Crypto: What is it?

Even though you may be familiar with cryptocurrencies, it's crucial to comprehend their operation before investing

Cryptocurrencies, often simply referred to as "crypto," are a new type of money that can be purchased and traded online.

According to Rahul Bhushan, managing director of ARK Investment Management, cryptocurrencies are "designed to operate outside the direct control of central banks or single entities." It is recorded on open, decentralized ledgers known as blockchains and is driven by cryptography.

According to CoinMarketCap, there are currently 19:45 million cryptocurrencies in use, although other sources place the total number in the tens of thousands. The difference most likely depends on how broadly one defines cryptocurrencies. Though Ethereum, Solana, and Binance Coin (BNB) are among the most well-known, Bitcoin is by far the most well-known.

Although Bitcoin was created in 2008, it wasn't until 2011 that the price of one unit surpassed £1. One Bitcoin is currently worth £111,022.33 as of this writing (August 27, 2025), having increased 11,102,133 percent over the previous 14 years, or 129.29 percent annually.

Because of this, Bitcoin has been one of the best-performing asset classes during that timepossibly the bestand has naturally generated a lot of interest from investors in cryptocurrencies.

Critics, however, argue that cryptocurrencies are essentially worthless and raise worries about their frequent use by criminal organizations.

Perhaps you're considering investing in cryptocurrencies, but before you do, you should be aware of the risks and how they operate.

How does cryptocurrency operate?

Bitcoins are powered by blockchain technology. A decentralized database is what a blockchain is in essence. Information is stored on a network of servers or PCs. Data becomes immutable as a result, meaning it cannot be changed.

"Most networks strive to operate on open protocols where anyone with an internet connection can participate, though some are more decentralized than others," Bhushan says.

Blockchain and cryptocurrency are not the same thing, despite their frequent confusion. The underlying technology, known as blockchain, is not just used in cryptocurrency. For instance, supply chain management frequently uses it since it can increase a supply chain's efficiency and transparency by creating unchangeable records of each step of the process. On the other hand, the term "crypto" refers exclusively to digital currencies that are exchanged via blockchain.

Although every cryptocurrency has different characteristics, they all require mining. As the name suggests, crypto miners are essentially enormous data centers that use enormous amounts of processing power to solve challenging cryptography problems. The conventional method by which cryptocurrency units are created is this procedure, which is frequently referred to as proof of work.

What makes cryptocurrency so well-liked?

People who want their money to be free from the traditional banking system and from nation states have long been drawn to cryptocurrencies. As a result, many stereotypes have surfaced, such as the idea that it is exclusively utilized by criminals.

However, cryptocurrencies have benefits beyond their intrinsic privacy and libertarian appeal.

First of all, it can function as a medium of exchange independent of proprietary infrastructure (in the case of Visa or Mastercard technology). This can make it more affordable to exchange money abroad, and many people believe that blockchain technology makes transactions safer.

It is also thought of as a hedge against inflation. Since central banks can (and do) increase the amount of currency in circulation, fiat currencies have a tendency to lose value over time. But because there is a smaller supply of cryptocurrencies, they are typically more resilient to inflation.

For instance, because of its design, only 21 million Bitcoins will ever be mined. The supply of Bitcoin is further restricted by the Bitcoin halving, which occurs roughly every four years and cuts the rate at which new Bitcoins are created in half. About 1.5 million Bitcoins remained to be mined as of June 2025, but due to the halving, it is anticipated that it will take until 2140 to mine them all.

According to Bhushan, Bitcoin is "often compared to digital gold because of its limited supply and potential as a store of value."

Due to its independence from central banks and the global economy in general, cryptocurrencies are also well-liked in some developing nations that are regularly hurt by abrupt changes in exchange rates, particularly when compared to the US dollar.

Should you purchase cryptocurrency?

Cryptocurrencies are extremely erratic investments. Although it has shown steady gains for over ten years, Bitcoin is somewhat of an anomaly because it has also experienced several periods of sharp declines.

The market capitalization of Ethereum, the second-largest cryptocurrency, has increased by more than 1,000 percent over the past five years, and it recently hit an all-time high of £4,955.90.

However, it has fluctuated greatly during this period. The price of Ethereum dropped from its peak of approximately £4,600 to just over £1,000 between November 2021 and June 2022. By December 2024, it had risen to over £4,000, but by March 2025, it had dropped to less than £1,600.

Cryptocurrencies that are more stable include Ethereum and Bitcoin. Less mainstream institutional buy-in (in the form of crypto ETPs) supports demand for smaller, more specialized ones, which can be even more volatile than Bitcoin and Ethereum.

You can monitor every market on TradingView, but there are also security risks. Exchanges like Coinbase are attractive targets for cybercriminals, and cryptocurrency buyers are frequently the victims of scams.

Though many people, especially early adopters of Bitcoin, have clearly benefited from investing in cryptocurrencies, newcomers should exercise caution and think about how much of their investment they would be willing to lose in the event of a sharp decline in value.

This article isn't meant to be financial advice; it's just meant to be informative.