What is cryptocurrency?

Crypto, or cryptocurrency, is a type of virtual currency designed to enhance financial transparency and inclusivity. Unlike traditional currencies, which are governed, issued and backed by governments around the world, cryptocurrencies are stateless and are not backed by any central bank, political party or person. 

Cryptocurrencies use concepts from cryptography, mathematics and computer science to deliver a decentralized, peer-to-peer monetary system. This system is based on clearly defined and transparent rules rather than centralized authority and trust.

While some dismiss cryptocurrency as a passing trend, others hail it as a groundbreaking revolution. 

The one thing that is clear is that cryptocurrencies' potential to redefine the ways we connect and transact can have a lasting impact on every person’s life.

• Cryptocurrency is a digital currency that utilizes cryptography, computer science and economic principles to establish a decentralized and secure financial system.
• Cryptocurrency utilizes blockchain technology, a decentralized ledger that securely records transactions.
• Securing your cryptocurrency involves choosing the right type of wallet and practicing good security habits to protect your assets.

Cryptocurrencies are digital currencies that leverage cryptography, computer science and economics to create a decentralized and highly secure payment system. These three disciplines work together to ensure the integrity and efficiency of cryptocurrency transactions.

• Cryptographic techniques keep crypto transaction information secure. 
• Computer science keeps this information consistent across all participants.
• Economic incentives encourage everyone to follow the rules for the benefit of the network.

A simple way to grasp the advantages of cryptocurrency and decentralized finance over the traditional financial system is by comparing them to physical letters and digital emails.

Sending a transaction through the traditional financial system is similar to mailing a physical letter via the postal service. It’s typically slow, costly and requires multiple intermediaries across every stage of the process to reach its final destination.

In contrast, transferring value with cryptocurrencies is more like sending an email. Depending on the cryptocurrency used, transaction fees can be minimal or even negligible. Payments are also processed truly in seconds, rather than hours or weeks, and no centralized intermediaries are needed to facilitate the transfer. 

This is a significant, but somewhat abstract point to understand. Cryptocurrency allows individuals to send value directly between each other, without the need for centralized intermediaries like governments or banks to be involved. 

This allows the individuals themselves to retain greater ownership over not just their finances, but also their information and privacy.

Some of the largest and most popular cryptocurrencies include Bitcoin, Ethereum, Tether, Solana and USD Coin.

Cryptocurrency is often misunderstood. Despite its growing presence in the financial world, many misconceptions still cloud its true nature. 

Common misconceptions include:

• Misconception: Only used for criminal activities
  • Truth: The vast majority of transactions are legitimate. A recent report by Chainalysis shows less than 0.5% of all cryptocurrency transactions are fraudulent or criminal.
• Misconception: Completely anonymous
  • Truth: Most cryptocurrency owners are pseudonymous, not anonymous. While transactions on the blockchain are visible, linking them to specific individuals can be extremely challenging.
• Misconception: Environmentally harmful
  • Truth: While some cryptocurrencies, like Bitcoin, have been criticized for their energy use, many newer cryptocurrencies are adopting more energy-efficient methods like proof-of-stake.
• Misconception: Backed by nothing
  • Truth: While physical assets or governments don't back cryptocurrencies, their value is derived from factors like limited supply, practical use cases and the functionality of the underlying technology.
• Misconception: Run by banks or governments
  • Truth: Cryptocurrencies are decentralized, meaning they operate independently of central authorities like banks or governments.
• Misconception: All cryptocurrencies are exactly like Bitcoin
  • Truth: Not all cryptocurrencies are clones of Bitcoin. A vast majority of altcoins have unique features, purposes and technologies, offering a diverse range of use cases.
• Misconception: The same thing as blockchain
  • Truth: Blockchain is the digital ledger technology that underpins cryptocurrencies, but it has a wide range of applications beyond just digital currencies.

Few things in the world are more misunderstood and fiercely debated than cryptocurrency. It’s important to clear away the myths and understand the facts.

Not all cryptocurrencies work in the same way, nor are they all meant to do the same thing. Here are some different things you can do with some of the most popular cryptocurrencies in the market today:

• Send value across borders — fast and cost-effectively.
• Own a self-sovereign store-of-value asset.
• Buy goods and services in a peer-to-peer way.
• Fund people and charitable causes without censorship
• Create and use decentralized applications.
• Vote on proposals shaping the future of the cryptocurrency.
• Earn rewards for securing the protocol via staking.
• Join a cryptocurrency mining pool.
• Support your favorite content creators directly.
• Prove ownership of digital assets.

For more details on the various ways to use cryptocurrency, consider exploring further on your own to discover what you can do with crypto.

One of the key characteristics of the crypto market is decentralization. However, when no one is "in charge" of something as important as transferring value between individuals, how can a system operate without some sort of oversight?

The solution involves two main components: blockchain technology and a globally distributed network of computers.

