Cryptocurrency (or “crypto”) is a digital currency that can be used to buy goods and services or traded for a profit. Bitcoin is the most widely used cryptocurrency.
What is cryptocurrency?

Cryptocurrency (or “crypto”) is a digital currency, such as Bitcoin, that is used as an alternative payment method or speculative investment. Cryptocurrencies get their name from the cryptographic techniques that let people spend them securely without the need for a central government or bank.

Here are a few examples:

Bitcoin was initially developed primarily to be a form of payment that isn’t controlled or distributed by a central bank. While financial institutions have traditionally been necessary to verify that a payment has been processed successfully, Bitcoin accomplishes this securely, without that central authority.
Ethereum uses the same underlying technology as Bitcoin, but instead of strictly peer-to-peer payments, the cryptocurrency is used to pay for transactions on the Ethereum network. This network, built on the Ethereum blockchain, enables entire financial ecosystems to operate without a central authority. To visualize this, think insurance without the insurance company, or real estate titling without the title company.
Scores of altcoins (broadly defined as any cryptocurrency other than Bitcoin) arose to capitalize on the various — and at times promising — use cases for blockchain technology.

» Get started: Learn now to buy cryptocurrency

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Why do people invest in cryptocurrencies?

People invest in cryptocurrencies for the same reason anyone invests in anything. They hope its value will rise, netting them a profit.

If demand for Bitcoin grows, for example, the interplay of supply and demand could push up its value. If people began using Bitcoin for payments on a huge scale, demand for Bitcoin would go up, and in turn, its price in dollars would increase. So, if you’d purchased one Bitcoin before that increase in demand, you could theoretically sell that one Bitcoin for more U.S. dollars than you bought it for, making a profit.

The same principles apply to Ethereum. “Ether” is the cryptocurrency of the Ethereum blockchain, where developers can build financial apps without the need for a third-party financial institution. Developers must use Ether to build and run applications on Ethereum, so theoretically, the more that is built on the Ethereum blockchain, the higher the demand for Ether.

However, it’s important to note that to some, cryptocurrencies aren’t investments at all. Bitcoin enthusiasts, for example, hail it as a much-improved monetary system over our current one and would prefer we spend and accept it as everyday payment. One common refrain — “one Bitcoin is one Bitcoin” — underscores the view that Bitcoin shouldn’t be measured in USD, but rather by the value it brings as a new monetary system.

How does cryptocurrency work?

Cryptocurrencies are supported by a technology known as blockchain, which maintains a tamper-resistant record of transactions and keeps track of who owns what. The use of blockchains addressed a problem faced by previous efforts to create purely digital currencies: preventing people from making copies of their holdings and attempting to spend it twice^[1].

Individual units of cryptocurrencies can be referred to as coins or tokens, depending on how they are used. Some are intended to be units of exchange for goods and services, others are stores of value, and some can be used to participate in specific software programs such as games and financial products.

How are cryptocurrencies created?

One common way cryptocurrencies are created is through a process known as mining, which is used by Bitcoin. Bitcoin mining can be an energy-intensive process in which computers solve complex puzzles in order to verify the authenticity of transactions on the network. As a reward, the owners of those computers can receive newly created cryptocurrency. Other cryptocurrencies use different methods to create and distribute tokens, and many have a significantly lighter environmental impact.

For most people, the easiest way to get cryptocurrency is to buy it, either from an exchange or another user.

Why are there so many kinds of cryptocurrency?

It’s important to remember that Bitcoin is different from cryptocurrency in general. While Bitcoin is the first and most valuable cryptocurrency, the market is large — there are thousands of cryptocurrencies. And while some cryptocurrencies have total market valuations in the hundreds of billions of dollars, others are obscure and essentially worthless.

If you’re thinking about getting into cryptocurrency, it can be helpful to start with one that is commonly traded and relatively well-established in the market. These coins typically have the largest market capitalizations.

Thoughtfully selecting your cryptocurrency, however, is no guarantee of success in such a volatile space. Sometimes, an issue in the deeply interconnected crypto industry can spill out and have broad implications on asset values.

Are cryptocurrencies financial securities, like stocks?

Whether or not cryptocurrency is a security is a bit of a gray area right now. To back up a little, generally, a “security” in finance is anything that represents a value and can be traded. Stocks are securities because they represent ownership in a public company. Bonds are securities because they represent a debt owed to the bondholder. And both of these securities can be traded on public markets.

Regulators have increasingly signaled that cryptocurrencies should be regulated similarly to other securities, such as stocks and bonds. However, with the June 2024 Loper Bright Enterprises v. Raimondo Supreme Court ruling, that may change — Congress may have to clearly define crypto regulation through law making rather than allowing the SEC to enforce rules based on its interpretation. That could have major implications for the asset class in the future.

