What is cryptocurrency? A beginner’s guide
Editorial staff, J.P. Morgan Wealth Management
- Cryptocurrencies are digital currencies that can be used in a variety of ways, including as an investment vehicle, as a store of value, for peer-to-peer transactions, and as payments for goods and services.
- Cryptocurrencies are generally considered high-risk compared to other types of investments.
- Investing in cryptocurrency-focused exchange-traded funds (ETFs) – which you can buy and hold in a brokerage account – can be much simpler than buying cryptocurrency directly.
Cryptocurrency, which started as a fringe technology, is now seemingly everywhere. Some pundits are urging investors to allocate a larger portion of their investable assets to cryptocurrency, while others have decried the phenomenon, calling it a bubble.
If you’re interested in learning the basics of cryptocurrency, how to go about investing in it and how to understand its associated risks and opportunities, keep reading.
First things first: What is cryptocurrency?
To understand what cryptocurrency is, you first need to understand what it's not: fiat currency. Fiat currency – or government-issued currency – is not backed by a physical commodity like gold and therefore has no intrinsic value. Rather, fiat currency derives its value from the trust and confidence that people have in the government that issues it and the belief that others will continue to accept it.
Cryptocurrency operates differently. Generally, cryptocurrency refers to digital currency that is not controlled by a single government or entity, relying instead on cryptography. Cryptocurrency operates on blockchain technology, a digital ledger that records all transactions across a network of computers.
There are thousands of individual cryptocurrencies. Bitcoin, widely recognized as the world’s first cryptocurrency, is the largest by market cap at over $2.3 trillion as of August 3, 2025.
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What kinds of cryptocurrency are there?
There are several types of cryptocurrency, including the following:
- Payment tokens: This form of cryptocurrency is designed for everyday transactions. Most well-known cryptocurrencies fall into this category; bitcoin, for example, is generally considered a payment token.
- Utility tokens: This form of cryptocurrency grants holders access to specific products, services or functions within a blockchain. Ethereum and solana are considered utility tokens.
- Stablecoins: Stablecoins are a form of cryptocurrency created to uphold a consistent value, often linked to a particular asset such as a fiat currency (e.g., the U.S. dollar) or commodities like gold. It’s important to note that stablecoins are not insured by the Securities Investor Protection Corporation (SIPC) or the Federal Deposit Insurance Corporation (FDIC). They can also be unpredictable and volatile, similar to other forms of cryptocurrency.
- Central bank digital currencies: These are government-issued digital versions of national currencies.
How can you buy and invest in cryptocurrency?
You can buy and invest in cryptocurrency in various ways. For example, you can buy it via a cryptocurrency exchange. Alternatively, if you don’t want to invest directly in cryptocurrency, you can invest in cryptocurrency-focused ETFs using a traditional brokerage account. You can also gain exposure by investing in stocks of companies that operate in the cryptocurrency space, be those publicly traded cryptocurrency exchanges or companies developing cryptocurrency technologies.
- Direct cryptocurrency investment: Depending on the type, cryptocurrency can be acquired through mining, proof-of-stake or direct purchase. Most people who acquire cryptocurrency buy it directly. Cryptocurrency is available for purchase on cryptocurrency exchanges, some conventional investment platforms and even certain mobile payment service applications.
- Cryptocurrency ETFs: Cryptocurrency ETFs are investment funds traded on stock exchanges that allow investors to gain exposure to cryptocurrency without directly owning the digital assets themselves. The funds may track the price of one or more cryptocurrencies, or hold a basket of assets including cryptocurrencies and cryptocurrency-related stocks.
- Cryptocurrency-related stocks: Investors can also consider cryptocurrency-related stocks for their portfolio. These might include cryptocurrency exchanges or technology companies with cryptocurrency exposure, such as those that manufacture hardware essential for cryptocurrency mining.
What are the opportunities and risks of investing in cryptocurrencies?
All investing involves risk, including strategies that have historically been considered “safe.”
Let’s consider cryptocurrency strictly from an investment perspective. For example, there’s the risk that comes with buying and holding such a new and volatile asset. Take bitcoin, widely considered the most “mature” cryptocurrency: It had a low of $1 in 2011 and a high of over $120,000 per coin in 2025 (as of August 2025), with constant and unpredictable fluctuations throughout the year. However, it has often outperformed the market. It’s important to note that past performance is not a guarantee of future results.
From a safety and security perspective, there’s the risk of someone gaining unauthorized access to your cryptocurrency and potentially stealing it, which is why some holders take extra precautions when it comes to storage.
Beyond volatility and security concerns, there are a host of other risks associated with cryptocurrency. Some – but not all – of these include lack of investor protections, liquidity risk with thinly traded tokens that may be hard to sell, and fraud and scams in the digital asset space.
Like all investment choices, deciding if and how much to invest in cryptocurrencies comes down to assessing your risk tolerance.
The bottom line
Cryptocurrency is a complex topic, and investors should buy it only if they understand and can accept the risks – and other potential downsides – that come with it. Because cryptocurrency is relatively new, you may want to be wary about devoting a large percentage of your investment portfolio to it. And remember, buy only what you can comfortably afford to lose.
Frequently asked questions about how cryptocurrency works
If you want to buy cryptocurrency directly, you may decide to go to a specialized website known as a cryptocurrency exchange to do so. On a cryptocurrency exchange, you can deposit money from a bank account to purchase cryptocurrency.
There are two basic kinds of exchanges: centralized and decentralized exchanges. Centralized exchanges are operated by companies, while decentralized exchanges use blockchain technology to enable peer-to-peer trading.
If you prefer to hold your digital assets outside of an exchange, you can also choose to store your cryptocurrency in a separate “wallet.”
You’ve probably heard of blockchain, which is the technology that makes cryptocurrency possible. More specifically, blockchain technology is a distributed ledger system, or shared database, that maintains transactional records. Transactions are grouped into “blocks,” and each block is connected to the previous one by a unique identifier. If data is changed in one block, the unique identifier changes, creating a domino effect visible in every subsequent block. This can serve as evidence of any potential tampering to all within the blockchain.,
The technology operates on a distributed network of computers, using encryption as well as public and private keys to maintain security.
Since cryptocurrency transactions occur on a blockchain, records such as transaction amounts and senders’ and recipients’ cryptocurrency wallet addresses may be visible if on a public blockchain.
When you own cryptocurrency directly, storage is accomplished through cryptocurrency “wallets,” which technically don’t hold your cryptocurrency but rather the private keys that give you control over it. Public keys are shared and allow you to receive funds, while private keys are the ones that allow you to authorize transactions.
Types of cryptocurrency wallets include the following:
- Hardware wallets: Sometimes called cold wallets, these are physical devices specifically designed to store your private cryptographic keys, which you need to access your cryptocurrency.
- Software wallets: Sometimes called hot wallets, these are applications on your computer or smartphone that store your cryptographic keys so you can access your cryptocurrency. One type of software wallet is a web wallet, which is an online service that stores your cryptocurrency keys on its servers.
Some cryptocurrency holders opt to store their cryptocurrency on exchanges. Keeping your cryptocurrency on exchanges can be convenient for trading but likely means you won’t have access to your private keys.
As with other types of investments, you may have to pay taxes on any profit you receive after selling cryptocurrency, even if the profits are used to buy more cryptocurrency. According to the IRS, you can pay either capital gains taxes or ordinary income taxes on cryptocurrency. Consult a tax professional or accountant to understand your tax burden.
Editorial staff, J.P. Morgan Wealth Management
