What is Cryptocurrency? A Basic Guide to Digital Assets

Key Takeaways:

• Cryptocurrency is a Decentralised Digital Currency: Cryptocurrencies are digital assets that use blockchain technology to enable peer-to-peer transactions without banks or intermediaries. The first and most well-known Bitcoin paved the way for thousands of other coins and tokens.
• Blockchain Ensures Transparency and Security: Every cryptocurrency transaction is recorded on a blockchain public ledger, making it secure, traceable, and tamper-resistant. This technology is the foundation of trust in the crypto ecosystem.
• Cryptos Serve Multiple Purposes Beyond Payments: While some cryptocurrencies are used as digital money, others power decentralised applications, smart contracts, and digital economies. Investors, developers, and users engage with crypto for diverse reasons—from trading and Bitcoin Investing to gaming and finance.

Cryptocurrencies have transformed the financial landscape, enabling peer-to-peer transactions, reducing reliance on banks, and opening new opportunities for innovation in areas such as payments, lending, and asset management. The method you select will ultimately depend on your objectives and level of technical know-how.

What is Cryptocurrency?

Cryptocurrency is a type of digital money that exists only online and isn’t controlled by any central authority like a government or bank. Instead, it operates on blockchain, a public, secure, and transparent ledger shared across many computers. As of April 2025, there have been 17,134 cryptocurrencies in existence globally, with over 560 million crypto users globally. 

At its core, crypto is decentralised, meaning no single person or institution has complete control over it. This sets it apart from traditional currencies like the dollar or euro, which are issued and managed by central banks. Over 18,000 cryptocurrencies are accepted as payment by businesses worldwide.

Digital assets that use cryptographic technology are complex mathematical codes that secure transactions and control the creation of new coins. This makes them resistant to counterfeiting and government interference, making them highly secure and nearly impossible to counterfeit.

In simple terms, crypto is:

• Digital: It exists only in electronic form.
• Decentralised: No central authority governs it.
• Secured by cryptography: Your money and transactions are protected through advanced encryption.
• Peer-to-peer: You can send or receive payments directly, without middlemen.

Examples include Bitcoin (BTC), Ethereum (ETH), and many others, each with different purposes but built on the same foundational ideas of openness, security, and freedom from centralised control.

How Does Cryptocurrency Work?

Behind the scenes, cryptocurrencies run on a combination of smart technology and network cooperation. Here’s a simplified look at how it all works:

1. The Network: A Decentralised System

Cryptocurrencies operate on a blockchain network, a large group of computers (called nodes) spread worldwide. Instead of one central server (like a bank), every node has a copy of the entire transaction history. This makes the system decentralised, transparent, and hard to tamper with.

2. Transactions: How Money Moves

When you send crypto to someone, you’re creating a transaction. This transaction includes:

• Your digital signature (proof it’s you),
• The amount you’re sending,
• The receiver’s wallet address.

Your transaction is then broadcast to the network for approval.

3. Validation: Ensuring Its Legit

Before your transaction is added to the blockchain, it must be verified. Nodes (computers) use a process called consensus to do this.

There are a few ways this happens, but the most common are:

• Proof of Work (PoW): Computers solve complex puzzles to confirm transactions (used by BTC).
• Proof of Stake (PoS): Validators are chosen based on how much cryptocurrency they “stake” as a kind of security deposit (used by Ether 2.0 and others).

Once verified, the transaction is bundled into a block permanently and unchangeably added to the blockchain.

4. Security and Trust

Because every node has a copy of the blockchain and all changes must be agreed upon, it’s nearly impossible for someone to cheat the system. That’s why trust is built into the technology, not placed in a single authority.

In short:

• You send money →
• Network checks it →
• Transaction is approved and recorded →
• Everyone sees and agrees it’s legit.

