a decentralized network of computers, called nodes, which enable a form of consensus (peer-to-peer) confirmation that can drive faster, more secure transactions. The distributed, self-governing nature of blockchain thus makes fraud and duplication far more difficult compared with legacy record-keeping systems.
The combination of speed, security, and transparency has not only enabled the growth of cryptocurrencies worldwide, many other industries are now exploring blockchain’s uses as well.
Crypto miners use special computer hardware to do the complex mathematical cryptography required to confirm each transaction on a blockchain. This process, called “proof of work” (PoW), requires miners to complete billions of calculations in order to verify a block of transactions. Proof of stake (PoS) is another consensus mechanism by which crypto is created, but PoW is common to many forms of crypto.
Crypto mining is highly competitive. The process relies on a network-wide consensus that essentially backs the validity of each transaction, even without a central authority. Once a miner has completed a certain number of calculations to verify a block of transactions on a given blockchain platform, they may be rewarded with new coins — if they are the first to verify the block.
Because proof-of-work crypto mining requires immense amounts of energy, there are concerns that the types of crypto that rely on PoW may be harmful to the environment.
With the exception of emerging crypto-based securities, it’s generally not possible to trade crypto on a traditional exchange, which is why you need a crypto exchange.
There are three main types of crypto exchanges: centralized, decentralized, and hybrid. While centralized exchanges are still more common for trading crypto, it’s important to understand the differences among the three so you can decide which is best for you.
A centralized cryptocurrency exchange is a platform where cryptos are bought and sold, with the help of a third party to conduct these transactions. On a centralized exchange you can use a traditional, a.k.a. fiat currency, like the dollar to execute trades, as well as trading crypto itself.
Decentralized exchanges (DEX) are more aligned with the spirit of crypto, in that these exchanges allow crypto investors to trade directly with each other, without the need for a middleman. In theory, a DEX might be more secure since there’s no central platform that can be hacked. Also, without the need for third parties, you might see lower fees and faster transaction speeds on a DEX.
Hybrid exchanges are less common than either centralized or decentralized exchanges. They aim to combine features of both: e.g., the liquidity of a centralized exchange and the security and anonymity of a DEX.
When choosing the exchange where you prefer to trade crypto, there are other issues to consider, including ease of use, whether your funds might be insured, as well as other considerations.
In a word: Growth. Investors are intrigued by the potential of cryptocurrency to grow in value — as well as the potential transformation of the financial system that crypto might bring.
When Bitcoin first launched in January 2009, few imagined a single BTC would be worth over $65,000 (as of November 15, 2021) — or that a single digital currency would spur the creation of thousands more. But it has. In just 13 short years, cryptocurrency has gone from being viewed as a financial fad to becoming a new market sector worth trillions.
But it’s not just the value of the coins and tokens themselves that has captured investors’ attention. Many forms of crypto are being created as part of larger digital platforms that are part of the DeFi — or decentralized finance — movement. There are new investments based on crypto, new channels for global transactions, and myriad other innovations, from smart contracts to non-fungible tokens.
Although cryptocurrencies are still largely unregulated (and their use as actual currency can be limited), there is a growing sense that a door has been opened to a vast number of new opportunities and technologies.
Recommended: Top 30 Cryptocurrencies by Market Cap
With 30 coins to trade from and no-fee crypto purchases1, our app offers a secure way to trade crypto 24/7.
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Bitcoin (BTC) was the first cryptocurrency to be created in 2009 by a person (or possibly a group) using the pseudonym Satoshi Nakamoto. Bitcoin was designed to be independent of any government or central bank. Instead it relies on blockchain technology, a decentralized public ledger that contains a digital record of every bitcoin transaction.
In essence, Bitcoin established the basic system of cryptography and consensus (i.e., peer-to-peer) verification that is the foundation of most forms of crypto today.
In 2008, an individual or group of individuals going by the pseudonym Satoshi Nakamoto, published a paper called, “Bitcoin: A Peer-to-Peer Electronic Cash System.” It was not the first case ever made for a digital currency — there were many attempts in the decades prior — but this was perhaps the first to propose a “trustless” system of electronic transactions that would depend on a peer-to-peer system of verification via blockchain technology. This innovative approach also solved a persistent problem with digital currencies, the so-called double-spending problem — or the risk that digital currencies could be hacked and spent more than once.