Pros and cons of cryptocurrency

Cryptocurrency inspires passionate opinions across the spectrum of investors. Here are a few reasons that some people believe it is a transformational technology, while others worry it’s a fad.

Cryptocurrency pros

Some supporters like the fact that cryptocurrency removes central banks from managing the money supply since over time these banks tend to reduce the value of money via inflation.
In communities that have been underserved by the traditional financial system, some people see cryptocurrencies as a promising foothold. Pew Research Center data from 2021 found that Asian, Black and Hispanic people “are more likely than White adults to say they have ever invested in, traded or used a cryptocurrency^[2].”
Other advocates like the blockchain technology behind cryptocurrencies, because it’s a decentralized processing and recording system and can be more secure than traditional payment systems.
Some cryptocurrencies offer their owners the opportunity to earn passive income through a process called staking. Crypto staking involves using your cryptocurrencies to help verify transactions on a blockchain protocol. Though staking has its risks, it can allow you to grow your crypto holdings without buying more.

Cryptocurrency cons

Many cryptocurrency projects are untested, and blockchain technology in general has yet to gain wide adoption. If the underlying idea behind cryptocurrency does not reach its potential, long-term investors may never see the returns they hoped for.
For shorter-term crypto investors, there are other risks. Its prices tend to change rapidly, and while that means that many people have made money quickly by buying in at the right time, many others have lost money by doing so just before a crypto crash.
Those wild shifts in value may also cut against the basic ideas behind the projects that cryptocurrencies were created to support. For example, people may be less likely to use Bitcoin as a payment system if they are not sure what it will be worth the next day.
The environmental impact of Bitcoin and other projects that use similar mining protocols is significant. A comparison by the University of Cambridge, for instance, said worldwide Bitcoin mining consumes more than twice as much power as all U.S. residential lighting^[3]. Some cryptocurrencies use different technology that demands less energy.
Governments around the world have not yet fully reckoned with how to handle cryptocurrency, so regulatory changes and crackdowns have the potential to affect the market in unpredictable ways.

Cryptocurrency legal and tax issues

There’s no question that cryptocurrencies are legal in the U.S. Ultimately whether they’re legal worldwide depends on each individual country.

The question of whether cryptocurrencies are legally allowed, however, is only one part of the legal question. Other things to consider include how crypto is taxed and what you can buy with cryptocurrency.

Legal tender: You might call them cryptocurrencies, but they differ from traditional currencies in one important way: there’s no requirement in most places that they be accepted as “legal tender.” The U.S. dollar, by contrast, must be accepted for “all debts, public and private.” Countries around the world are taking various approaches to cryptocurrency. For now, in the U.S., what you can buy with cryptocurrency depends on the preferences of the seller.
Crypto taxes: Again, the term “currency” is a bit of a red herring when it comes to taxes in the U.S. Cryptocurrencies are taxed as property, rather than currency. That means that when you sell them, you’ll pay tax on the capital gains, or the difference between the price of the purchase and sale. And if you’re given crypto as payment — or as a reward for an activity such as mining — you’ll be taxed on the value at the time you received them.

» Learn more: Understanding crypto and taxes

Your decision: Is cryptocurrency a good investment?

Cryptocurrency is a relatively risky investment, no matter which way you slice it. Generally speaking, high-risk investments should make up a small part of your overall portfolio — one common guideline is no more than 10%. You may want to look first to shore up your retirement savings, pay off debt or invest in less-volatile funds made up of stocks and bonds.

There are other ways to manage risk within your crypto portfolio, such as by diversifying the range of cryptocurrencies that you buy. Crypto assets may rise and fall at different rates, and over different time periods, so by investing in several different products you can insulate yourself — to some degree — from losses in one of your holdings.

Perhaps the most important thing when investing in anything is to do your homework. This is particularly important when it comes to cryptocurrencies, which are often linked to a specific technological product that is being developed or rolled out. When you buy a stock, it is linked to a company that is subject to well-defined financial reporting requirements, which can give you a sense of its prospects.

With cryptocurrencies, on the other hand, discerning which projects are viable can be more challenging. If you have a financial advisor who is familiar with cryptocurrency, it may be worth asking for input.

For beginning investors, it can also be worthwhile to examine how widely a cryptocurrency is being used. Most reputable crypto projects have publicly available metrics showing data such as how many transactions are being carried out on their platforms. If use of a cryptocurrency is growing, that may be a sign that it is establishing itself in the market. Cryptocurrencies also generally make “white papers” available to explain how they’ll work and how they intend to distribute tokens.