Blockchain Technology

Imagine a blockchain as a digital ledger or notebook—shared by thousands of people—that records every transaction made with crypto. Everyone has a copy; once something is written, it can’t be erased or changed. Here’s a simple breakdown of how it all functions:

1. Recording Transactions: The Ledger Starts

When you send or receive crypto, you’re creating a transaction. This includes details like:

• Who sent it (your wallet address)?
• Who received it?
• How much was sent?

This transaction is shared with the blockchain network and is waiting to be confirmed.

Entity Attribute Value:

• Cryptocurrency – Operate on – Blockchain network
• Transaction – Includes- Digital signature, amount, wallet address
• Nodes – Function as – Distributed computers
• BTC – Uses- PoW
• Ether 2.0 – Uses – PoS

2. Adding a Block: Building the Chain

Transactions don’t go directly onto the blockchain one by one. Instead, they are grouped into blocks, like pages in that digital notebook.

Once a block fills up with a group of verified transactions, it’s:

• Validated by the network (through consensus methods like Proof of Work or Proof of Stake),
• Given a unique code (called a hash),
• Linked to the previous block by including the last block’s code (hash).

This connection forms a chain of blocks—hence the name “blockchain.”

3. Why It’s Secure: Locked With Math

Each block contains its unique cryptographic fingerprint (hash), plus the fingerprint of the block before it. If someone tries to change anything in a block—even just one number—it changes the block’s fingerprint, which breaks the entire chain.

Because this chain is copied across thousands of computers and constantly checked for consistency, it’s nearly impossible to cheat. Everyone would know immediately if something doesn’t match.

4. Why It’s Transparent: Everyone Can See

Blockchains are public. Anyone can view the entire history of transactions. Even though wallet addresses are anonymous, the movement of funds is visible. This builds trust because:

• You don’t need to rely on a middleman,
• The system keeps everyone honest,
• Everything is open and traceable.

In short:

• Transactions are grouped into blocks.
• Blocks are linked together and locked with cryptographic codes.
• The whole network checks and agrees before anything is added.
• Once it’s in, it stays there permanently and transparently.

Consensus Mechanism

Cryptocurrencies use special methods to verify transactions and ensure no one cheats, keeping the system fair, secure, and running smoothly. The two most common are Proof of Work (PoW) and Proof of Stake (PoS). 

Proof of Work (PoW): Hard Work Pays Off

Think of Proof of Work like a race where powerful computers compete to solve a math puzzle.

• Whoever solves the puzzle first gets to add the following block of transactions to the blockchain.
• They earn some crypto (like a digital prize) as a block reward.
• This process requires a lot of energy and computing power, so it’s very hard to cheat—you’d need massive resources to fool the system.

Why it’s secure: It’s too expensive and complicated for bad actors to mess with the network, making it trustworthy.

Used by: Bitcoin (BTC) and some other older cryptocurrencies.

Proof of Stake (PoS): Trust Through Ownership

Proof of Stake works differently—it’s more like a lottery system where the more crypto you hold (or “stake”), the higher your chances of being chosen to validate the next block.

• Instead of racing, people lock up some of their coins as a sign of trust.
• The network randomly selects one of them to confirm transactions.
• If they do it honestly, they get rewarded. But if they try to cheat, they lose their staked coins.

Why it’s secure: People have something to lose if they misbehave, so it encourages good behaviour.

Bonus: PoS is more energy-efficient than PoW because it doesn’t require massive computing power.

Used by: Ether 2.0, Cardano, Solana, and many newer cryptocurrencies.

In Summary:

• Proof of Work = Solve puzzles with computing power.
• Proof of Stake = Earn trust by locking up your coins.
• Both methods help verify transactions and protect the network from fraud or tampering.

Proof of Work (PoW)

PoW is like a digital competition in which computers race to solve a challenging puzzle. The first one to solve it gets to add the next group of transactions to the blockchain and earns a reward (like BTC). It takes time, energy, and computer power, so cheating isn’t worth it. This “work” helps keep the network honest and secure.

