Understanding Cryptocurrency doesn’t have to begin with complicated technology or a whole new financial vocabulary. It can begin with one simple question: What exactly is cryptocurrency?
You’ve probably heard about Bitcoin. You may also have heard names such as Ethereum, Dogecoin or dozens of others without really knowing what they are or why they exist.
If you’ve ever wondered how Bitcoin, cryptocurrency, altcoins, blockchain and digital wallets all fit together, you’re in the right place.
Let’s start at the beginning and put the pieces together one at a time.
What Is Cryptocurrency?
Cryptocurrency is a type of digital asset that uses computer technology to help securely record and verify when it is sent or received. Unlike the dollar bills and coins in your wallet, cryptocurrency exists digitally. When you hear someone refer to Bitcoin or another cryptocurrency as a “coin,” they are talking about a digital unit—not a physical coin you can hold in your hand.
Different cryptocurrencies are designed for different purposes. Some are intended primarily for sending or receiving cryptocurrency. Others may be associated with networks that provide different digital services. To learn even more about cryptocurrency, just click on the doormat in the picture to the right.
And this is where one very familiar name enters the story.
Where Does Bitcoin Fit In?
Bitcoin is a cryptocurrency.
That simple sentence clears up one of the biggest sources of confusion for people who are new to this subject.
Think of cryptocurrency as the large category and Bitcoin as one member of that category.
Bitcoin was introduced in 2009 and became the first cryptocurrency to achieve widespread recognition. It operates on its own blockchain network and allows cryptocurrency to be sent from one person to another without requiring a traditional bank to maintain the central record of every transaction.
Because Bitcoin became so well known, people sometimes use the words Bitcoin and cryptocurrency almost as though they mean the same thing.
But they don’t.
Bitcoin is one cryptocurrency. There are many others.
And that leads directly to another term you’re likely to encounter:
What Are Altcoins?
The word altcoin comes from “alternative coin.” It has traditionally been used as a broad term for cryptocurrencies other than Bitcoin.
Altcoins have been created for many reasons. Some offer alternatives to the way Bitcoin works, while others are designed for particular uses in the digital world.
You may recognize names such as Ether, which is associated with the Ethereum network, or other digital assets you’ve seen mentioned in the news or online.
But here’s something important for a beginner to understand: The fact that a cryptocurrency exists doesn’t mean that it has lasting value or that it is a good investment.
Thousands of crypto projects have appeared over the years, and their purposes, popularity, risks and staying power have been very different.
That’s one reason education matters.
Before worrying about which cryptocurrency you might buy—or whether you should buy any at all—it helps to understand the technology underneath them.
What Does Blockchain Have to Do With It?
This is where the pieces begin connecting.
A blockchain is a type of digital record-keeping system. Information about transactions can be recorded and verified across a network rather than depending entirely upon one central record keeper.
Bitcoin uses blockchain technology to maintain its transaction history. Other cryptocurrencies and blockchain networks may use the technology somewhat differently.
So when you hear blockchain and cryptocurrency mentioned together, remember:
Blockchain is the underlying technology. Cryptocurrency is one of the things that can use that technology.
You don’t have to understand all of the computer science behind blockchain to begin understanding cryptocurrency.
For now, you’ve already learned four of the biggest pieces:
- Cryptocurrency is the broad category.
- Bitcoin is one cryptocurrency.
- Altcoins generally refer to cryptocurrencies other than Bitcoin.
- Blockchain is the technology that makes many of these digital systems possible.
And now we’re ready for the really interesting question:
Why Does Cryptocurrency Have Value?
This is an interesting question because most cryptocurrencies aren’t backed by the U.S. dollar. You can use dollars to buy cryptocurrency, but that doesn’t mean the dollar determines its value.
Its value can come from several things, including supply and demand, how useful people believe a particular cryptocurrency or network is, how widely it is accepted or used, and how much confidence people have in its future.
Bitcoin gives us an interesting example. Its design limits the total number of bitcoins that can ever be created. That limited supply, combined with demand from people who want to own or use Bitcoin, is one factor that can influence its value.