» Storing crypto? These are the top crypto wallets

If you’re looking to invest in less established crypto products, here are some additional questions to consider:

Who’s heading the project? An identifiable and well-known leader is a positive sign.
Are there other major investors who are investing in it? It’s a good sign if other well-known investors want a piece of the currency.
Will you own a portion in the company or just currency or tokens? This distinction is important. Being a part owner means you get to participate in its earnings (you’re an owner), while buying tokens simply means you’re entitled to use them, like chips in a casino.
Is the currency already developed, or is the company looking to raise money to develop it? The further along the product, the less risky it is.

It can take a lot of work to comb through a prospectus; the more detail it has, the better your chances it’s legitimate. But even legitimacy doesn’t mean the currency will succeed. That’s an entirely separate question, and that requires a lot of market savvy. Be sure to consider how to protect yourself from fraudsters who see cryptocurrencies as an opportunity to bilk investors.

Frequently asked questions

How does a blockchain work?

Most cryptocurrencies are based on blockchain technology, a networking protocol through which computers can work together to keep a shared, tamper-proof record of transactions. The challenge in a blockchain network is in making sure that all participants can agree on the correct copy of the historical ledger. Without a recognized way to validate transactions, it would be difficult for people to trust that their holdings are secure. There are several ways of reaching “consensus” on a blockchain network, but the two that are most widely used are known as “proof of work” and “proof of stake.”

What does proof of work mean?

Proof of work is one way of incentivizing users to help maintain an accurate historical record of who owns what on a blockchain network. Bitcoin uses proof of work, which makes this method an important part of the crypto conversation. Blockchains rely on users to collate and submit blocks of recent transactions for inclusion in the ledger, and Bitcoin’s protocol rewards them for doing so successfully. This process is known as mining.

There is stiff competition for these rewards, so many users try to submit blocks, but only one can be selected for each new block of transactions. To decide who gets the reward, Bitcoin requires users to solve a difficult puzzle, which uses a huge amount of energy and computing power. The completion of this puzzle is the “work” in proof of work.

For lucky miners, the Bitcoin rewards are more than enough to offset the costs involved. But the huge upfront cost is also a way to discourage dishonest players. If you win the right to create a block, it might not be worth the risk of tampering with the records and having your submission thrown out — forfeiting the reward. In this instance, spending the money on energy costs in an attempt to tamper with the historical record would have resulted in significant loss.

Ultimately, the goal of proof of work is to make it more rewarding to play by the rules than to try to break them.

» Learn more: How does Bitcoin work?

What is proof of stake?

Proof of stake is another way of achieving consensus about the accuracy of the historical record of transactions on a blockchain. It eschews mining in favor of a process known as staking, in which people put some of their own cryptocurrency holdings at stake to vouch for the accuracy of their work in validating new transactions. Some of the cryptocurrencies that use proof of stake include Cardano, Solana and Ethereum (which is in the process of converting from proof of work).

Proof of stake systems have some similarities to proof of work protocols, in that they rely on users to collect and submit new transactions. But they have a different way of incentivizing honest behavior among those who participate in that process. Essentially, people who propose new blocks of information to be added to the record must put some cryptocurrency at stake. In many cases, your chances of landing a new block (and the associated rewards) go up as you put more at stake. People who submit inaccurate data can lose some of the money they’ve put at risk.

How do you mine cryptocurrency?

Mining cryptocurrency is generally only possible for a proof-of-stake cryptocurrency such as Bitcoin. And before you get too far, it is worth noting that the barriers to entry can be high and the probability of success relatively low without major investment.

While early Bitcoin users were able to mine the cryptocurrency using regular computers, the task has gotten more difficult as the network has grown. Now, most miners use special computers whose sole job is to run the complex calculations involved in mining all day every day. And even one of these computers isn’t going to guarantee you success. Many miners use entire warehouses full of mining equipment in their quest to collect rewards.

If you don’t have the resources to compete with the heavy hitters, one option is joining a mining pool, where users share rewards. This reduces the size of the reward you’d get for a successful block, but increases the chance that you could at least get some return on your investment.

How do you pull your money out of crypto?

Just like with buying cryptocurrencies, there are several options for converting your crypto holdings into cash. While decentralized exchanges and peer-to-peer transactions may be right for some investors, many choose to use centralized services to offload their holdings.

With a centralized exchange, the process is basically the reverse of buying. But one advantage if you own crypto is that you probably already have everything set up. Here are the steps:

Connect the wallet that holds the cryptocurrencies that you want to sell, and make sure the exchange you’ve chosen supports both that wallet and the asset in question.
Move your cryptocurrency onto the exchange.
Sell your cryptocurrency.
Transfer the proceeds back to your bank account.

Every exchange will handle such transactions differently, so you’ll want to look up the fees and processes for your specific provider. Also, remember that you may be creating crypto tax liability when you sell your digital assets.

