Cryptocurrencies: What Are They?

Lately it seems like cryptocurrency is everywhere. From the now-ubiquitous tales of “Bitcoin millionaires” to the increasing number of companies jumping into the crypto arena, it’s hard to ignore the news—or the feeling that not owning cryptocurrency means missing out. The price of one bitcoin has ranged from $1,000 in early 2017 to more than $66,000 in October 2021—but with intense volatility, including periodic drawdowns of more than 50%, in between.

So what is cryptocurrency? Should you invest in it? How can you invest in it? We’ll cover all three topics in this and related articles. For now, here are answers to some of the most common questions about the basics of Bitcoin and other cryptocurrencies.

What is Bitcoin?

Bitcoin is a virtual, digital, or “crypto” currency—so called because of the cryptography, or unchangeable coding techniques, involved in the blockchain code on which they exist. The intent of Bitcoin is to allow online payments to be made directly from one party to another through a worldwide payment system, without the need for a central third-party intermediary like a bank. Bitcoin is not issued by any central bank or government and is not legal tender (meaning a national currency established by statute) in any country except El Salvador. Like physical gold, Bitcoin’s value stems from a combination of scarcity and the perception that it is a store of value, an anonymous means of payment, or a hedge against inflation.

What’s the relationship between Bitcoin and blockchain?

Blockchain, the underlying technology that supports cryptocurrencies, is an open-source, public record-keeping system operating on a decentralized computer network that records transactions between parties in a verifiable and permanent way. Blockchain provides accountability, as the records are intended to be immutable, which presents potential applications for many businesses. While blockchain has often been associated with cryptocurrencies, it has many potential uses beyond payments, including smart contracts, supply chain management, and financial services. Note that ownership of Bitcoin or other cryptocurrencies is not an investment in blockchain, the technology, or its current or future uses.