Thanks to the research detailed in this paper, the first Bitcoins were created in January 2009, and the bitcoin mining system was established. But the number of BTC in the market is capped. While there are more than 18.8 million Bitcoin tokens in circulation as of November 2021, worth over $1 trillion, the total limit is 21 million BTC.
Bitcoin miners use powerful computers to verify blocks of transactions and generate more bitcoins — a complex, time-consuming process called proof-of-work (PoW). Each block of transactions is logged permanently on the blockchain, which helps to validate and secure each bitcoin and the network as a whole. Owing to the vast number of computers or nodes on the bitcoin blockchain, the PoW process ends up using so much energy that many people question whether it’s sustainable.
There are a few different ways to buy bitcoin.
• Exchanges. As noted above, you can trade crypto — including bitcoin — on centralized, decentralized, or hybrid exchanges. All you need is a crypto wallet for storing your bitcoins.
• ATMs. There are several thousand crypto ATMs where you can purchase bitcoin: estimates range from 14,000 to 26,000. Unlike a traditional ATM, though, you can’t withdraw actual cash from these machines; they make digital only transactions via the blockchain.
• Brokerages. A growing number of brokers now allow you to buy and sell crypto, similar to any other security, including SoFi Invest®.
Bitcoin may be the oldest and most popular form of crypto (by market share), but it comes with its pros and cons.
• Market capitalization. The crypto-verse has thousands of players, but bitcoin outstrips them all, with a market cap of over $1.1 trillion as of Nov. 15, 2021. For context: Ethereum, the number 2 crypto by market cap, is about half that at $5.5 billion.
• Volatility. In 2021 alone, the value of bitcoin ranged from about $29,000 on January 1 to $64,000 in mid-April, dropping to about $26,600 in late July and rising to about $64,000 again as of Nov. 15. Even within the course of a single day, the value can fluctuate by thousands.
Recommended: Why Is Bitcoin So Volatile?
• Not SIPC insured. Most investors are insured by the SIPC up to $500,000 if a brokerage fails (or funds are stolen). But the SIPC doesn’t cover crypto.
• Regulation and usage. The inconsistency of regulations governing crypto has limited the use of these currencies around the world. That said, a number of companies do accept bitcoins as payment — just do your research first.
“Altcoin” is a catch-all term for alternative cryptocurrencies to bitcoin. There are many different altcoins — different types, and within those categories, different specific products. Litecoin is generally recognized as the first altcoin.
Polkadot was co-founded by Gavin Wood, also a co-founder of Ethereum, to take the capabilities of a blockchain network to another level. The blockchain’s cryptocurrency is called dot.
Polkadot operates using two blockchains — the main “relay” network, where transactions are permanent, and a parallel network of user-created blockchains, called “parachains.” Parachains can be customized for myriad uses like building apps (they can even support other coins). What differentiates Polkadot from other blockchains is its core mission to solve the problem of interoperability by building so-called bridges between blockchains.
More: What is Polkadot (DOT)?
Bitcoin Cash was created in 2017, after some developers became frustrated with the slowdown of Bitcoin transactions (and subsequent higher fees) as Bitcoin’s 1MB data blocks filled up. So they executed a hard fork on the Bitcoin blockchain and came up with Bitcoin Cash, which has a much larger block size of 8MB. For users, that means faster processing speeds and lower fees.
Dogecoin (pronounced dohj-coin) is widely known as the first joke cryptocurrency; it was launched in 2013 as an altcoin and it runs on a blockchain network using a PoW system similar to Bitcoin and Ethereum. But the number of coins that can be mined are unlimited (versus the 21 million-coin cap on Bitcoin). Despite its place as one of the biggest coins by market cap, Dogecoin trades at one of the lowest prices: about 24 cents, as of November 15, 2021.
More: What is Dogecoin (DOGE)?
Ready to expand your crypto knowledge? Check out our crypto coin glossary and get an in-depth look at some of the most popular cryptocurrencies.