Article sources

NerdWallet writers are subject matter authorities who use primary, trustworthy sources to inform their work, including peer-reviewed studies, government websites, academic research and interviews with industry experts. All content is fact-checked for accuracy, timeliness and relevance. You can learn more about NerdWallet’s high standards for journalism by reading our editorial guidelines.

1.National Institute of Standards and Technology. Double Spend (Problem). Accessed Jun 15, 2022.
2.Pew Research Center. 16% of Americans Say They Have Ever Invested in, Traded or Used Cryptocurrency. Accessed Apr 19, 2022.
3.Cambridge Centre for Alternative Finance. Cambridge Bitcoin Electricity Consumption Index – Comparisons. Accessed Jun 15, 2022.

About the author

Andy Rosen

Andy Rosen is a former NerdWallet writer focused on cryptocurrency and alternative investments. He has more than 15 years of journalism experience as a reporter and editor at organizations including The Boston Globe and The Baltimore Sun. See full bio.

What is Staking? How to Earn Crypto Rewards

Staking cryptocurrency is a way to earn passive income on your crypto holdings.

Table of Contents

Is crypto staking worth it?
What cryptocurrencies allow staking?
How does staking work?
How do you stake cryptocurrency?
What kind of returns does staking offer?
Is staking the right option?

Crypto staking rewards are the digital equivalent of interest or dividends, and they can allow owners to earn passive income while holding onto their underlying assets.

Staking pays out cryptocurrency as compensation for using your existing holdings to vouch for the accuracy of transactions on an underlying blockchain network.

While this sounds complicated, everyday users can often do it directly from their digital wallets. Some crypto exchanges also offer staking programs in which they handle the technical details for a cut of the proceeds. Of the platforms on our list of the best crypto exchanges, the following offer such staking services:

Coinbase
Crypto.com
Binance.US
Gemini
eToro (ADA, TRX and SOL only)
Robinhood Crypto (SOL only)

However, these exchange-based staking programs are under increasing regulatory scrutiny. U.S. regulators have gone after a handful of providers, most recently Coinbase, alleging that the arrangement runs afoul of securities laws.

With so much uncertainty in the world of staking, it’s especially important to understand what you’re getting into and how it works.

Is crypto staking worth it?

Whether crypto staking is worthwhile depends on what kind of crypto owner you are.

Generally speaking, cryptocurrency staking offers returns that exceed those you can earn in a savings account. However, staking is not without risk. You’ll earn rewards in crypto, a volatile asset that can decline in value.

Sometimes, you have to lock up your crypto for a set period of time. And there is a chance that you could lose some of the cryptocurrency you’ve staked as a penalty if the system doesn’t work as expected.

That said, staking can also be a way to grow your crypto portfolio using assets you plan to hang onto for awhile. Staking is also a more energy efficient way of running a crypto network than the mining process used by Bitcoin and some others.

What cryptocurrencies allow staking?

Crypto staking is an important part of the technology behind certain cryptocurrencies. However, it’s important to note that not all crypto networks use staking.

Proof-of-stake cryptocurrencies, as they are called, are likely to support staking. Here are a few examples:

Ethereum (which shifted from previously using proof-of-work).
Cardano.
Solana.
Shiba Inu.

Proof-of-work cryptocurrencies use mining, which relies on expensive computers and can use a significant amount of electricity. They generally do not support staking. Proof-of-work cryptos include:

Bitcoin.
Litecoin.

» Learn more: What are altcoins?

How does staking work?

To understand staking, it helps to have a basic grasp of what blockchain networks do. Here are a few details you need to know.

Blockchains are “decentralized,” meaning there’s no middleman — such as a bank — to validate new activity and make sure it comports with a historic record maintained by computers across the network. Instead, users collate “blocks” of recent transactions and submit them for inclusion into an immutable historic record. Users whose blocks are accepted get a transaction fee paid in cryptocurrency.

Staking is a way of preventing fraud and errors in this process. Users proposing a new block — or voting to accept a proposed block — put some of their own cryptocurrency on the line, which incentivizes playing by the rules.

Generally, the more that is at stake, the better a user’s chance of earning transaction fee rewards. But when a user’s proposed block is found to have inaccurate information, they can lose some of their stake — in a process known as slashing.

How do you stake cryptocurrency?

There are several ways to start staking cryptocurrency, depending on how much of a technical, financial and research commitment you’re willing to make.

Your first decision will be whether to actually validate transactions using your own computer or to “delegate” your cryptocurrency to someone who’s doing that legwork for you.

Networks that support crypto staking typically allow people who own tokens to provide them for other users to deploy in validating transactions, thereby earning a share of the rewards.

Using an exchange

One option is to use an online service to stake your tokens for you. Some popular cryptocurrency exchanges offer staking in exchange for a commission, and they allow you to use fiat currency to purchase crypto.