Blockchains act as a public ledger, tracking and recording all sorts of information. They accomplish this through highly secure and censorship-resistant rules. These rules are coded directly into the protocols and are typically available for anyone in the world to inspect for themselves.

Each network participant (called a node) maintains their own copy of the blockchain database, and helps the entire network reach consensus on newly added data before it is committed to the blockchain.

Rather than trusting one single individual with determining if a piece of information is true or false, blockchains require nodes to collectively approve or reject pending transaction data submitted to the ledger. The community is able to assess the facts for themselves and collectively agree on a yes or no answer.

To learn more about nodes and the important role they play in blockchain networks, check out our article What are blockchain nodes and clients?

This process of all nodes coming into agreement amongst each other is known as reaching “consensus.”

Blockchains use various consensus mechanisms, such as proof-of-work and proof-of-stake, to achieve this. These mechanisms often include incentives and penalties to encourage honest behavior and discourage malicious activity.

Blockchains get their name from how they "chain" together "blocks" of information (such as transaction details) by including information from the previous block in each new block.

Each new block's header contains the hash of the previous block, among other pieces of data, serving as a digital fingerprint unique to that block. This creates an immutable chain that anyone can self-verify.

This process is what makes blockchain ledgers tamper-proof, as changing even a single transaction within a block would radically change its unique fingerprint.  Attackers would also need to gain majority control over the network (more than 50% of all staking or mining power) to be able to manipulate the ordering of new blocks and potentially double spend funds.

This process of linking blocks and ensuring data integrity is a key aspect of blockchain technology and is rooted in advanced cryptographic techniques. It is also the reason why these decentralized networks are known as “blockchains.”

To learn more about these techniques, you can explore how cryptocurrencies use cryptography.

Because of the amount of coordination, money and processing power this would require, such an attack has proven to be practically impossible to carry out on widely adopted blockchains like Bitcoin or Ethereum.

Just like you don't need to be a mechanic to drive a car, you don't need to be a crypto expert to use cryptocurrency. All you need is an internet connection and a device, like a smartphone, laptop, tablet or desktop computer.

Once you have those, you have several options to choose from when deciding to buy crypto:

Many feel the safest and easiest way to purchase popular cryptocurrencies is by using a crypto trading platform like Kraken.

These platforms function like digital stock exchanges, allowing you to buy and sell cryptocurrencies directly from other users. When you create an account, the platform automatically sets up a crypto wallet for you, providing a secure place to store your funds.

After you create and fund your account with your bank account, debit or credit card, you can purchase any of the cryptocurrencies listed for trading.

First-time investors may decide to use a dollar-cost averaging strategy to buy cryptocurrency on a regular basis, which removes the need to time the market and can help smooth out market volatility.

To place an order, simply use your platform’s user interface. Select “buy,” input the desired amount you wish to purchase and confirm your order.

After you have bought your cryptocurrency, it is important to take some basic steps to keep your funds safe. There are several options available to secure your crypto, each with its own benefits and drawbacks. Understanding these can help users identify which method best suits their needs.

While the decentralized nature of cryptocurrencies makes them highly tamper-resistant, crypto users need to take several measures to keep their crypto secure. The security of your cryptocurrency largely depends on how you manage and store it and ineffective custody practices can lead to significant crypto losses each year.

Choosing the right wallet is crucial for protecting your assets. Whether you prioritize maximum security or convenience, each type of wallet has its own set of trade-offs. Conduct thorough research to find the best solution for keeping your cryptocurrency safe.

When securing your cryptocurrency, you have several wallet options, each with distinct advantages and limitations.

Often called Web3 wallets, these devices are designed to store and protect your cryptographic private keys, which are essential for proving ownership of your digital assets.

Wallets come in two main types:

• Software wallets: Digital wallets installed on your computer or smartphone. They offer greater convenience, but are always connected to the internet, making them more susceptible to hacks.
• Hardware wallets: Physical devices that store your private keys offline, providing greater security. While hardware wallets can be less convenient to use, the fact that they don’t remain constantly connected to the web offers them greater protection.

Ultimately, wallets can be cold (offline) for maximum security, but lower convenience or hot (online) for great convenience, but also greater exposure to online threats. They can also be custodial (managed by a third party) or non-custodial (giving you complete control over your keys).

Custodial wallets involve a third party managing your private keys for you, while non-custodial wallets give you complete control over your private keys. 

The choice between a custodial vs noncustodial way of managing your crypto ultimately depends on how much responsibility you alone are willing to take on when it comes to your financial freedom.

To learn more about the various advantages and disadvantages of these two types of crypto wallets, check out our article What are custodial and non-custodial crypto wallets?

Kraken offers a secure and easy way to get started in the cryptocurrency market. 

With hundreds of different cryptocurrencies available to buy, sell and trade, millions choose Kraken as they start their journey to financial freedom.

Create your account to buy and sell crypto with Kraken today.