What Is Cryptocurrency? A Simple Guide for Beginners

Cryptocurrency has evolved from a niche experiment into a major force that has the potential to reshape global finance in many ways. You’ve likely heard of Bitcoin, Ethereum, or even Solana, Dogecoin, or XRP, but what exactly is cryptocurrency? How does it work, and why does it matter?

Fortunately, you don’t need to be a tech expert or a Wall Street insider to understand it. At its core, cryptocurrency is a digital asset that operates through a computer network without relying on a central authority, such as a government or central bank. Below, we’ll break down the basics of crypto — what it is, how it works, and how people use it today.

While SoFi members may be able to buy, sell, and hold a selection of cryptocurrencies, such as Bitcoin, Solana, and Ethereum, other cryptocurrencies mentioned may not be offered by SoFi.

What Is Cryptocurrency in Simple Terms?

Cryptocurrency, or “crypto,” is a type of virtual asset that exists entirely online. It may be used for electronic payments or as a store of value, though importantly it is not legal tender, backed by the U.S. government.

Unlike the cash in your wallet or the balance in your bank account, cryptocurrencies have no physical form (i.e., no coins or bills). Instead, ownership and transactions are recorded digitally through specialized software.

You can use some cryptocurrencies to purchase goods and services, store value, or transfer value across borders. What makes them unique in the financial space is that they may operate independently of central intermediaries, such as central banks, governments, and corporations, enabling a decentralized financial system. The blockchain technology they’re built upon may offer transparency, flexibility, and, in some cases, cheaper and faster financial transactions.

How It’s Different From Regular Money (e.g., U.S. Dollars)

Everyday money, also known as fiat currency, is issued and controlled by a central authority — typically a government or central bank. In the U.S., for instance, the Federal Reserve is responsible for controlling the supply of U.S. dollars.

In contrast, cryptocurrency is not issued or managed by any government or central bank. It operates on a decentralized network of computers spread across the globe.

Fiat currency derives its value from government backing and its status as legal tender, whereas cryptocurrency generally has no set or guaranteed value. Instead, its price depends on market forces — such as supply and demand, market sentiment, and the perceived quality of its underlying technology. In other words, a cryptocurrency’s value is typically shaped by how much people want to use or own it, how much of it exists, and public confidence that the coin will continue to be useful in the future.

The Core Idea: No Central Authority (Decentralization)

One of the most powerful concepts behind cryptocurrency is decentralization — the idea that no single person, company, or government controls the network. Instead, transactions are verified and recorded by thousands of independent computers around the world.

These participants, known as “validators” or “miners,” validate and process transactions without the need for a central authority. Each independent participant maintains a copy of a shared digital ledger, called a blockchain, which records every transaction ever made.

This process is guided by what’s called a consensus mechanism — a method that helps all the computers on the network agree on which transactions are valid. The two major consensus mechanisms are proof of work (PoW) and proof of stake (PoS). These systems help ensure that everyone follows the same rules and makes the blockchain itself extremely difficult to tamper with. Blockchain technology’s immutability helps to safeguard cryptocurrency networks and make them more resistant to system failures.

How Does Cryptocurrency Actually Work?

Cryptocurrency combines blockchain technology, cryptography, and digital wallets to enable secure, peer-to-peer transactions. Let’s unpack how that works.

Blockchain: The Technology Behind Cryptocurrency

Blockchain is the foundational technology behind cryptocurrencies. You can think of it as a public digital ledger, or online notebook, that records every transaction ever made with a specific cryptocurrency.

Each “block” (like a page in that notebook) contains a group of transactions. New blocks are continually added in order, creating a chronological and permanent record. These blocks are linked together in sequence — forming a “chain” — and once added, a block cannot be altered.

The blockchain is distributed across thousands of computers, known as “nodes”, meaning no single entity has control. This decentralized structure allows crypto users to verify the transaction history, fostering trust without relying on a central authority.

As a result, the system may eliminate the need for traditional intermediaries to verify or settle payments — the network itself handles the validation.

How Transactions Are Kept Secure With Cryptography

Every transaction on a blockchain is secured through advanced mathematical algorithms known as cryptography.

When someone uses or sends cryptocurrency, the transaction is digitally signed with a private key — a unique code known only to the owner. The network then verifies this digital signature before approving the transaction.

This cryptographic process helps ensure that only the rightful owner can transfer their funds, that transactions cannot be altered or forged, and that the integrity of the blockchain remains intact.

It’s this cryptographic foundation that gives cryptocurrency its name.

The Role of Crypto Wallets and Keys

To use cryptocurrency, you’ll need a crypto wallet— a digital tool that allows you to manage, send, and receive crypto assets.