» Learn more: How to buy cryptocurrency

Exchanges that offer staking

Of the crypto exchanges reviewed by NerdWallet, a handful offer staking or rewards for at least some crypto assets. But there are some potential tradeoffs at play with such programs. For one, they’ll likely take a cut of your earnings — a cost you could avoid by staking on your own.

Perhaps more importantly, some products that have offered to stake assets on behalf of customers (or to offer similar rewards programs) have run into serious regulatory or financial difficulties:

Gemini froze withdrawals from its rewards program, Gemini Earn, late in 2022 amid a similar crisis that played out at a company that was operating its lending program. It took until May 2024 for Gemini to return the funds to an estimated 232,000 users.
In February of 2023, the crypto exchange Kraken had to halt its staking program under an agreement with the SEC, which argued that the program amounted to an unregistered securities offering.
And in June of 2023, the SEC hit Coinbase with a similar allegation. Coinbase is disputing the federal government’s interpretation of how the laws apply to its program.

Finally, it’s worth remembering that third-party crypto staking programs often require you to keep your crypto online, on their platforms. That can leave you vulnerable to potential losses in the event of a crypto exchange failure like the FTX collapse.

Joining a pool

If you don’t want to trust an exchange to make your staking decisions for you — or if you can’t find one that supports the token you want to stake — you can join what is known as a “staking pool” operated by another user.

To do this, you’ll likely have to know how to use a crypto wallet in order to connect your tokens with the validator’s pool.

The official websites of many proof-of-stake blockchains include information about how to research validators, including links to details about how they operate.

Omkar Bhat, data engineering lead at Boston-based analytics firm Flipside Crypto, suggested looking carefully at a prospective validator’s track record.

Some information that is publicly available can help you see whether a pool operator has ever been penalized for mistakes or malfeasance, and some lay out their policies for protecting people who delegate tokens. Other details you can look at include the level of fees or commissions.

Bhat says it’s good to pick an established pool, though you might not want to pick the absolute biggest. Blockchains are supposed to be decentralized, so there’s an argument for preventing any one group from accumulating too much influence.

“People often delegate to validators with lower voting power to increase the decentralization of an ecosystem,” Bhat says.

Becoming a validator

Setting up your own staking infrastructure can be complicated. It requires the proper computing equipment and software and downloading a copy of a blockchain’s entire transaction history. It can also have a high cost to entry.

On the Ethereum network, for example, you’d need to start with at least 32 ETH, which on July 3, 2024, would be worth more than $105,000. Staking through a pool or through an online service does not carry such requirements.

What kind of returns does staking offer?

The rewards for staking vary based on the cryptocurrency, conditions (such as demand on the blockchain network in question) and the method you use. But the rates offered by exchanges offer some insight into what you can expect.

Crypto.com, for instance, was estimating in July of 2024 that annual yield for its highest-yielding cryptocurrency would exceed 19%. Coinbase, meanwhile, was offering rates up to 9%.

For comparison, yields on savings accounts reviewed by NerdWallet are currently averaging 0.42% APY, according to the Federal Deposit Insurance Corp.

Is staking the right option?

Staking may not be for everyone. There are a few questions to ask before making a decision about whether to stake your crypto.

Will you need access to your staked crypto?

Crypto staking can involve committing your assets for a set period of time during which you might not be able to sell or trade them. If you think you might move your crypto on short notice, make sure you look at the terms carefully before staking it.

It’s important to remember that crypto is a volatile asset. While crypto staking can provide a measure of predictability in investment returns, if the market value for your cryptocurrency drops in value by 20% during the time you’re staking it, for instance, the rewards you’re getting may not look as attractive.

Do you believe in the project?

Ultimately, deciding to stake your cryptocurrency may come down to whether you feel confident that it’s a good investment over the long term.

If you believe in the value of the Ethereum network, for instance, the day-to-day swings in price may not affect your desire to sell. Staking is one thing you can do to get shorter-term value from a crypto investment you want to hold onto.

Have you explored other forms of passive income?

Crypto staking is one way of earning passive income, which does not require daily effort after an initial investment. And while staking may be a good choice for some cryptocurrency owners, there are many other ways of generating passive income. It may be worth looking into some of those options, as well.

Other common forms of passive income include dividends from stock holdings, interest on bonds, and real estate income. There are also non-staking options for earning on your crypto, including lending programs and decentralized finance (DeFi) applications.

» Learn more: How to generate passive income

Disclosure: The author owned Bitcoin, Ethereum, Shiba Inu, Cardano and Solana at the time of publication. The editor owned Ethereum and Bitcoin at the time of publication. NerdWallet is not recommending or advising readers to buy or sell Bitcoin or any other cryptocurrency.