Proof of Stake (PoS)

PoS is like putting your money down to show you can be trusted. Instead of racing with computers, people lock up (or “stake”) some of their crypto. The system then picks someone with more staked coins to verify the next group of transactions. If they play fair, they earn rewards. If they try to cheat, they lose their staked coins. It’s a more energy-efficient way to keep the network safe and honest.

Transactions and Wallets

Here’s a quick and simple breakdown on how people send, receive or store crypto:

Sending & Receiving Crypto

• You need the other person’s wallet address (like a digital bank account number) to send crypto.
• You enter the amount, hit send, and the network processes the transaction.
• To receive crypto, you give someone your wallet address, and they send the funds, and it shows up in your wallet.

Storing Crypto: Hot vs. Cold Wallets

Hot Wallets (Connected to the Internet):

• Easy to use for everyday transactions.
• Examples: Mobile apps, browser extensions, web wallets (like MetaMask or Coinbase Wallet).
• Convenient, but more exposed to online threats.

Cold Wallets (Offline storage):

• It is not connected to the internet, so it is super secure.
• Examples: Hardware wallets (like Ledger or Trezor) or paper wallets.
• Best for long-term storage or significant amounts of crypto.

In short:

You send/receive crypto using wallet addresses and store it safely using either hot wallets (for easy access) or cold wallets (for high security).

Entity Attribute Value:

• Block – Contains – Verified transactions and hash
• Blockchain – Formed by – Linked blocks with hashes
• Wallet – Stores – Cryptocurrency
• MetaMask – Is a – Hot wallet
• Ledger – Is a – Cold wallet

Common Types and Examples

Here’s an easy overview of the main types of digital assets you might come across:

Bitcoin (BTC)

Source

The first and most well-known cryptocurrency is  Bitcoin. It is also widely used as a store of value and for sending money without a third party like banks.

Altcoins (Alternative Coins)

Any crypto that isn’t Bitcoin (BTC).

• Ethereum (ETH): ethereum is a platform for building apps and smart contracts, like a programmable blockchain.
• BNB (Binance Coin): Used mainly on the Binance exchange for trading fees and services.

NFTs (Non-Fungible Tokens)

You can own, sell, or trade unique digital items—like art, music, or game assets. Each one is one-of-a-kind and lives on the blockchain.

CBDCs (Central Bank Digital Currencies)

Government-backed digital money—like a digital version of your country’s currency, but powered by blockchain tech. It is still being explored in many places.

Exchange Tokens

Cryptocurrencies are created by trading platforms (like BNB from Binance or UNI from Uniswap). They’re often used for discounts, voting, or rewards on that platform.

In short:

Bitcoin (BTC) started it all, Altcoins expanded it, NFTs made digital things ownable, and newer assets like CBDCs and exchange tokens pushed crypto into new areas.

Entity Attribute Value:

• BNB – Used on – Binance for fees and services
• NFTs – Represent – Unique digital assets
• CBDCs – Issued by – Governments as digital currencies

Cryptocurrency Strengths and Weaknesses

Benefits:

• Fast & borderless: Send money anywhere, anytime—no banks needed.
• High potential returns: Some investors have seen big profits.
• Ownership & control: You hold your own money, not a bank.
• Innovation: Access to new tech like NFTs, DeFi, and smart contracts.

Downsides:

• Volatile prices: Crypto values can rise or fall quickly.
• Security risks: Hackers target wallets and exchanges.
• Scams & fraud: The space still has shady projects and fake promises.
• Regulation uncertainty: Rules can change fast and vary by country.

In short:

Crypto offers freedom, innovation, and opportunity, but it also comes with risks, so it’s essential to learn before diving in.

Pros

Here are some key advantages of crypto, explained:

• Decentralisation: No single company or government controls it—you’re in charge of your own money.
• Lower Fees: Sending money, especially across borders, can be much cheaper than using banks.
• Financial Inclusion: Anyone with a phone and internet can access crypto, even without a bank account.
• Transparency: Every transaction is recorded on a public blockchain—nothing is hidden.
• Inflation Resistance: Some cryptocurrencies (like BTC) have limited supply, helping protect value over time.