Unlike a traditional wallet, a crypto wallet doesn’t actually store your coins. Instead, it holds your cryptographic keys. These keys give you access to the cryptocurrency you own, which is recorded on the blockchain.

There are two types of keys:

There are two main types of crypto wallets:

Are All Cryptocurrencies the Same?

There are thousands of cryptocurrencies out there and many differences between them. Let’s explore some of the main types of cryptocurrency.

Bitcoin (BTC)

Introduced in 2008 by an anonymous developer or group of developers known as Satoshi Nakamoto, Bitcoin was the first cryptocurrency — and remains the most valuable and widely recognized.

Bitcoin is also the name of the public blockchain used to create and manage Bitcoin (BTC). Mining is the process by which transactions are officially entered on the blockchain and new bitcoins are launched into circulation. Bitcoin miners compete with one another to solve a cryptographic puzzle, a process known as proof of work. The first to solve it gets to add the next block of transactions to the blockchain and earns newly minted bitcoins as a reward.

Bitcoin can be used for purchases and as an asset you buy and sell to potentially earn a profit, though Bitcoin’s price is highly volatile and can result in a loss as well.

Ethereum (ETH)

Ethereum, or Ether (ETH), is the second-largest cryptocurrency by market capitalization, following Bitcoin. Ethereum is more than just a digital asset — it’s also a global decentralized network that allows developers to build applications without relying on traditional servers. The Ethereum blockchain currently powers a wide range of innovations, including financial tools, games, and complex decentralized financial (DeFi) products.

“Ether” is the native cryptocurrency token used by the Ethereum network. Ether (often simply referred to as just “Ethereum,” though there is a difference!) functions both as a digital asset and an on-network currency on the Ethereum blockchain.

Ethereum is currently secured by a system known as proof of stake, a consensus mechanism that relies on randomly selected validators (who stake their coins for a chance to be chosen) to validate transactions and receive rewards.

Altcoins

Altcoins, short for “alternative coins,” are any cryptocurrencies other than Bitcoin. Since Bitcoin’s launch, thousands of altcoins have emerged, each built on its own blockchain. Many are forks — modified versions of existing blockchains like Bitcoin or Ethereum — designed to improve speed, efficiency, or add new features. For example, Litecoin (LTC), a fork of Bitcoin, was created with the aim to finalize transactions faster.

Memecoins, cryptocurrencies inspired by internet memes or viral trends, are another type of altcoin. Typically created as jokes or a take on a popular trend, memecoins usually lack practical utility, with their value driven almost entirely by online hype. This makes them highly volatile, offering opportunities for speculative profit — but also significant risk. Dogecoin, the most famous memecoin, started as a parody but gained recognition and limited acceptance as a form of payment, partly due to promotion by Elon Musk.^[1]

Other well-known alt coins include: Solana (SOL), XRP, Binance Coin (BNB), and Cardano (ADA).

Recommended: What Is Solana Cryptocurrency?

Stablecoins

Stablecoins are cryptocurrencies designed to maintain a stable value by being pegged to a specific asset, such as a fiat currency like the U.S. dollar or a commodity like gold. For example, USDT (Tether) and USDC (USD Coin) are intended to maintain a one-to-one value with the dollar.

By minimizing the price volatility common in other cryptocurrencies, stablecoins aim to combine the benefits of digital assets with greater stability. They are often used to transfer money quickly, hold funds on crypto exchanges for easy conversion into other cryptocurrencies, or make payments for goods and services without the risk of sudden price swings. However, stablecoins come with fewer consumer protections compared to traditional banking deposits.

What Are the Main Ways People Use Cryptocurrency?

People use cryptocurrency in a variety of ways. Here’s a closer look at some of the most common uses.

Holding, Buying, and Selling (Hoping for Gains)

Many people see cryptocurrency as a way to diversify their portfolios beyond traditional assets like stocks, real estate, and cash. Some buy crypto and hold it, while others actively buy and sell crypto to potentially profit from short-term price movements.

The high volatility of crypto markets offers the potential for significant returns — but also substantial losses due to the high level of risk involved. It’s generally wise not to buy crypto with money you can’t afford to lose.

Sending Money (Faster and Cheaper Across Borders)

Cryptocurrencies can make international money transfers faster and more affordable. Traditional cross-border transfers generally involve multiple intermediaries, which may make the process slower and more expensive. By contrast, crypto transactions rely on blockchain technology, enabling direct peer-to-peer transfers that can cut costs and processing times.