What Is a Blockchain? Definition and Examples of Blockchain Technology

Blockchain is the core technology behind Bitcoin and thousands of cryptocurrencies and has promising potential beyond digital currencies.

Many, or all, of the products featured on this page are from our advertising partners who compensate us when you take certain actions on our website or click to take an action on their website. However, this does not influence our evaluations. Our opinions are our own. Here is a list of our partners and here’s how we make money.

The investing information provided on this page is for educational purposes only. NerdWallet, Inc. does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks, securities or other investments.

Updated Jan 4, 2023 · 5 min read

Fact Checked

Written by Andy Rosen

Lead Writer/Spokesperson

Edited by Chris Davis

Assigning Editor

Blockchain: A definition

A blockchain is a digital ledger of transactions maintained by a network of computers in a way that makes it difficult to hack or alter. The technology offers a secure way for individuals to deal directly with each other, without an intermediary like a government, bank or other third party.

A list of records, called blocks, is linked together using cryptography. Each transaction is independently verified by peer-to-peer computer networks, time-stamped and added to the ledger. Once recorded, the data cannot easily be altered.

While popularized with the growing use of Bitcoin, Ethereum and other cryptocurrencies, blockchain technology has promising applications for legal contracts, property sales, medical records and any other industry that needs to authorize and record a series of actions or transactions.

» Dive deeper: What is cryptocurrency?

Blockchain example: Bitcoin

Using the Bitcoin system as an example, here’s how blockchain — also known as distributed ledger technology — works:

The purchase and sale of Bitcoin is entered and transmitted to a network of powerful computers, known as nodes.
This network of thousands of nodes around the world vie to confirm the transaction using computer algorithms. This is known as Bitcoin mining. The miner who first successfully completes a new block is rewarded with Bitcoin for their work. These rewards are paid with a combination of newly minted Bitcoin and network fees, which are passed on to the buyer and seller. The fees can rise or fall depending on the volume of transactions.
After the purchase is cryptographically confirmed, the sale is added to a block on the distributed ledger. The majority of the network must then confirm the sale.
The block is permanently chained to all previous blocks of Bitcoin transactions, using a cryptographic fingerprint known as a hash, and the sale is processed.

The concept of blockchain technology first appeared in academic papers from 1982, in a dissertation discussing “the design of a distributed computer system that can be established, maintained, and trusted by mutually suspicious groups.” But it was a 2008 paper by the pseudonymous Satoshi Nakamoto titled “Bitcoin: A Peer-to-Peer Electronic Cash System” that brought an academic theory into real-world use.

» Learn more: How to invest in Bitcoin

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Blockchain pros and cons

Here are some of the pros and cons of how blockchain technology works when applied to cryptocurrencies:

Pros

Decentralization

While the U.S. dollar is issued by the Federal Reserve, no government agency issues or controls Bitcoin and other cryptocurrencies. This also means that the ability of any one government or agency to determine the fate of a public blockchain is eliminated. The lack of intermediaries reduces cost, as the fees associated with third-party transactions also are eliminated. Another byproduct of how blockchain works is time efficiency — the blockchain is open for business 24 hours a day, 365 days a year, unlike banks and other intermediaries.

Transparency plus anonymity

All transactions on the Bitcoin blockchain are recorded on computers across the network. Transactions are completely transparent because the address and transaction history of crypto wallets, which hold the cryptocurrency, are publicly viewable, but the owners of each wallet connected to those public addresses are anonymous and not recorded.

Accuracy and security

Because the transaction involves little human interaction, there is a lower risk of error. Each transaction must be confirmed and recorded by a majority of the network nodes, which makes it vanishingly difficult to manipulate or alter information. This also prevents anyone from spending a Bitcoin more than once.

Public and private blockchain applications

Blockchain technology creates efficiencies that potentially extend far beyond digital currencies. Developers in the sector have built complex decentralized finance (DeFi) products, games and digital collectibles known as NFTs.

Bitcoin and other popular cryptocurrencies (sometimes called altcoins) are on public blockchain networks, meaning anyone can join. But many applications for business can be created on private blockchain networks, where organizations can control who joins:

Blockchain supply chain: Companies such as IBM Blockchain are already providing private network solutions using blockchain technology to more accurately track product supply chains. For example, companies can use the technology quickly find out where recalled food products have been shipped and sold.
Health care records: Deloitte Consulting has suggested that a nationwide blockchain network for electronic medical records “may improve efficiencies and support better health outcomes for patients.”
Smart contracts: With blockchain technology, contract terms can automatically be changed or updated based on hitting a predetermined set of conditions.
Digital elections: Some developers are working on blockchain technology to be applied to elections.
Property transactions: Proponents say blockchain technology can be applied to a wide range of asset sales, be it real estate, autos or investment portfolios.

