Cryptocurrency is a digital asset that acts as a medium of exchange, a store of value and a unit of account. It’s also often touted as a potential investment with eye-popping returns, but investing in cryptocurrency comes with unique risks that can make it a bad idea for some investors.
Crypto’s technical start dates back to the 1980’s, when an American cryptographer developed the algorithm that web-based encryption uses today. That early work paved the way for later developments, including cryptocurrencies, such as Bitcoin (with a lowercase b).
The idea behind crypto is to allow people to send and receive money quickly and inexpensively from one person or business to another over the internet without needing a third party to confirm that a transaction is valid. It does this by allowing users to record transactions on a blockchain, which is a shared public ledger that records all additions and deletions in a crypto’s history. The blockchain is secured using cryptography, which means that once a transaction is added to the blockchain, it can’t be changed.
Bitcoin was the first cryptocurrency, launched in 2009 by a pseudonymous person or group known as Satoshi Nakamoto. It was the first crypto to allow peer-to-peer transactions, and it is now the most popular. Its price is largely determined by supply and demand, as well as how useful people expect it to be in the future. Some cryptos also get some of their value from being backed by real-world assets, like gold or oil, while others try to maintain a stable price by pegging themselves to a benchmark currency.
While some of these features make cryptos appealing to investors, the fact that they’re largely unregulated and susceptible to wild price swings can turn them off for some users. For example, the lack of a central clearinghouse makes it easy for criminals to use cryptos for illegal purchases. Additionally, banks insure money kept in traditional bank accounts, but digital wallets used to hold cryptocurrencies don’t offer the same level of protection.
It’s important to consider all of these factors before buying any cryptocurrency, as well as to diversify your investments. If you’re thinking of investing in crypto, look for companies with prominent warnings about the risk of losing your money and a team of subject matter experts. NerdWallet writers are subject matter experts who research and review primary sources, government websites, academic research and interviews with industry professionals before creating content. Our high standards for journalism help ensure that all of our articles are accurate, helpful and transparent. Read our editorial guidelines.