Making Purchases (Growing But Still Limited)

Although not yet mainstream, an increasing number of businesses now accept cryptocurrency as payment. Companies such as AMC Theatres, Chipotle, IKEA, The Home Depot, and Whole Foods accept Bitcoin or other digital currencies.^[2] Often, you pay directly from your crypto wallet. You simply initiate payment, select the cryptocurrency you’d like to use, specify the amount, and confirm the transaction. Some merchants even simplify the process by providing a QR code for crypto payments. In this case, you just scan the code, input the amount, and confirm the transaction.^[3]

Exploring Passive Income (Through Staking, Yield Farming, or Crypto Lending)

Crypto may also generate passive income. Common methods include:

It’s important to note that passive income from crypto is not guaranteed. The value of your principal and the rewards can fluctuate due to market volatility, platform risks, and other factors.

What Are the Advantages of Cryptocurrency?

Cryptocurrency offers several unique benefits. Here are some key advantages to consider:

You Control Your Own Money

When you hold cryptocurrency in a private wallet, you have full and exclusive control over your funds without relying on intermediaries like exchanges. You hold the private keys to your digital holdings and can make transactions without third-party approval.

Accessibility

Cryptocurrency is borderless and inclusive. Nearly anyone with an internet connection and a digital device can access crypto services. This may make it easier for people who are unbanked or underbanked to conduct online transactions or send money globally.

Lower Transaction Fees

Cryptocurrency transactions often have lower fees than traditional financial services, especially for international transfers. By eliminating intermediaries, crypto transactions avoid many service and processing charges that typically apply to money transfers. While network congestion can occasionally increase fees, cryptocurrency transaction costs are generally minimal.

Transparency

Crypto transactions are recorded on a public blockchain and therefore visible to anyone. While users can remain pseudonymous, cryptocurrency transactions are typically publicly accessible, creating a clear audit trail that encourages accountability and reduces the risk of fraud. Note that there are some exceptions to this, such as with certain private cryptocurrencies designed to reduce traceability.

What Are the Biggest Risks to Be Aware Of?

While cryptocurrency offers significant opportunities, it also comes with real risks. It’s important to understand these before participating in the crypto market.

Extreme Volatility

Cryptocurrency prices can fluctuate dramatically, sometimes by double digits in a single day. While this volatility can create opportunities for profit, it also means you can lose money quickly if prices drop suddenly. This unpredictability makes crypto a risky option for individuals seeking a stable place to store funds and may make it challenging to use as a reliable payment method.

Security Risks

Blockchain technology in of itself is considered very secure, but cryptocurrencies can still be vulnerable to security threats, such as phishing scams and hacking of software that interacts with cryptocurrencies. Cybercriminals have targeted cryptocurrency exchanges and digital wallets, causing significant losses. Because crypto transactions are irreversible, recovering stolen funds is extremely difficult.

If you use a private wallet, security becomes your responsibility. Losing your private keys or recovery seed phrase (a password that acts as a master key to your wallet) — or sharing them with the wrong party — can result in permanent loss of your crypto, as no intermediary can recover it for you.

Recommended: Top 10 Crypto Scams to Watch Out For in 2025

Evolving Tax Rules and Regulations

In the U.S., the Internal Revenue Service (IRS) classifies cryptocurrency as property, not currency.^[4] This means that every crypto transaction is a taxable event, even using crypto for purchases.

Starting with the 2025 tax year, new Form 1099-DA reporting requirements mean that exchanges and hosted wallet providers will report customer sales and exchanges directly to the IRS. While this may simplify reporting for some, it remains the responsibility of the taxpayer to keep accurate records, particularly for transactions on decentralized finance (DeFi) platforms or those involving non-custodial wallets.

How to Get Started with Crypto: A Simple 3-Step Overview

If you’re ready to explore the world of cryptocurrency, here’s a simple roadmap to get you started.

Step 1: Choose a Reputable Cryptocurrency Platform

To buy and sell cryptocurrencies, you’ll need to open an account on a cryptocurrency platform, such as a cryptocurrency exchange (a platform where you can swap dollars or other currencies for crypto), a traditional brokerage platform, or even a banking platform, given that banks are beginning to offer crypto trading, as well. A cryptocurrency platform will usually allow users to buy cryptocurrency directly using traditional (fiat) money that’s deposited into the account. A crypto platform may also manage your digital wallet and private keys on your behalf, which lessens the technical burden for newcomers.

Step 2: Buy Your First Crypto (Start Small)

Once you choose an exchange and set up an account, you can typically deposit funds, such as by using a bank transfer or debit card, and purchase your first cryptocurrency. You don’t need to commit a large sum — buying fractions of cryptocurrencies is common, and many platforms and exchanges have no minimum requirements. Starting with $50 or $100 can be a great way to learn the process before committing larger amounts of capital.

Step 3: Decide How to Store Your Crypto

After purchasing cryptocurrency, you have two main storage options:

1. Keep it on the crypto platform or exchange: This is convenient for beginners since you don’t have to manage private keys yourself. Everything is accessible whenever you log in. However, the risk is that if the exchange suffers a security breach or your account is hacked, your funds could be compromised.