» Ready to invest? Here are our picks for best Bitcoin and cryptocurrency exchanges.

Opportunities for the underbanked

In countries and regions with poor or corrupt financial institutions, cryptocurrencies based on blockchain protocol allow the transfer and holding of cash that bypasses unscrupulous third parties.

Cons

Criminals like crypto

Like a lot of new technologies, some of the first adopters have been criminal enterprises. They use cryptocurrencies such as Bitcoin both as payment because of the privacy it provides and to target holders of Bitcoin for scams. For example, Bitcoin was used by consumers of Silk Road, a black market online shopping network for illegal drugs and other illicit services that was shut down by the FBI in 2013. In the recent ransomware attack on Colonial Pipeline, the company paid $4.4 million in cryptocurrency to unlock its computer systems.

Meanwhile, Bitcoin investment scams have skyrocketed in tandem with its recent historic rise. The Federal Trade Commission reported nearly 7,000 people lost $80 million from October 2020 through March 2021 in schemes touting quick returns, a nearly 1,000% rise in reported losses year-on-year.

Blockchain cryptocurrencies are highly volatile

Some people wonder, “Is blockchain a good investment?” That depends on your investing goals and your risk tolerance. The popularity of cryptocurrency exploded in 2021, with Bitcoin hitting a record spot price of nearly $65,000. But by the fall of 2022, the price of Bitcoin and many other cryptocurrencies had declined by more than half. Crypto projects known as stablecoins have sought to take on this issue with mechanisms intended to peg digital assets to the value of the dollar or other fiat currencies and commodities.

Crypto use is still niche

Many more exchanges, brokerages and payment apps now sell Bitcoin, and many companies such as PayPal and Microsoft accept Bitcoin for payment. Still, purchases with blockchain currencies such as Bitcoin remain the exception, not the rule. Also, the sale of Bitcoin for purchases on cash apps such as PayPal requires users to pay capital gains taxes on the Bitcoin sold, beyond whatever state and local taxes are paid on the product or service.

Bitcoin mining takes energy

The process of Bitcoin mining uses a network of high-speed computers that consume a lot of energy. If Bitcoin’s proof-of-work system were a country, it would be the 34th biggest consumer of electricity, behind Pakistan and ahead of the Kazakhstan, according to the University of Cambridge Electricity Consumption Index. Tesla CEO Elon Musk announced in May 2021 that the carmaker would no longer accept Bitcoin until the cryptocurrency can find ways to reduce its carbon footprint. Developers of other blockchains have come up with less energy-intensive options, including a protocol known as “proof of stake,” which replaces mining with crypto staking.

Bitcoin blockchain is slow

The Bitcoin blockchain can process about seven new transactions a second. By comparison, credit card giant Visa says it can process 24,000 transactions per second. That presents the Bitcoin system with a scalability problem. Other forms of blockchain-based cryptocurrency are working on this problem, including Ethereum, which recently completed the Ethereum merge.

» Learn more: How to buy Ethereum

The future of blockchain technology

While the Bitcoin system is the best-known application of blockchain technology, there are thousands of cryptocurrencies that are built on the back of this emerging technology. While it remains to be seen if Bitcoin will succeed in supplanting other forms of traditional payment methods, the applications of blockchain technology are growing fast, and proponents say they may lead to dramatic changes across industries.

The author Andy Rosen and the editor owned Bitcoin and Ethereum at the time of publication.

How to Buy Bitcoin (BTC): Quick-Start Guide

Bitcoin wallets, cryptocurrency exchanges and Bitcoin ETFs: There are a variety of ways to invest in Bitcoin.

Updated Dec 5, 2024 · 2 min read

Fact Checked

Written by Kevin Voigt

Writer+ more

Reviewed by Michael Randall

Certified Financial Planner®

Edited by Andrea Coombes

Writer

Co-written by Andy Rosen

Lead Writer/Spokesperson

Nerdy takeaways

Common ways to buy Bitcoin include Bitcoin wallets, centralized cryptocurrency exchanges, certain traditional brokers and Bitcoin ETFs.
Once you’ve learned how to invest in Bitcoin, you’ll need to store your Bitcoin in a hot wallet or a cold wallet.

Buying Bitcoin is often the first step that investors take into the world of cryptocurrency — and right now, more investors may be looking to take that step: After a lengthy price slump, Bitcoin hit a series of record highs in 2024, including topping $100,000 for the first time in early December.

But buying even a more mainstream cryptocurrency like Bitcoin can feel like an unfamiliar landscape for someone used to traditional financial products. The good news: There are many ways to buy Bitcoin and other cryptocurrencies, from stockbrokers to dedicated exchanges and even in-app purchases in some crypto-linked applications.