In short:

Crypto gives people more control, lowers costs, and opens financial doors for those often left out.

Cons

Here are some drawbacks of crypto to keep in mind:

• Volatility: Prices can swing wildly—what’s up today might drop tomorrow.
• Lack of Regulation: Rules aren’t always clear, leading to uncertainty or legal risks.
• Scams & Fraud: Fake coins and shady projects can trick people out of their money.
• Limited Acceptance: You still can’t use crypto at most shops or businesses.
• Environmental Concerns: Some cryptocurrencies (like BTC) use energy to run their networks.

In short:

Crypto offers significant opportunities but comes with real risks, so staying cautious and informed is smart.

Entity Attribute Value:

• BTC – Has – Limited supply for inflation resistance
• Crypto – Offers – Decentralisation and financial inclusion
• Transactions – Recorded on – Public blockchain
• Wallets – Targeted by – Hackers
• Regulation – Varies by – Country and changes quickly

How to Buy and Store Cryptocurrency Safely

How to Acquire Crypto:

• Buy on Exchanges: Platforms like Coinbase, Binance, and Kraken let you buy crypto with traditional money (USD, EUR, etc.).
• Earn through Mining or Staking: If you’re tech-savvy, you can mine (solve puzzles to earn) or stake (lock up coins for rewards).
• Peer-to-Peer (P2P): You can buy directly from other people, but make sure it’s a trusted platform.

How to Protect Crypto:

• Use a Wallet: Store your crypto in a digital wallet—either a hot wallet for easy access or a cold wallet for extra security.
• Enable Two-Factor Authentication (2FA): Add an extra layer of protection to your exchange accounts.
• Backup Keys: Keep your private keys and recovery phrases safe and never share them.
• Be Cautious of Scams: Only use trusted platforms, and avoid phishing or shady offers.

In short:

Get crypto through exchanges or P2P, store it safely in wallets, and always take extra steps to protect your assets from theft or loss.

Ways to Buy

Here are some common ways to acquire crypto:

Exchanges:

• Coinbase, Binance, Kraken, Gemini: Popular platforms where you can buy, sell, and trade crypto with traditional money.

P2P Platforms:

• LocalBitcoins, Paxful: These platforms let you buy and sell crypto directly with other people, often using local payment methods.

Bitcoin ATMs:

• Available in many cities, Bitcoin (BTC) ATMs let you buy crypto with cash or debit cards, just like a regular ATM.

Payment Apps:

• Cash App, PayPal, Venmo: Some payment apps now let you buy, sell, and hold crypto directly within their platforms.

In short:

You can get crypto through exchanges, P2P platforms, BTC ATMs, or even payment apps—each offering a simple way to enter the crypto world.

Setting Up Wallets for Storage

Hot Wallets vs. Cold Wallets: What’s the Difference?

Hot Wallets (Online Storage):

• These are connected to the internet, making them easy to access and use for everyday transactions. They’re ideal for storing small amounts of crypto you want to trade or spend quickly.
  • Examples: Mobile wallets (like Trust Wallet), web wallets (like MetaMask), or exchange wallets (like Coinbase Wallet).
  • Risk: Being online means they’re more vulnerable to hacking.

Cold Wallets (Offline Storage):

• These are not internet-connected, so they’re much more secure. They’re best for storing larger amounts of crypto for long-term holding.
  • Examples: Hardware wallets (like Ledger or Trezor) or paper wallets.
  • Risk: Less convenient since they’re offline, but much safer from hackers.

How to Choose the Right One?

• A hot wallet works well for daily use and smaller amounts because it’s easy to access and use.
• A cold wallet is safer for long-term storage or larger amounts because it’s offline and protected from online threats.

