What Cryptocurrency Including Bitcoin Is and How It Works

digital rendition of cryptocurrency with question mark in the middle and blockchain

(Image credit: Getty Images)

last updated 15 January 2025

Investor interest in cryptocurrency reached a peak in late 2024 after Donald J. Trump won the U.S. presidential election in November.

Bitcoin, the world's first and still its largest cryptocurrency, crossed the $100,000 milestone on December 4 and traded as high as $108,265 on December 16.

The digital asset continues to trade above $90,000, suggesting interest in cryptocurrency remains strong a little more than a year after the U.S. Securities and Exchange Commission approved the first bitcoin exchange-traded fund.

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And President Trump promises an even friendlier regulatory environment.

All that makes it easy to forget bitcoin was trading in the $40,000s last January and sank below $16,000 during a crypto winter in November 2022.

If you're new to investing or you're simply attracted by exciting price action, now is an ideal time to get familiar with cryptocurrency and the industry behind it before you put your hard-earned money into the space.

What is cryptocurrency and how does it work?

Vanguard is one of the most prominent asset managers in the world. Its website's investor resources section provides a good definition of cryptocurrency.

"A cryptocurrency is a digital asset stored on blockchain technology that serves as a type of currency or store of value. Unlike traditional currencies, cryptocurrencies aren't backed by major governments or developed economies," states the Vanguard website.

In other words, blockchain technology enables cryptocurrencies like bitcoin to view and verify transactions between two parties through a decentralized network of users known as nodes. These nodes validate and record these transactions rather than through a single authority or middleman.

The bitcoin blockchain, for example, contains every bitcoin transaction that's ever taken place, divided into blocks. When stacked on each other, these blocks create a chain of blocks, or a blockchain.

"Finding and publishing new blocks is what bitcoin miners do to earn bitcoins," states a Coinbase help page explaining the bitcoin blockchain.

"Whenever a new block is broadcast, approximately every 10 minutes, a quantity of bitcoins is received by the miner who solved that block. Bitcoin miners keep the network secure, and this is how they are rewarded. This system ensures that all transactions are valid, and keeps the bitcoin network secure from fraud."

Why own cryptocurrency?

Investors have been asking themselves "Why own cryptocurrency?" ever since bitcoin was created in 2009.

Proponents of the digital asset argue that decentralized finance takes the power of money creation away from central banks and bankers, democratizing the global financial system.

Cryptocurrencies are especially effective for transferring funds across borders quickly and efficiently to people living in countries with volatile currencies or significant cross-border restrictions, etc.

The other reason to own cryptocurrencies such as bitcoin is as an investment. There is a school of thought that cryptos provide a hedge against inflation.

To be such a beast, they must provide a store of value into the future, meaning they are worth the same or more with time. Further, they must be exchangeable for things like gold, U.S. dollars, etc. Lastly, they must have limited supply increases over time.

Bitcoin, for example, has a capped limit of 21 million. There are currently around 19.7 million bitcoins. Every 10 minutes, approximately 6.25 bitcoins are mined and put into circulation. The limit is not expected to be reached until 2140.

This scarcity may make bitcoin more expensive as the limit draws closer, but that's purely hypothetical.

Advantages of cryptocurrency

Three of the most significant advantages of cryptocurrency are accessibility, transaction speed and transparency.

Market hours for cryptocurrency are 24 hours a day, seven days a week. Whether you're in your living room at three in the morning in the U.S. or traveling overseas, you can buy and sell digital assets without any concern your crypto exchange will be closed. It's always open.

The benefits of this accessibility to crypto beginners are debatable. However, cryptocurrencies have always been about democratizing finance.

Anyone, anywhere, at any time can make a trade. That's what makes it appealing to investors. Market participants have always been interested in faster and, where humanly possible, cheaper transactions.

In the case of cryptocurrencies, faster transaction speeds are critical because they influence the overall adoption of cryptocurrencies.

"For example, if it takes 10 minutes for a bitcoin transaction to be confirmed, it may not be practical for buying a cup of coffee," wrote The Baltic Times in an April 2023 article about cryptocurrency scalability and transaction speeds.

Transparency is a critical benefit of cryptocurrencies too. According to Bitcoin.org, all bitcoin transactions are public, traceable and permanently stored in the bitcoin network. Bitcoin addresses are the only information used to define where bitcoins are allocated and where they are sent.

And open-source code provides real-time, accurate results for auditors. That's essential for regulators seizing cryptocurrency used in criminal activities.

"According to the Financial Action Task Force (FATF), seizure rates of illicit funds within the traditional financial system are around 0.1% – meaning regulators have recaptured about one-thousandth of the funds known to have been used for criminal activity.

The seizure rate for crypto: 27%, according to [Uniswap Legal Chief Salman] Banaei," Consensus magazine deputy managing director Daniel Kuhn wrote in April 2023.

Disadvantages of cryptocurrency

Anything that purports to decentralize finance is going to attract scrutiny in countries with well-developed financial systems based on the rule of law and incumbents who enjoy the stability such systems provide.

And so it is that crypto and bitcoin and the exchanges that enable their transfer have come to the attention of regulators.

Indeed, in early June 2023, the SEC sued Binance and Coinbase Global (COIN), the world's two largest cryptocurrency exchanges.

But we're 18 months along in the SEC's litigation against the crypto exchanges. We're unlikely to see a ruling on the merits in either case until at least late in 2025 or early in 2026. And then there's the appeals process.

All this, of course, assumes the SEC under new, Trump-appointed leadership will continue to pursue the litigation.

If you're new to cryptocurrency, it's crucial to understand that the industry is still relatively young, and it remains in transition. Even amid favorable broad trends there remain many regulatory challenges.

This makes any investment – including in diversified crypto ETFs – potentially volatile and marked by above-average risk.

Will has written professionally for investment and finance publications in both the U.S. and Canada since 2004. A native of Toronto, Canada, his sole objective is to help people become better and more informed investors. Fascinated by how companies make money, he's a keen student of business history. Married and now living in Halifax, Nova Scotia, he's also got an interest in equity and debt crowdfunding.