🤓Nerdy Tip

The Securities and Exchange Commission approved a spot Bitcoin ETF in early 2024. Learn what that means for Bitcoin and other cryptocurrencies.

» Learn more: What is cryptocurrency?

6 ways to invest in Bitcoin

Six of the most common ways to invest in Bitcoin include Bitcoin wallets and centralized cryptocurrency exchanges, certain traditional brokers, a few money transfer apps, Bitcoin ATMs and Bitcoin ETFs. Bitcoin can be traded as fractional shares, so your investment could be as low as, say, $25.

Here’s an overview of how to buy Bitcoin:

1. Cryptocurrency exchanges

You can purchase bitcoin from cryptocurrency exchanges. Many offer dozens of cryptocurrency choices, while others simply have Bitcoin and a few alternatives. They carry a variety of different fees and consumer protections, so do your diligence before choosing. Cryptocurrency exchanges where you can purchase bitcoin include Gemini, Kraken, Coinbase and Crypto.com.

» View our list: The best crypto exchanges and platforms

2. Traditional stockbrokers

The choices among traditional brokers that give customers a way to buy and sell Bitcoin are few right now — Robinhood was the first mainstream investment broker to offer Bitcoin. Like its stock-trading platform, Robinhood charges no fees for Bitcoin trades. Other online brokers that offer access to Bitcoin or other cryptocurrencies include Fidelity.

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3. Bitcoin ATMs

These work like normal ATMs, only you can use them to buy and sell Bitcoin. They are often placed in locations where you might find normal ATMs, such as convenience stores. Before you carry out a transaction, make sure you look at the fees you’ll be charged, and have a plan for where to send the Bitcoin once you buy it.

4. Bitcoin exchange-traded funds

In early 2024, the Securities and Exchange Commission approved spot Bitcoin ETFs, which track the price of Bitcoin and trade over major exchanges. This was a long-awaited approval from the SEC, and one that makes it even easier for traditional investors to gain access to Bitcoin. Spot Bitcoin ETFs are available through traditional brokerage accounts.

» Learn how to buy Bitcoin ETFs

5. Peer-to-peer money transfer apps

Cash transfer services like PayPal, Venmo, or Cash App allow their users to purchase Bitcoin using the apps. You can purchase, store, send and sell Bitcoin directly through the apps, which is convenient if you’re used to those interfaces.

6. Wallet software

Some crypto apps, such as games, crypto wallets or other online services that use blockchain technology, allow users to buy and sell digital assets directly within their app.

If you’re using cash in one of these apps, you may wind up using a third party service such as MoonPay to fill your order. Such services can cost a bit more than regular exchanges, but offer some advantages in the form of quick, relatively painless transactions.

How to store the Bitcoin you buy

If you’re purchasing Bitcoin, you’ll need a place to keep it.

Bitcoin can be stored in two kinds of digital wallets: a hot wallet or a cold wallet. With a hot wallet, transactions generally are faster, while a cold wallet often incorporates extra security steps that help to keep your assets safe but also make transactions take longer.

Hot wallet

With a hot wallet, Bitcoin is stored by a trusted exchange or provider in the cloud and accessed through an app or computer browser on the internet. Any trading exchange you join will offer a free Bitcoin hot wallet where your purchases will automatically be stored. But many users prefer to transfer and store their Bitcoin with a third-party hot wallet provider, also typically free to download and use.

Why choose a wallet from a provider other than an exchange? While advocates say the blockchain technology behind Bitcoin is even more secure than traditional electronic money transfers, Bitcoin hot wallets are an attractive target for hackers. As Bitcoin.org warns: “Many exchanges and online wallets suffered from security breaches in the past and such services generally still do not provide enough insurance and security to be used to store money like a bank.”

Cold wallet

A cold wallet is a small, encrypted portable device that allows you to download and carry your Bitcoin. Cold wallets can cost less than $100 and are considered much more secure than hot wallets.

When creating accounts for your digital wallets and currency exchange, use a strong password and two-factor authentication.

» Get started: Our list of the best Bitcoin wallets

What to do with the Bitcoin you buy

Bitcoin can function either as an investment or a medium of exchange. So you can either spend it, trade it or hold it. If you’re spending Bitcoin, there are a handful of retailers and digital services that allow you to use crypto as payment.

If you’re investing, it’s good to think about what kind of investor you want to be. Investors who day trade — a risky investment strategy that involves frequent buying and selling — try to buy Bitcoin low and sell it if and when its value moves higher.

But if you see a future for Bitcoin as a digital currency, perhaps your investment plan is to buy and hold for the long haul. Whatever your plan, know that owning Bitcoin may create a complex tax situation.

» Interested in other alternative investments? Learn how to buy gold.