In short:

Hot wallets are great for quick access and trading, while cold wallets are better for secure, long-term storage. Your choice depends on how often you need access and how much risk you will take.

Create Your Own

How to create a crypto (Without building a blockchain from scratch):

You don’t need to be a tech genius to create your crypto these days—thanks to existing blockchains like Ether, Binance Smart Chain (BSC), or Solana, you can build a coin or token right on top of them.

Here’s How It Works:

1. Choose a Blockchain Platform:
2. Pick a network that supports smart contracts—Ethereum (ETH) and BSC are popular choices.
3. Use Token Standards:
4. Create your coin using ready-made standards, such as ERC-20 (Ethereum) or BEP-20 (BSC). These set the rules for how your token behaves.
5. Write or Use a Smart Contract:
6. You can code your own or use online tools that help you generate one (like TokenMint or Remix). This smart contract defines your token’s name, symbol, supply, and rules.
7. Deploy It on the Blockchain:
8. Once ready, you publish your smart contract to the blockchain. Your crypto can be used, sent, or listed on platforms.

In short:

You can create crypto using existing blockchain platforms, write a smart contract (or use tools), and launch it without building everything from scratch.

Entity Attribute Value:

• Coinbase – Is a – Crypto exchange platform
• Ledger – Is a – Cold wallet for offline storage
• ERC-20 – Is a – Token standard on Ethereum
• TokenMint – Used for – Creating crypto tokens
• BSC – Supports – Smart contract deployment

What Can You Do With Cryptocurrency?

Crypto isn’t just for buying and holding—it has many real-world uses. Here’s a quick look at what you can do with it:

Make Payments & Transfers

You can send money instantly worldwide, often with lower fees than banks or remittance services. Many online stores and some physical businesses now accept crypto as payment.

Invest or Trade for Profit

Buy low, sell high—just like stocks. Some people trade crypto daily, while others invest long-term, hoping its value will grow.

Use in DeFi Platforms & Smart Contracts

Decentralised Finance (DeFi) lets you lend, borrow, earn interest, or swap tokens—no bank needed. Smart contracts automatically run these services’ rules securely and without middlemen.

Participate in Governance or Staking

Some cryptocurrencies let you vote on changes to the network (governance) or earn rewards by staking (locking up coins to support the network’s security and operations).

In short:

Crypto lets you pay, invest, earn, and even help shape the future of blockchain systems—all from your phone or computer.

Make Payments & Transfers

Crypto makes domestic and international payments faster, cheaper, and more accessible, especially compared to traditional banking systems.

Domestic Payments:

You can instantly pay friends, freelancers, or businesses using crypto without a bank.

• Example: Paying a local graphic designer in Ethereum (ETH) using a mobile wallet takes seconds and avoids bank delays or fees.

International Transfers:

Sending money across borders is one of crypto’s most significant advantages—there is no need for expensive wire transfers or currency conversions.

• Example: A worker in South Africa can send Bitcoin (BTC) to family in Nigeria without paying high remittance fees or waiting days for the funds to arrive.

Benefits at a Glance:

• Faster transactions (minutes instead of days)
• Lower fees than banks or money transfer services
• No middlemen—you deal directly with the recipient.
• Global access with just a phone and the internet

In short:

Crypto Bitcoin makes sending money—locally or globally—simple, fast, and cost-effective, helping people move funds without relying on banks.

Invest or Trade for Profit

Buying Crypto:

Start by signing up on a crypto exchange like Binance, Coinbase, or Kraken.

• Link your bank account or card
• Choose a coin (like BTC or Ether)
• Enter the amount and hit “buy”

Holding Crypto:

Once bought, your crypto sits in a wallet. You can leave it on the exchange (easy but riskier) or move it to a hot or cold wallet for better security.

• Ideal if you’re in it for the long term or waiting for the right time to trade.

Trading Crypto:

If you want to earn from price swings, you can trade.