Other cryptocurrencies may work very differently. Some are connected to blockchain networks designed to perform particular services or functions. Their value may be influenced by how useful or popular those networks become.
But here’s where we need to be careful.
The price of a cryptocurrency can rise quickly—and it can fall just as quickly. Popularity, speculation, changing regulations, technology problems, security concerns and even news or social-media attention can affect what people are willing to pay.
That’s why a high price doesn’t necessarily mean a cryptocurrency is “better,” and a low price doesn’t necessarily mean you’ve discovered a bargain.
Understanding what you’re looking at comes first.
How Do People Get Cryptocurrency?
Once you understand what cryptocurrency is, the next question may be: How does someone actually get it?
One common way is to buy cryptocurrency through a cryptocurrency exchange. An exchange provides a place where people can buy, sell or trade the cryptocurrencies offered on that exchange.
Cryptocurrency can also be received from another person or business. In some situations, it may be earned as payment, received as a reward or obtained through certain blockchain activities.
You may also encounter programs offering small amounts of cryptocurrency for completing educational activities, referrals or promotions. Those offers can change over time, so it’s important to check the current terms rather than assume an older offer is still available.
And here’s an important distinction: Getting cryptocurrency and storing or managing access to cryptocurrency are not quite the same thing.
That’s where another word we’ve been using enters the picture.
Where Does a Blockchain Wallet Fit In?
A cryptocurrency wallet doesn’t work exactly like the leather wallet in your pocket.
Your physical wallet holds your cash.
A Blockchain Wallet helps you access and manage your cryptocurrency. It does this by protecting special digital information called a private key. Think of the private key as a password that proves you have permission to access and use your crypto. Unlike a password you might give someone helping with an account, a private key should never be shared.
There are different kinds of wallets, and they don’t all work the same way. Some are connected to the internet for convenience, while others can keep important access information offline.
Protecting that access information matters. If someone obtains the credentials or private keys controlling certain crypto assets, recovering those assets may be difficult or impossible.
We have an entire introduction devoted to wallets, so rather than turn this section into another article:
Learn what a Blockchain Wallet is and how it fits into the crypto world HERE.
What About the Risks?
There’s a quote from our founder, Rory Ricord, which you can find on our Uses for Crypto page by clicking HERE, that describes one side of the cryptocurrency world rather well: “The Wild Wild West.”
Cryptocurrency has attracted legitimate technology, businesses and investment, but it has also attracted scams, fraudulent projects and people hoping to take advantage of someone who doesn’t yet understand how the system works.
A message promising guaranteed profits should raise questions. So should pressure to act immediately, requests to send cryptocurrency to an unfamiliar person or wallet, or anyone asking for passwords, recovery phrases or private keys.
And there’s another kind of risk that isn’t necessarily fraud at all: the value itself can change dramatically.
Cryptocurrency shouldn’t be treated as guaranteed income or guaranteed to grow. Before putting money into something you don’t understand, learn what it is, how it works and what could go wrong. For additional information about protecting crypto assets and understanding some of the risks, visit the SEC’s Investor.gov information HERE.
That’s one reason to start with education.
What Can Cryptocurrency Be Used For?
Now to the fun part!
Depending on the cryptocurrency and the services that support it, crypto can be used in different ways. People can use it to send or receive payments, although not all businesses accept cryptocurrency. Blockchain networks can also support other digital activities that go beyond simply buying and selling coins.
And those possibilities deserve a page of their own.
Explore how cryptocurrency can be used HERE.
Understanding Cryptocurrency Is the Beginning.
You don’t have to become an expert in these 21st Century overnight.
If you came to this page wondering whether Bitcoin and cryptocurrency were two different things, you’ve already learned something important: Bitcoin is one cryptocurrency within a much larger category.
You’ve also learned what altcoins are, how blockchain fits into the picture, why cryptocurrencies can have value, some of the ways people obtain them, in the Blockchain Technology section and keep learning one piece at a time.