DeFi, short for decentralized finance, is disrupting legacy financial models by providing the same financial services (e.g., lending, trading, payments, etc.) using blockchain technology, thus theoretically making financial products and services more affordable and accessible. DeFi encompasses many new products: e.g. dApps (or dapps), which are decentralized computer programs built primarily on the Ethereum blockchain and governed by smart contracts, as well as crypto coins and tokens.
What is the difference between DeFi coins and tokens?
DeFi coins (like Bitcoin) are similar to fiat coins in that they are fungible, and they’re a digital means of storing and transferring value.
The important thing to know about DeFi tokens is they are more like financial tools, meaning that tokens are non-fungible assets, and perform other functions than just being a store of value. Many DeFi tokens offer innovative solutions to existing blockchain problems, and for this reason may provide different opportunities for investors than being a store of value. Following are a few common DeFi tokens.
SushiSwap was created from a hard fork off the prominent DeFi exchange, Uniswap, in 2020. It’s considered an automated market maker (AMM) that enables users to trade different types of crypto assets. But it’s a decentralized exchange, so there’s no central authority monitoring trades. Traders on SushiSwap use liquidity pools to trade, and trades are processed using smart contracts.
Wrapped bitcoin is the ERC-20 token that represents one bitcoin and can be used in decentralized applications (DApps). With WBTC, users essentially can use Bitcoin in the Ethereum ecosystem where they otherwise wouldn’t be able to. DApps can process wrapped token transactions faster because there is no need for computation to happen across different blockchains, which is a difficult process. Thus, WBTC helps to bring the liquidity of Bitcoin to the Ethereum network, allowing people to combine the price value of Bitcoin with the programmability of Ethereum.
The Graph Network and its token, GRT, are relatively new. As of spring 2021, GRT had been on the crypto market for less than a year. GRT is an Ethereum-based token that powers the Graph, which is a decentralized query protocol built for querying and indexing data from different blockchains. The Graph also allows users to build APIs, known as subgraphs, to allow applications to talk to each other, and it also makes querying networks fast and secure. GRT is its native token.
More: What is The Graph (GRT)?
Non-Fungible Tokens, NFTs, are cryptographic digital assets that have uniquely identifiable metadata and codes. An NFT’s data is stored on a blockchain like Ethereum (which supports many NFTs) or up-and-comers like Tezos, ensuring that the NFT can’t be replicated or forged.
The tokens act as a representation for either digital or tangible items — like digital artwork, virtual real estate in a game, collectible Pokemon cards, or a tokenized version of the first-ever tweet, created by Twitter CEO Jack Dorsey (which sold for $3 million in March 2021).
The real value of NFTs is still emerging, but already these tokens are transforming art, travel, gaming, even supply chains and personal identification, thanks to the use of blockchain technology, which is designed to prevent duplication and fraud and takes issues like ownership and personal data security to a new level.
As with any form of investing, there are various ways to invest in crypto. But the specifics of the crypto market — being wholly digital, decentralized and dependent on blockchain technology — means that investing in this realm can look quite different from trading stocks, bonds, and ETFs. That said, even crypto is inching into more traditional markets, as you’ll see when you explore the options below.
Perhaps the easiest way to invest in crypto is by trading, much as you would trade traditional securities like stocks, bonds or ETFs. You can open an account on a crypto exchange (see above); fund the account by connecting your bank or using a wire transfer of cash (different exchanges have different rules); and begin buying and selling the crypto of your choice.
As with traditional forms of investing, it’s best to have a strategy. Are you going to trade daily? Are you looking to buy and hold for the long term? Do you want to invest in bigger, more established crypto with some smaller coins for diversification? With SoFi Invest® you can start trading crypto with as little as $5, and you’re able to trade 24/7.
Mining is another way to obtain crypto assets, but it typically requires a much bigger investment in terms of time and equipment. Crypto mining, also called proof-of-work, is a consensus mechanism used by many crypto platforms. It’s an intensive and highly competitive endeavor, whereby miners (basically the computers or “nodes” on the network) execute billions of complex calculations in order to verify a block of data on a given blockchain. When a miner is the first to confirm a block, they’re typically rewarded with coins.
