What is cryptocurrency? How it works and how to invest in it

Cryptocurrency is as much a cultural and economic movement as it is a form of payment or store of value. It sits at the crossroads of finance, technology, community, and personal freedom, presenting lots of exciting opportunities for investors and tech enthusiasts alike.

But the cryptosphere also hosts its fair share of risks, including scams where bad actors hope to steal money or login credentials. Dive into how crypto works, the key risks you need to watch out for, and what you can do to invest more safely.

What is cryptocurrency?

Cryptocurrency is digital money that’s secured using cryptography, with popular examples including Bitcoin and Ether. It functions similarly to physical currency but only exists online and is managed by vast networks of computers instead of single authorities, like central banks or governments.

This quality, called “decentralization,” is one of the defining traits of crypto. All of the computers that participate in the network record every single transaction on a permanent, tamper-proof ledger called a blockchain. That makes cryptocurrency highly resistant to counterfeiting or double-spend fraud.

The decentralized nature of cryptocurrencies also allows users to quickly and securely send money without an intermediary, like a bank. But cryptocurrency’s use cases extend far beyond peer-to-peer (P2P) transfers. It can also be used to buy goods, donate to charities, or invest in the hopes of making a return.

How does cryptocurrency work?

Cryptocurrency works using blockchain technology. Transactions are grouped into “blocks,” verified as legitimate by a network of computers, then added to a permanent “chain” of previous transactions. This creates a digital ledger that records every transaction stretching back to the cryptocurrency’s creation.

Blockchain technology makes cryptocurrencies highly transparent, secure, and largely tamper-proof. Anybody can check the blockchain to look up previous transactions, but nobody can alter it to fraudulently add, remove, or change transaction data, creating a high-trust system.

That trust is amplified by the decentralization of blockchains. They’re managed, maintained, and verified by a public network of “nodes” — computers that each store a local copy. Each node continuously checks the validity of the blockchain, while some also contribute towards processes like “mining” or  “staking,” generating new blocks and processing transactions to earn a reward.

Users don’t have to participate as a node or miner to interact with blockchains. They can buy or sell cryptocurrency — either peer-to-peer or using exchange platforms like Coinbase — or hold it in digital wallets protected by private keys.

Types of cryptocurrency

While the two most popular cryptocurrencies, Bitcoin and Ether, represent 65% of the total crypto market value, there are thousands of other cryptotokens. Many serve common purposes — to facilitate transactions — but some have unique roles, like mirroring the value of the U.S. dollar (USDT) or enabling decentralized application development (Solana).

These are some of the most popular cryptocurrencies:

• Bitcoin (BTC): The first and most well-known cryptocurrency, often called “digital gold.” Bitcoin is widely used for peer-to-peer transactions or held as an investment, with many buying it hoping to store value over time and protect against inflation.
  
• Ether (ETH): Ether is the native cryptocurrency of the popular Ethereum blockchain. It’s best known for enabling smart contracts, which allow users to create automated actions based on conditions, hosting decentralized apps (dApps), and playing a pivotal role in powering the world of non-fungible tokens (NFTs).
  
• Tether (USDT): A stablecoin that mirrors the value of the U.S. dollar, Tether is designed to offer price stability and reduce the volatility typically associated with crypto markets.
  
• Binance Coin (BNB): Originally created to provide users of the Binance exchange platform an easy way to pay transaction fees, BNB has expanded to other transactions and services within the Binance ecosystem.
  
• Solana (SOL): Famed for its fast transaction speeds and low fees, Solana is a popular choice for developers building dApps and DeFi (decentralized finance) platforms.
  
• Cardano (ADA): The native coin of the Cardano blockchain, ADA is used for transactions on a platform focused on smart contracts and dApps, with a strong emphasis on academic research and peer-reviewed technology.
  
• Dogecoin (DOGE): One of the first “meme coins,” Dogecoin has gained popularity through online communities and social media influence. It’s commonly used for tipping, making online payments, and funding community-driven projects.
  
• USD Coin (USDC): Another stablecoin pegged to the U.S. dollar, USDC is generally used for making fast, secure digital payments.
  
• XRP (XRP): XRP is designed to facilitate high-speed, low-cost cross-border transactions — especially for banks and financial institutions.
  
