Cryptocurrencies – often abbreviated to ‘crypto’ – are a novel form of currency that is acquired and exchanged digitally.
Cryptocurrencies are “designed to operate outside the direct control of central banks or single entities”, says Rahul Bhushan, managing director at ARK Investment Management. “It’s powered by cryptography and recorded on public, distributed ledgers called blockchains.”
There are currently 19.45 million cryptocurrencies in existence, according to CoinMarketCap, though other sources put the total number in the tens of thousands (the discrepancy likely depends to a large extent on how loose a definition of cryptocurrency is being used). Some of the most popular are Ethereum, Solana and Binance Coin (BNB) but the best known by far is Bitcoin.
Sign up to Money Morning
Don’t miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don’t miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Bitcoin was invented in 2008, but the price of a single Bitcoin didn’t pass $1 until 2011. At time of writing (27 August 2025), one Bitcoin is now worth $111,022.33, an increase of 11,102,133% over the last 14 years, or an annualised return of 129.29%.
That makes Bitcoin one of the best-performing asset classes during that period (possibly the best) and has, understandably, sparked huge interest in cryptocurrencies among investors.
But critics view crypto as an inherently valueless asset, and point to concerns that cryptocurrencies are often used by criminal organisations.
You might be thinking about investing in crypto, but before doing so it is important to understand how cryptocurrencies work and the risks involved.
How does crypto work?
Cryptocurrencies run on blockchain technology. A blockchain is effectively a decentralised database. It stores information across a network of computers or servers. It makes data immutable – meaning that it cannot be altered.
“While some networks are more decentralised than others, most aim to run on open protocols where anyone with an internet connection can participate,” says Bhushan.
While often conflated, crypto and blockchain are two different things. Blockchain is the underlying technology, and it has other applications beyond cryptocurrencies. For example, it is often used in supply chain management: the ability to create immutable records of every stage of a supply chain can improve its efficiency and transparency. Crypto, on the other hand, refers specifically to the digital currencies that are traded using blockchain technology.
Each cryptocurrency has its own unique features, but in general they have to be ‘mined’. Crypto miners are effectively vast data centres that deploy massive amounts of computing power in order to solve complex cryptography problems – from which crypto derives its name. This process is often referred to as ‘proof of work’ and is the traditional way in which units of cryptocurrency come into existence.
Why is crypto so popular?
Crypto has always been popular among people who want their money to be independent of any form of influence either from nation states or the traditional banking system. This has led to a number of stereotypes emerging, for example the myth that it is only used by criminals.
But there are some advantages to crypto beyond its inherent privacy and libertarian appeal.
Firstly, it can operate as a means of exchange that doesn’t rely on proprietary infrastructure (such as Mastercard’s or Visa’s technology). This can make it a cheaper means of exchanging money internationally, and blockchain technology is viewed by many as a more secure method of exchange.
Secondly, it is perceived to be a hedge against inflation. Fiat currencies tend to depreciate in value over time because central banks can (and do) push more currency into the supply. Cryptocurrencies, though, tend to be resistant to inflation because their supply is more limited.
There will, for example, only ever be 21 million Bitcoins mined thanks to how it was designed. The rate at which new Bitcoins come into existence also halves approximately every four years, in an event known as the Bitcoin halving, which further limits the supply of Bitcoin. As of June 2025 there were around 1.5 million more Bitcoins to mine – but because of the halving, it is expected to take until 2140 to mine them all.
Bitcoin is “often compared to digital gold because of its limited supply and potential as a store of value”, says Bhushan.
Crypto’s independence from central banks and the global economic system more broadly also makes it popular in some developing economies who are frequently stung by volatile shifts in currency exchange rates, especially against the dollar.
Should you buy crypto?
Cryptocurrencies are hugely volatile assets. Bitcoin is something of an outlier in having posted consistent gains for more than a decade, and even then it has seen multiple periods of rapid declines along the way.
Ethereum (the second-largest cryptocurrency by market capitalisation) has gained over 1,000% in the last five years, and recently reached an all-time high of $4,955.90.
But during this time it has fluctuated wildly. Between November 2021 and June 2022 Ethereum fell from its peak (at around $4,600) to just over $1,000. It recovered to above $4,000 by December 2024 before falling to below $1,600 by March 2025.
Bitcoin and Ethereum are two of the more stable cryptocurrencies. Smaller, more niche ones can be even more volatile, and unlike Bitcoin and Ethereum, there is little mainstream institutional buy-in (in the form of crypto ETPs) to support demand.
Additionally, there are some security risks. Crypto buyers are often targets for scams, and exchanges like Coinbase make promising targets for cyber attackers.
So while investing in crypto has undoubtedly paid off for many people, particularly early adopters of Bitcoin, new entrants should proceed with caution and consider how much of their investment they would be prepared to lose in the event of a sudden crash in the price.
This article is intended for information purposes only and should not be considered financial advice.
