How does cryptocurrency make money?
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The Rise of Cryptocurrencies After the Financial Crisis
Although the foundations of digital money were laid decades ago, the turning point came during the 2008–2009 global financial crisis. As confidence in banks and government-led financial systems weakened, alternative monetary solutions began gaining attention. Cryptocurrencies were developed with the intention of removing intermediaries such as banks and central authorities — institutions that many critics believed had contributed to the crisis.
Since then, the crypto market has expanded dramatically. By June 2021, the total market capitalization of cryptocurrencies had exceeded $1.3 trillion, according to CoinMarketCap. Thousands of digital tokens now exist, and new projects continue to launch — sometimes sparking speculative excitement that resembles a modern-day gold rush.
Access to cryptocurrencies is now easier than ever. However, investing in them requires caution. The market is highly volatile and speculative. While rapid price increases may suggest easy profits, significant losses can happen just as quickly. Anyone considering investing should understand the risks and approach the market with careful research and risk management.
What Is a Cryptocurrency?
A cryptocurrency is a digital payment system that enables secure online transactions using virtual “tokens.” These tokens are created through cryptographic processes and are typically built on blockchain infrastructure. Like traditional currencies, digital currencies can be used to purchase goods and services, depending on their level of adoption.
How Do Cryptocurrencies Work?
Cryptography ensures that cryptocurrencies are extremely difficult to counterfeit or spend twice. Most digital currencies rely on blockchain technology — a decentralized system that records transactions across a distributed network of computers.
Instead of being stored in a central database, transaction records are maintained collectively across many participants in the network. These participants, commonly referred to as miners, use computing power to verify transactions and add them to the shared digital ledger. Once confirmed, transactions become permanent and transparent within the blockchain.
Both the issuance and transfer of cryptocurrencies are decentralized. There is no single authority, such as a central bank, that controls supply or oversees distribution. In many cases, the total number of tokens is predetermined by code, limiting supply and reducing inflationary pressures within the system.
What Is the Purpose of Crypto?
The first widely recognized cryptocurrency was Bitcoin, which remains the largest in terms of stored value. One of its primary goals was to enable peer-to-peer financial transactions without relying on centralized financial institutions.
By leveraging blockchain technology, cryptocurrencies aim to create a financial system built on transparency, security, and decentralization — giving users greater control over their assets and transactions.
A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.
– Excerpt from the original paper guiding the development of Bitcoin
Another issue which the original developers of Bitcoin identified was that transactions with traditional financial institutions are non-reversible:
Commerce on the Internet has come to rely almost exclusively on financial institutions serving as trusted third parties to process electronic payments. While the system works well enough for most transactions, it still suffers from the inherent weaknesses of the trust-based model. Completely non-reversible transactions are not really possible, since financial institutions cannot avoid mediating disputes.
– Excerpt from the original paper guiding the development of Bitcoin
Digital currencies seek to solve these problems through various means involving cryptography and other technology solutions like blockchain technology.
Those who praise cryptocurrencies highlight their transparency, their resistance to inflation, becasue there is no central bank in the crypto ecosystem, which can print money, decreasing their value. Cryptocurrencies’ supplies are limited and cannot be arbitrarily created. For instance there will only ever be 21 million bitcoins ever produced. Another advantage of cryptocurrencies is their portability, it is easy to access them whether you hold it in an online or offline wallet. However, cryptocurrencies have also faced criticism for their use in illegal activities, exchange rate volatility, unregulated status that attracts speculators, and vulnerabilities in the digital infrastructure underpinning them.
Be aware when investing in cryptocurrencies! Cryptocurrencies are extra risky, their regulation is patchy, the market is extremely volatile, consumer protection is very weak, and security breaches, scams and frauds pester the market. Only invest money in cryptocurrencies that you are prepared to lose. The idealistic drive behind cryptocurrencies might seem romantic but reality will kick in once you lose your money. In this and a series of other articles, we will guide you through how cryptocurrencies work, and – after careful consideration – how to invest in them.
What is cryptocurrency?
How does cryptocurrency make money?
How to Earn, Invest in, and Use Cryptocurrencies
One way to obtain cryptocurrency tokens is through mining. Participants known as miners are rewarded with digital coins when they successfully validate blocks of transactions and add them to the blockchain. This reward system motivates users across the network to maintain an accurate and trustworthy ledger without relying on a central authority. Mining also serves as the mechanism through which new coins are introduced into circulation.
Another approach is purchasing or trading cryptocurrencies. However, investing in digital assets requires caution. The market is not an effortless path to wealth. Before buying assets such as Bitcoin or other digital currencies, you should decide whether to use a cryptocurrency exchange or a traditional brokerage platform that offers crypto exposure.
Equally important is determining how you will store your coins. Digital assets can be kept in hot wallets (connected to the internet) or cold wallets (offline storage). Each option has its own trade-offs in terms of accessibility and security, so the choice depends on your personal risk tolerance and preferences.
Before investing, decide how much capital you are willing to allocate — and mentally prepare for the possibility of losing it. The crypto market is highly volatile, and risks such as hacking incidents, scams, or sudden price swings are real. Creating a clear investment strategy and defining your long-term objectives can help you approach the market more responsibly.
What Are the Advantages of Buying Cryptocurrencies?
One key benefit of digital currencies is independence from centralized institutions. Crypto assets can be stored and transferred without direct involvement from governments or banks. Transactions are typically fast and can be relatively inexpensive, especially for cross-border transfers.