Recommended: Is Crypto Mining Still Profitable in 2021?
An alternative to the proof-of-work model is proof-of-stake (PoS). This is also a consensus mechanism, but it employs a process that’s considered more passive and therefore more energy efficient compared with PoW. Staking crypto involves purchasing crypto and waiting to be selected as a validator on the network. Validators, similar to miners in a PoW system, validate blocks on the blockchain and can be rewarded with more coins. Thus far, there are fewer projects that use PoS, and there is some debate about whether PoW or PoS is more efficient or more secure.
After a prolonged regulatory battle, in October 2021 the SEC began approving exchange-traded funds (ETFs) based on bitcoin futures, opening the door to a wave of new investment opportunities. As of November 2021, these ETFs only invest in bitcoin futures, not actual bitcoin assets. Investors can also consider certain funds that are investing in blockchain-based technologies.
As cryptocurrencies grow, so do the companies that provide hardware and other backend services. Investors can consider investing in companies that do large-scale crypto mining, cryptocurrency exchanges, or companies that use crypto as part of their business or payments model. Like the emerging crypto-based ETFs, crypto stocks are likely to provide investors with an increasing number of opportunities as this space expands.
Recommended: 8 Ways to Make Money With Cryptocurrency
Start trading Bitcoin, Ethereum, Litecoin, Polkadot, and Dodgecoin – you don’t even need to set up a crypto wallet.
One of the biggest concerns with cryptocurrency investing is how safe cryptocurrency is, as well as how the evolving world of regulations may impact different platforms and opportunities worldwide.
In this section: How safe is crypto? Cryptocurrency rules and regulations
When investors ask about security and crypto, there are a few angles to this question. The first is that while crypto is secure in that it’s built on the principles of cryptography and peer-to-peer consensus, many cryptocurrencies — especially in the early days — have been beset by hacks, theft, and other forms of cyber attacks. These aren’t common, but they are a potential risk to consider.
Then there’s the issue of how to secure the crypto you buy. To store crypto securely, an investor needs to use a cryptocurrency wallet: either a digital wallet or a physical means of storage like a thumb drive. When using a crypto wallet, you will be relied on to store, remember, and secure a password that only you know. This is frequently an issue with crypto, as people who forget their passwords essentially have had their assets stranded. Crypto wallets may also be vulnerable to hacks.
Last, investors have to consider the overall risks of trading an investment as volatile as most cryptocurrencies can be. Crypto values can fluctuate by the day, the hour, the minute. And while that’s also true of some traditional investments, particularly equities, cryptocurrencies are so new that the sector as a whole doesn’t have much of a track record that investors can consider when making investment choices.
While cryptocurrency has become much easier to buy and sell thanks to widespread interest in it from the general public, the cryptocurrency rules and regulations are less well established than they are for other types of assets or currencies like stocks or dollars. This is true in the U.S. and in countries around the world, many of which are still determining whether to sanction the use of cryptocurrencies at all, and if they do, how to regulate them. The Securities and Exchange Commission (SEC), which regulates the trading of many financial assets, has basically split the cryptocurrency world into two, ruling that bitcoin is a “payment mechanism and store of value,” i.e. not a security like a stock or bond, which come under much more strict scrutiny from the SEC.
Many “tokens,” cryptocurrencies issued by companies to fund or pre-fund a business project, do fall under the SEC’s definition of “security” and thus face much tighter regulation. It’s wise to keep an eye on how regulatory issues are evolving in this space, as changes to existing rules can have a substantial impact on investments.
Curious about crypto arbitrage? Thinking of day-trading crypto? If you’re already comfortable with blockchain technology and familiar with the ins and outs of how cryptocurrencies work, here are a few more advanced topics you can explore.
On SoFi Invest®, investors can trade their first cryptocurrency with as little as $10. Doing so will get them a bonus of $10 in Bitcoin. Unlike the stock market, investors can also trade cryptocurrencies like Bitcoin, Litecoin and Ethereum 24/7. Plus, SoFi takes security seriously and uses a number of tools to keep investors’ crypto holdings secure.
First Trade Amount