• Buy low, sell high
• Some platforms offer spot trading, margin trading, or automated tools
• Start small and learn as you go—it’s easy to get caught up in the hype

In short:

Buy crypto on an exchange, store it in a wallet, and trade when the time is right. Just be sure to research and stay safe.

Use in DeFi Platforms & Smart Contracts

Crypto isn’t just for trading—it fuels a whole world of financial services without banks. Here’s how it works in simple terms:

Lending & Borrowing:

You can lend your crypto to others and earn interest, just like a savings account, but without a bank. Or you can borrow crypto by locking up your own as collateral.

• Example: Use platforms like Aave or Compound.

Yield Farming:

This is like using your crypto. You move your funds between DeFi platforms to earn the best possible returns, like hunting for the best savings rates.

Automated Contracts (Smart Contracts):

Smart contracts are bits of code that run on the blockchain. They handle the rules and money automatically—no paperwork, no middlemen.

• Example: When you lend crypto, a smart contract ensures you get your interest.

In short:

Crypto in DeFi lets you lend, borrow, and earn passively—all powered by automated smart contracts, not banks.

Participate in Governance or Staking

Vote on Project Decisions (Governance):

Some crypto projects give users a say in how things are run. If you hold a token like UNI (Uniswap) or DOT (Polkadot), you can vote on proposals, like new features or fee changes.

• The more tokens you hold, the more weight your vote has.

Earn Passive Income (Staking):

Staking means locking up your crypto to help run the network. In return, you earn rewards, similar to interest.

• Example: Stake Ether on a platform like Lido or directly on the network and earn regular payouts.

In short:

With crypto, you can help guide projects through voting or earn steady rewards by staking your coins and supporting the network.

Entity Attribute Value:

• Binance – Is a – Crypto exchange for buying, selling, trading digital assets
• Aave – Enables – Decentralised crypto lending and borrowing
• UNI – Allows – Governance voting using UNI tokens
• Lido – Provides – Staking services for earning crypto rewards
• Smart contracts – Are – Blockchain-based automated agreements

Risks, Regulation, and Legal Considerations

While crypto has excellent potential, it also comes with significant risks to watch out for:

Scams & Hacks

Fake projects, phishing links, and hacked exchanges can lead to significant losses. Always double-check websites and never share your wallet keys.

Lack of Legal Protections

You usually can’t call a bank or get your money back if something goes wrong, like a hack or scam. Crypto is still a “use at your own risk” space.

Tax Implications

In many countries, crypto profits are taxed. Whether you sell, trade, or earn crypto, you should report it to the tax office.

Evolving Global Regulations

Crypto laws change quickly and vary by country. What’s legal today may be restricted tomorrow, especially regarding privacy coins, stablecoins, or exchanges.

In short:

Crypto can be exciting, but it’s essential to stay alert, protect yourself, and understand the rules in your area.

Does Cryptocurrency Have a Future?

Experts see crypto growing beyond coins—it’s becoming part of a larger shift in how we use money and the internet.

Institutional Adoption

Big players like banks, hedge funds, and companies are getting involved, bringing more legitimacy and stability.

AI & Crypto

AI is helping improve crypto security, trading, and even creating smart contracts, opening the door for smarter, faster systems.

CBDCs 

Governments are exploring digital versions of national currencies, like the digital dollar or e-naira, which could blend traditional finance with blockchain tech.

Web3 & the Future Internet

Crypto powers Web3—an internet where users control their data, identity, and money without relying on big tech companies.

Conclusion:

Crypto is evolving into more than just digital money—it’s becoming part of a larger movement to reshape finance, ownership, and the internet itself. While the future isn’t guaranteed, it’s full of potential for those who stay informed and adaptable.

Entity Attribute Value:

• AI – Enhances – Crypto securities, trading, and smart contract automation
• Web3 – Represents – Decentralised internet empowering user data and ownership
• E-naira – Is – Nigeria’s Central Bank Digital Currency
• Digital Dollar – Is – A Proposed US government-backed CBDC

FAQ