Cryptocurrency is one of the most polarizing topics in investing. Some people believe it is the future of money. Others think it is pure speculation. For beginners, the truth is somewhere in between, and understanding the basics helps you make your own informed decision.
What Cryptocurrency Is
Cryptocurrency is digital money that uses cryptography (mathematical encryption) to secure transactions and control the creation of new units. It operates on decentralized networks, meaning no single bank, government, or company controls it.
The most well-known cryptocurrency is Bitcoin, created in 2009. Since then, thousands of others have been created, including Ethereum, Solana, Cardano, and many more.
How It Differs from Stocks
When you buy a stock, you are buying ownership in a company that generates revenue, earns profits, and has tangible assets.
When you buy cryptocurrency, you are buying a digital asset. Most cryptocurrencies do not generate revenue or profits. Their value is based on supply, demand, utility, and market sentiment.
This fundamental difference matters for how you evaluate each investment type.
Key Concepts
Blockchain: The technology underlying most cryptocurrencies. It is a distributed ledger that records all transactions across a network of computers. Once a transaction is recorded, it cannot be altered.
Wallet: Where you store cryptocurrency. Can be software-based (app or browser extension) or hardware-based (physical device).
Exchange: Where you buy and sell cryptocurrency. Similar to a stock brokerage but for digital assets.
Volatility: Cryptocurrency prices can swing 10-20% or more in a single day. This is significantly more volatile than most stocks.
What Beginners Should Know
It is highly volatile. The same Bitcoin that went from $69,000 to $16,000 (a 77% drop) between 2021 and 2022 later recovered and exceeded its previous high. If you cannot handle that kind of volatility, crypto may not be right for you.
Not all cryptocurrencies are the same. There are thousands of cryptocurrencies, and most of them will eventually become worthless. Bitcoin and Ethereum are fundamentally different from a random token someone created last week.
Regulation is evolving. Cryptocurrency regulation varies by country and is changing rapidly. Tax treatment, reporting requirements, and legal status are all still developing.
Security is your responsibility. If you lose access to your crypto wallet or send cryptocurrency to the wrong address, there is no bank to call for help. Self-custody means self-responsibility.
Only invest what you can afford to lose entirely. This applies to all investing, but especially to cryptocurrency given its volatility and the number of projects that have gone to zero.
How It Fits in a Portfolio
Many financial educators suggest that if you choose to invest in cryptocurrency, it should be a small portion of a diversified portfolio, typically 1% to 5%. This lets you participate in potential upside while limiting the impact if it goes to zero.
This is not a recommendation. It is a common framework used by investors who include crypto in their portfolios.
The Progressive Trailblazer includes cryptocurrency portfolio tracking alongside traditional stock holdings. Educational only. Not financial advice.