• Polkadot (DOT): Native to the Polkadot network, the DOT token is used for staking, governance, and launching new blockchains, making it essential to the platform’s security and expansion.
  
• Avalanche (AVAX): The native coin of the Avalanche blockchain, AVAX is a favorite among designers. Avalanche is known as a high-speed smart contract platform with low fees and fast finality.

Cryptocurrency risks

Secure, encrypted transactions are one of cryptocurrency’s main draws. But, just because legitimate transactions are safe, that doesn’t mean crypto is free from risks. From NFT scams to sudden price swings, unregulated exchange platforms to pump-and-dump schemes, there are lots of threats to be aware of, meaning both users and investors should tread carefully when navigating the cryptosphere.

Here’s a more detailed look at some of the main risks associated with cryptocurrency:

Crypto scams

Where there’s hype, there’s bound to be scams — and crypto is no exception. Crypto scams can take many forms, but fake investment schemes, phishing websites, and impersonations on social media are some particularly common ploys. Crypto scams are especially dangerous because if you fall victim and send funds to a scammer, there’s essentially no way to recover them.

The same applies if you fall for a phishing scam and accidentally give a scammer access to your account — any crypto they steal will be nearly impossible to recover. To help protect your money and accounts, learn how to invest in crypto more safely.

Volatility

The value of cryptocurrencies can swing wildly day to day, or even hour to hour. Sometimes, that means your investment will see significant short-term growth. But, other times, your portfolio value might plummet before you can even think about reacting.

If you’re new to the space, be aware that crypto’s volatility is one of its major risks — and for some, part of the reward. Investing in digital currency has real-world consequences, so don’t invest more than you’re willing to lose.

Unregulated exchanges and platforms

Most people use third-party exchanges and platforms to make crypto transactions or store their coins, as opposed to the less user-friendly P2P or self-custodial options. While many of these platforms are perfectly legitimate (and even traded publicly, in the case of Coinbase), some may operate outside of regulatory frameworks and may not fall under the jurisdiction of your country’s financial authorities.

That means you’re at the mercy of the platform’s policies and security — or, as is unfortunately the case, the lack thereof. If these exchanges or platforms shut down, get hacked, or go bankrupt, there may be no safety net to recover your funds. Before signing up to an exchange, do your homework. Learn where the platform is based, what regulations it follows (if any), and how it protects your assets.

Limited fraud protection

Credit card fraud can often be reversed, but crypto fraud stories rarely have happy endings. With no fraud protection enshrined in law, and very little in the way of platform-specific recourse options, crypto asset recovery is often a dead end. That’s the trade-off with a deregulated currency with no central oversight.

If your wallet is hacked, you fall for a phishing scam, or send funds to the wrong address, those coins are most-likely gone for good. So take extra precautions when sending crypto because, once it leaves your wallet, there’s no getting it back.

Is cryptocurrency a good investment?

While you might have read stories about people making millions overnight, whether cryptocurrency is a good investment for you depends on your risk-tolerance, goals, and understanding of the market.

Here are some factors to weigh up if you’re considering investing in crypto:

• Volatility: Cryptocurrencies can grow in value rapidly, with successful investments capable of generating much greater return on investment than most conventional assets like stocks. However, prices can (and often do) just as easily crash, meaning you should only ever invest money that you’re willing to lose.
• Decentralization: The idea of a financial system not controlled by banks or governments is appealing and progressive for many investors. However, decentralization also comes with risks, most notably in the lack of legal fraud protections.
• Blockchain technology: Blockchain technology offers transparency, security, and new use cases through smart contracts. For some investors, it's a bet on the future of digital infrastructure.
• Borderless transactions: Decentralization means no middle man for exchanges. That means crypto theoretically allows for fast international exchanges without hidden fees and rates, but sending money to other users on an exchange still typically involves fees.
• Inflation hedge: Some cryptocurrencies, most notably Bitcoin, are in part defined by their limited supply. This gives them a deflationary property that some investors consider an essential part of their ability to store value in the same way as gold, for example.

Remember, just because some people see success from crypto investing, it doesn’t mean you’re guaranteed the same experience. If you’re convinced it’s the right decision for you, start small, take every precaution to avoid scams, and aim to stay informed about the latest developments.