2. Transfer to a personal crypto wallet: Personal storage options include hot wallets (mobile apps, desktop programs, or web-based wallets) and cold wallets (offline hardware devices or paper wallets). If you plan to become more involved in crypto, a hardware wallet is preferred by some for long-term storage.

The Takeaway

The cryptocurrency landscape is quickly evolving, as are the potential uses of blockchain technology in the broader financial landscape. Before deciding if buying and using cryptocurrencies is for you, it’s important to understand their advantages and downsides. Beginners can navigate this evolving space by familiarizing themselves with core concepts like blockchain, cryptography, and the diverse types of digital assets available.

While crypto offers advantages such as accessibility and potentially lower transaction fees, it’s important to be aware of the inherent risks, including extreme volatility, potential security concerns, and evolving regulations. Understanding the mechanics and potential pitfalls of crypto is key to engaging with it responsibly.

SoFi Crypto is back. SoFi members can now buy, sell, and hold cryptocurrencies on a platform with the safeguards of a bank. Access 25+ cryptocurrencies, such as Bitcoin, Ethereum, and Solana, with the first national chartered bank to offer crypto trading. Now you can manage your banking, investing, borrowing, and crypto all in one place, giving you more control over your money.

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FAQ

How might cryptocurrency make you money?

Cryptocurrency might make you money primarily through price appreciation — buying coins at a low price and selling them at a higher one. It may also be possible to earn passive income via staking, yield farming, or lending their crypto to earn interest. However, crypto markets are highly volatile, and profits aren’t guaranteed. It’s essential to do thorough research and only buy what you can afford to lose.

Are cryptocurrencies insured like bank deposits?

No, cryptocurrencies are generally not insured like traditional bank deposits. In the U.S., the Federal Deposit Insurance Corporation, or FDIC, protects your deposits (up to certain limits), but only for funds held in insured banks, not crypto holdings. Some crypto exchanges offer private insurance, but this usually covers only specific events like theft through hacks, not market losses. It’s likely a good idea to check a platform’s security policies before using it.

How are crypto gains taxed in the U.S.?

In the U.S., the Internal Revenue Service (IRS) treats cryptocurrency as property, not currency. Any profit from selling, exchanging, or spending crypto is subject to capital gains tax. The rate depends on your holding period and individual income. Consult a tax professional for guidance.

How do I avoid cryptocurrency scams?

To avoid crypto scams, be skeptical of promises of high returns, verify the legitimacy of any platform or project, use secure and trusted crypto platforms and wallets, and never share your private keys or recovery phrases. Also, be wary of unsolicited messages, social media ads, and requests to pay in cryptocurrency, as these are common red flags.

Can I use cryptocurrency for everyday purchases?

Yes, you can use cryptocurrency for some everyday purchases, but acceptance varies. A growing number of retailers and online platforms accept Bitcoin and other coins directly or through third-party payment processors. You can also use crypto debit cards that convert digital assets into fiat (government-backed money like U.S. dollars) at checkout. That said, volatility and limited merchant adoption still make crypto less practical for daily use compared to traditional currencies.

How is the value of a cryptocurrency determined?

The value of a cryptocurrency is primarily determined by supply and demand in the market. Factors like general interest, utility, scarcity, and overall market sentiment influence demand for a particular cryptocurrency and, therefore, its price. Other factors — such as technology updates, government regulations, and media coverage — also impact demand. Unlike traditional currencies, most cryptocurrencies aren’t backed by physical assets or central authorities, making their prices highly volatile.

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About the author

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Article Sources

1. Yahoo! Finance. Elon Musk and Dogecoin: How the Billionaire Became the ‘Dogefather’.
2. GoBankingRates. 50 Stores Where You Can Pay With Crypto.
3. GoBankingRates. 7 Ways To Use Cryptocurrency for Everyday Purchases.
4. IRS. Digital assets.

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Photo credit: iStock/VioletaStoimenova

Cryptocurrency and other digital assets are highly speculative, involve significant risk, and may result in the complete loss of value. Cryptocurrency and other digital assets are not deposits, are not insured by the FDIC or SIPC, are not bank guaranteed, and may lose value.

All cryptocurrency transactions, once submitted to the blockchain, are final and irreversible. SoFi is not responsible for any failure or delay in processing a transaction resulting from factors beyond its reasonable control, including blockchain network congestion, protocol or network operations, or incorrect address information. Availability of specific digital assets, features, and services is subject to change and may be limited by applicable law and regulation.

SoFi Crypto products and services are offered by SoFi Bank, N.A., a national bank regulated by the Office of the Comptroller of the Currency. SoFi Bank does not provide investment, tax, or legal advice. Please refer to the SoFi Crypto account agreement for additional terms and conditions.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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