Another advantage is that the crypto market operates around the clock — 24 hours a day, 7 days a week — since it is not tied to the opening hours of any central exchange.
In theory, cryptocurrencies provide users with greater financial autonomy compared to fiat currencies. Because transactions do not require a bank intermediary, individuals maintain more direct control over their funds.
Additionally, crypto transactions are generally more difficult to directly associate with a person’s identity compared to traditional banking transfers. Similar to cash payments, this relative anonymity has contributed both to their appeal and to concerns regarding potential misuse in illicit activities.
Is Cryptocurrency Legal?
In most major developed economies, cryptocurrencies such as Bitcoin are legal to buy, sell, and hold. However, legal treatment varies significantly by country, and regulatory frameworks are still evolving.
Governments continue to refine rules to address concerns such as money laundering, terrorist financing, and other unlawful uses. In many jurisdictions, cryptocurrencies are classified as property rather than legal tender, which affects how they are taxed. Importantly, most cryptocurrencies are not officially recognized as legal tender for settling debts.
How to Use Cryptocurrencies
To benefit from digital currencies, you generally need to follow three basic steps:
1. Acquire them
You can obtain cryptocurrencies through mining, purchasing them on exchanges, or receiving them as payment.
2. Store them
Choose a secure storage method, such as a digital wallet (hot or cold), depending on your security needs.
3. Transfer them
You can send cryptocurrencies to other users via blockchain transactions, often quickly and across borders.
Understanding these fundamentals can help you approach the crypto space with greater clarity and confidence — while remaining aware of the risks involved.
What is cryptocurrency?
How to get cryptocurrencies
You can obtain digital currencies or get exposure on them in several ways:
Owning cryptocurrencies directly
Buying
A surefire way of owning cryptocurrencies is actually buying them, which you can do on services called cryptocurrency exchanges. These companies allow you to create an account on their website, transfer fiat money (i.e. USD or any other “normal” currency) to this account and exchange this money to one or more of the digital currencies they have available. (You can also transfer crypto coins to be exchanged for a different type of cryptocurrency.) From the user perspective, this process looks a lot like any traditional exchange.
Mining
If you are willing to contribute technical knowledge, preparation and actual computing power (i.e. fast computers), you can help maintain the blockchain of your choice (i.e. Bitcoin or Ethereum) by crypto mining. In return, you will be rewarded with cryptocurrencies.
Initial coin offerings
Also requiring some technical savvy is when you invest in coins before they are actually available at the launch of a new cryptocurrency. The crypto coins are transferred to your wallet when the blockchain is started. This process resembles an initial public offering of stocks.
Before you invest through initial coin offerings, check who owns the company offering the crypto coin, and see also if there are other major investors investing in it to make sure you are not falling prey to a scam. You may also want to check whether you will own a stake in the company or just get tokens; and whether the currency is already developed or the company is still looking to raise money to develop it.
Other ways of getting exposure to digital currencies
If you want to invest in cryptocurrencies or speculate on their price changes, here are some other popular methods.
CFD
Several online brokers offer cryptocurrencies as CFDs (Contracts for Difference). This allows you to invest in crypto currencies and bet on their price movements using a regulated and familiar environment (i.e. your favorite online broker which is a regulated financial institution) without having to deal with the technicalities. However, you don’t directly own the digital currency in this case and therefore you can’t use it for any transactions.
ETF/ETN
Several Exchange Traded Funds (ETFs) or Exchange Traded Notes (ETNs) are available which give you various levels of cryptocurrency exposure. Cryptocurrency ETFs/ETNs track a single cryptocurrency or a basket of different crypto tokens and currencies. This allows you to choose an ETF/ETN that fits your investment strategy and style. This form of investment likewise does not require you to manage the digital assets themselves. So it is a good way for mainstream investors or those seeking a bit more security before they enter the digital currency market, as it creates an added layer of security compared to holding a digital wallet or investing through an exchange.
Additional options
You can also invest in cryptocurrencies via futures and options, and other investment vehicles (e.g. Grayscale’s Bitcoin Trust on the OTC market).
What is cryptocurrency?
How to store cryptocurrencies
Digital wallets
The default and most secure way of storing your coins is in things called digital wallets. Each cryptocurrency blockchain has their own wallet which is a set of cryptographic information that identifies a destination to which only you have access.
Setting up a wallet requires some research and some technical savvy on your end which might lead you to keep your coins on the medium of exchange.
On a cryptocurrency exchange
If you acquired your bitcoin or other virtual currency on a crypto exchange you can actually keep it there.
The benefit is that you have a lot of control over your currencies there, i.e. you have the power to send any amount to another party or make some other payment.
The downside is that you don’t have direct access to the wallet behind it, meaning the exchange will stay as a mediator. “Physically” the exchange has your coins, similarly to a bank or other financial institution. If the system of the exchange is not available or goes bankrupt users will have a hard time accessing their coins.
What is cryptocurrency?
Cryptocurrency terminology
There are several terms and a specific jargon used in relation to digital currencies. This is due to the fact that their creation and their distribution is very technologically driven and its usage is very different to normal (also known as “fiat”) currencies.
On the cryptocurrency terminology page you’ll get to know some of the most important phrases you will come across when learning about cryptocurrencies.
What is cryptocurrency?
Cryptocurrency exchanges
Our cryptocurrency reviews section offers you a selection of the top exchanges with unbiased opinion and rating based on our thorough methodology.