How to safely invest in cryptocurrency

Safely investing in cryptocurrency is all about managing risk. Since there’s no central oversight or fraud protections, you need to take a proactive approach to your investment, being aware of the fact that you bear the responsibility for any losses. Here are some smart strategies for safer crypto investment:

• Research before investing: Before buying a new cryptocurrency, read the project's whitepaper, check who’s behind it, and understand its real-world usage. There are plenty of failed tokens out there, many of which were simple pump-and-dump scams that can be avoided with simple research.
• Use reputable platforms: Stick with well-known cryptocurrency exchanges that follow security best practices and comply with relevant regulations. Don’t be lured in by low rates on sketchy platforms, which could cost you more in the long run.
• Diversify your investments: Like with any investment, avoid putting all your funds into a single cryptocurrency. Remember, crypto is extremely volatile. Coins that are hot today may be gone tomorrow.
• Enable two-factor authentication (2FA): 2FA adds an extra layer of protection to your exchange accounts and wallets. It’s one of our key cryptocurrency protection tips.
• Use secure wallets: For long-term holdings, consider a hardware or cold wallet for enhanced security, rather than leaving it on an exchange. You can never predict the fate of a specific exchange platform, no matter how safe it seems right now.
• Watch out for crypto scams: Steer clear of unsolicited investment offers, social media hype, or promises of guaranteed returns. Your instinct can be a cybersecurity asset — if something feels off, it probably is. If you’re ever unsure, use a scam detection tool like Norton Genie for more information.
• Be cautious of unsolicited messages: Emails, texts, or DMs claiming to be from your bank, the IRS, or a crypto exchange demanding crypto payments are a red flag that you’re being targeted by a scam.
• Never send crypto to unknown wallets: Once crypto leaves your wallet, it’s gone for good. Before making a transaction, check carefully that the person you’re sending money to is legitimate, and that you’ve entered their wallet address accurately.
• Verify URLs and apps: Fake URLs and apps are a common ploy in the cryptosphere. Only download crypto apps from trusted sources, and always double-check URLs before you click on them to help avoid phishing scams.
• Avoid sharing private keys: Treat your private key like a bank PIN or password. If someone can access your wallets or accounts, they can steal your crypto — and there’s no way to get it back.

How to buy cryptocurrency

To buy cryptocurrency, you’ll need to choose a reputable exchange platform. From there, you’ll create an account, verify your identity, and link your account with a payment method — like a bank account or digital wallet.

Once up and running, you can browse available cryptocurrencies and make a purchase. While most platforms let you store your coins on their site, for better security, you’ll want to transfer them to a private wallet.

Help protect against crypto scams

Crypto is exciting, but the sheer volume of scams that prey on newbie investors means it’s critical that you take precautions. Keep your guard up the easy way with Norton 360 Deluxe and its built-in scam detection tools. It offers a layer of protection against risks like phishing messages, malicious websites, and device security threats, so you can stay focused on your investment journey.

FAQs

Is cryptocurrency safe?

Cryptocurrency can be relatively safe if you buy reputable options, like Bitcoin, on legitimate platforms, like Coinbase or Binance. However, the safety of investing in the cryptosphere decreases the more niche you go. Buying a new, practically unknown token on a shady exchange, for instance, may put you at significant risk of losing your investment. And even “safe” investments are likely to experience high volatility.

What can I buy with cryptocurrency?

You can buy a wide range of goods and services with cryptocurrency — from gift cards and electronics to flights and hotel bookings. And crypto’s growing popularity is fueling new ways to spend it. Some retailers accept cryptocurrency directly, while others convert it to local currency.

Why do people invest in cryptocurrency?

People’s reasons for investing in cryptocurrency could range from chasing high returns to embracing the libertarian values that blockchain and decentralized currency systems represent. Before making an investment decision yourself, consider your reason for investing. If it’s just to chase a quick buck, think about whether it’s worth the risk of losing your money.

How can I pull my money out of crypto?

To pull money out of crypto, you’ll need to perform a fiat withdrawal on a cryptocurrency exchange. This typically involves selling your crypto for traditional currency and transferring the funds to your linked bank account. Processing times and fees may vary, depending on your platform and withdrawal settings. Alternatively, some bi-directional crypto ATMs may allow you to sell your crypto in exchange for cash.