Cryptocurrencies: Everything You Need to Know Before Investing

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Cryptocurrencies have taken the financial world by storm, with Bitcoin leading the charge as the most recognized digital asset. Recently, Bitcoin surged to an all-time high of $42,000—nearly six times its value the previous year—only to drop to $29,000 within a week. This kind of volatility keeps investors on edge, yet interest in cryptocurrencies continues to grow. From football clubs making player signings using digital coins to global payment platforms embracing crypto, the momentum is undeniable.

But what exactly are cryptocurrencies? How do they work? And more importantly—can you trust them with your money?

What Is a Cryptocurrency?

A cryptocurrency is a digital or virtual currency secured by cryptography and built on blockchain technology—a decentralized, distributed ledger that records all transactions across a network of computers. Unlike traditional money controlled by central banks, cryptocurrencies operate without a single authority. Instead, independent validators (often called miners or nodes) verify and approve transactions.

Each cryptocurrency exists as a unique digital file, accessible through specialized software wallets used to store, send, and receive funds. According to Jorge Soriano, co-founder and CEO of Criptan, a cryptocurrency trading and custody platform, digital currencies represent “a new form of money that changes how we interact with value.”

Bitcoin was among the first cryptocurrencies, introduced in 2008 by the mysterious Satoshi Nakamoto amid the global financial crisis. Whether Nakamoto is an individual or a group remains unknown. That year, a whitepaper titled Bitcoin: A Peer-to-Peer Electronic Cash System sparked widespread debate and led to the development of open-source software enabling direct digital transactions—without intermediaries.

The vision? A decentralized currency free from central control, transaction fees, and elite decision-making.

How Many Cryptocurrencies Exist?

As of now, over 7,000 cryptocurrencies are available worldwide, according to CoinMarketCap. While most remain niche or experimental, several dominate the market:

Bitcoin still controls the largest share of market capitalization, followed closely by Ethereum.

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What Are Cryptocurrencies Used For?

While many buy crypto as an investment, they were originally designed as a digital payment method. Today, real-world adoption is growing:

These milestones signal a shift from speculative asset to functional currency.

How to Buy Cryptocurrencies

There are three main ways to acquire cryptocurrencies:

  1. Purchase them through exchanges or brokers.
  2. Receive them as payment for goods or services.
  3. Mine them by solving complex mathematical problems using high-powered computers.

Mining is dominated by large-scale operations known as “whales,” often running massive data centers—referred to as mining farms. Jesús Pérez, founder of Crypto Plaza and director at Digital Assets Institute, notes: “There are entire warehouses filled with computers dedicated solely to mining.”

For most people, buying through regulated platforms is safer and more accessible. Some even use cryptocurrency ATMs. Always check fees and security features before choosing a provider. Once purchased, each user receives a private key—a unique password that must be stored securely.

What Determines the Value of Bitcoin?

Bitcoin has no fixed value. Its price fluctuates based on supply and demand. In early 2020, it traded around $7,000. By January 2021, it hit $42,000—only to dip below $29,000 a week later. It quickly rebounded to $31,000 days after.

This volatility means investors must stay informed. Real-time pricing can be tracked on financial data platforms or crypto market trackers.

Should You Invest in Cryptocurrencies?

Yes—but with caution. The crypto market is highly speculative and prone to rapid swings. Experts generally consider Bitcoin and Ethereum the safest entry points due to their established networks and widespread adoption.

Bitcoin ranks as the seventh-highest capitalized asset globally—surpassing companies like Amazon or Google in market value—with around $700 billion in circulation. However, remember the golden rule of investing: past performance does not guarantee future results.

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Where Are Cryptocurrencies Stored?

Cryptocurrencies are stored in digital wallets (crypto wallets), which come in several forms:

Statista reports over 64 million crypto wallets globally. While self-custody offers full control, many prefer leaving assets with trusted custodians for added security.

Is There Regulation Around Cryptocurrencies?

Regulation varies globally. The European Union recognizes Bitcoin and other cryptos as legal payment methods—equal in status to the euro—since 2015. However, Christine Lagarde, President of the European Central Bank (ECB), has expressed concerns over Bitcoin’s speculative nature and called for tighter oversight.

In response, the ECB is developing a digital euro—not a cryptocurrency, but a central bank digital currency (CBDC) with the same value as physical cash. Trials involve testing tokenized money distribution via the Red-i platform, aiming to enhance digital payments and support programmable finance.

Spain requires all crypto-related income or expenses to be declared in annual tax filings. A 2020 anti-fraud bill mandates reporting of crypto balances and transaction details.

Outside the EU:

Advantages of Cryptocurrencies

Experts highlight several key benefits:

Risks of Investing in Cryptocurrencies

Despite their potential, cryptocurrencies carry significant risks:

1. Volatility

Prices can swing dramatically within hours. While stablecoins like USDC or DAI (pegged to the dollar or euro) offer less risk, most cryptos are highly unpredictable.

2. Loss of Private Keys

If you lose your wallet’s private key, access is gone forever. Chainalysis estimates that between 17% and 23% of all Bitcoins are lost, often due to forgotten passwords or discarded hard drives.

One infamous case involved a U.S. programmer who lost a hard drive containing 7,002 Bitcoins—worth over €220 million today.

3. Irreversible Transactions

Once sent, crypto transactions cannot be canceled or reversed—even if sent to the wrong address.

4. Scams and Cybercrime

Cryptocurrency fraud is rampant. CipherTrace reported that cybercriminals stole over $4.26 billion in digital assets in 2020 alone.

Frequently Asked Questions (FAQ)

Q: Can I lose all my money investing in cryptocurrencies?
A: Yes. Due to extreme volatility and lack of regulation in some regions, total loss is possible. Always invest only what you can afford to lose.

Q: Are cryptocurrencies legal in most countries?
A: Most countries allow ownership and trading, but regulations vary. Some ban financial institutions from handling crypto, while others embrace it.

Q: How do I keep my crypto safe?
A: Use strong passwords, enable two-factor authentication, store keys offline (e.g., hardware wallets), and avoid sharing sensitive information online.

Q: Will Bitcoin ever replace traditional money?
A: Unlikely in the near term. While adoption grows, widespread replacement would require global regulatory alignment and infrastructure changes.

Q: Are crypto gains taxable?
A: In most jurisdictions—including the U.S., EU, and UK—crypto profits are subject to capital gains tax. Always report transactions accurately.

Q: Can I earn interest on my cryptocurrencies?
A: Yes—through staking or lending platforms that offer yield on holdings. However, these come with their own risks, including platform failure or fraud.

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