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What is Cryptocurrency and How Does it Work?

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| Updated:
February 4, 2025
What is cryptocurrency?
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You must have been hearing about cryptocurrency but despite how popular it has become, you still struggle to understand how it works. Or perhaps, you have heard shocking stories of people losing their money to crypto scams. Take for instance, one of the most infamous cases, the OneCoin scam, led by Ruja Ignatova, also known as the “Cryptoqueen.”

In 2014, Ignatova launched OneCoin, promising investors a revolutionary cryptocurrency to put Bitcoin out of business. The scheme attracted billions of dollars from people worldwide. Unlike Bitcoin, OneCoin had no real blockchain, no public ledger, and no way to verify transactions. It was a complete fraud. By 2017, authorities started investigating, and Ignatova vanished. She has remained on the FBI’s Most Wanted List ever since. The OneCoin scam defrauded investors of an estimated $4 billion. Source: BBC.

Stories like this make many people fear cryptocurrency. They wonder: Is it safe? How does it work? Can I trust it? These are important questions. While scams exist, cryptocurrency itself is not a scam. It is a real digital currency that operates on blockchain technology. Many legitimate cryptocurrencies, such as Bitcoin and Ethereum, are improving the financial system.

Before you dismiss cryptocurrency as too risky or jump in without knowledge, you need to understand how it works. This article explains cryptocurrency in simple terms. You will learn what it is, how it differs from traditional money, how transactions happen, and how to avoid scams. By the end, you will have a clear understanding of cryptocurrency and how to use it safely.

What is Cryptocurrency?

Cryptocurrency is a digital currency that exists only on the internet. Unlike traditional money, it is not issued or controlled by any central bank or government. Instead, cryptocurrency relies on a technology called blockchain, which records transactions securely across a decentralised network.

The term cryptocurrency comes from two words: “crypto” and “currency.” “Crypto” refers to cryptography, a method of securing data to prevent fraud. “Currency” signifies its role as a medium of exchange. Together, cryptocurrency means a secure digital form of money that can be used for transactions.

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Bitcoin was the first cryptocurrency, introduced in 2009 by an anonymous person or group using the name Satoshi Nakamoto. Since then, thousands of cryptocurrencies, such as Ethereum, Binance Coin, and Solana, have emerged. Some serve as a store of value, while others enable smart contracts, gaming, and decentralised finance.

Unlike physical cash, cryptocurrency does not exist in coins or paper notes. Instead, ownership records are stored digitally. People use special wallets to send, receive, and store their cryptocurrency securely.

Cryptocurrency is often seen as an alternative to traditional money, offering faster transactions, lower fees, and more financial freedom. However, its price can be highly volatile, making it both an exciting and risky asset.

See Also: Pros and Cons of Cryptocurrency for Investment

How Are Cryptocurrencies Created?

Cryptocurrencies do not come from banks or governments. Instead, they rely on blockchain technology, which ensures security and transparency. The process of creating cryptocurrency follows specific rules coded into the system. This prevents manipulation and keeps the system fair for all users.

There are three main ways new cryptocurrencies enter circulation:

  1. Mining (Proof of Work – PoW)
  2. Staking (Proof of Stake – PoS)
  3. Pre-mined and Centralised Cryptocurrencies

Each method works differently and affects the supply, security, and accessibility of the cryptocurrency. Let’s break them down in detail.

1. Mining (Proof of Work – PoW) – The Backbone of Bitcoin

Mining is the most well-known method of creating cryptocurrency. Bitcoin, Litecoin, and Dogecoin all use this system. Mining relies on powerful computers to verify transactions and secure the network.

How Mining Works

  1. A transaction begins – When someone sends Bitcoin, the transaction goes to a pool where it waits for confirmation.
  2. Miners compete to verify transactions – Thousands of computers race to solve a complex mathematical puzzle. The first to solve it gets the right to add a new block to the blockchain.
  3. The block gets confirmed – Other miners check the solution. If correct, the new block becomes part of the blockchain.
  4. The miner receives a reward – The miner who solved the puzzle earns new cryptocurrency and transaction fees.

Why Mining Matters

Mining keeps the blockchain secure by ensuring that only valid transactions get recorded. However, it comes with challenges.

  • It requires expensive hardware – Specialised mining machines (ASICs) cost thousands of dollars.
  • It consumes enormous energy – Bitcoin mining alone uses more electricity than some countries.
  • It gets harder over time – The puzzles become more difficult, making mining less profitable for small operators.

Despite these issues, mining remains essential for many cryptocurrencies. However, a newer method called staking is gaining popularity.

2. Staking (Proof of Stake – PoS) – A Greener Alternative

Instead of solving puzzles, staking allows people to use their cryptocurrency to validate transactions. Ethereum, Cardano, and Solana all use this method.

How Staking Works

  1. Users lock up their coins – To become a validator, you must stake a certain amount of cryptocurrency.
  2. The system selects validators – The blockchain picks validators randomly, but those with more staked coins have a higher chance of selection.
  3. Validators confirm transactions – The chosen validator checks and approves transactions before adding them to the blockchain.
  4. Validators earn rewards – The network pays validators with new cryptocurrency and transaction fees.

Why Staking is Growing Fast

  • It uses less energy – Staking does not need powerful computers.
  • It costs less to participate – Anyone with coins can stake, while mining requires expensive hardware.
  • It allows passive income – Users earn rewards just by holding and staking their coins.

However, staking is not risk-free. If validators approve fraudulent transactions, they lose some of their staked coins. This process, known as slashing, ensures honesty in the system.

3. Pre-Mined and Centralised Cryptocurrencies

Not all cryptocurrencies require mining or staking. Some projects create all their coins at once and distribute them gradually. These are called pre-mined cryptocurrencies.

Examples of Pre-Mined Cryptocurrencies

  • Ripple (XRP) – The company behind Ripple created 100 billion XRP at launch. It releases new coins periodically.
  • Binance Coin (BNB) – Binance issued BNB through an initial coin offering (ICO) before making it available for trade.
  • Tether (USDT) – A stablecoin that represents real-world money. New USDT tokens appear when users deposit fiat currency.

Since pre-mined cryptocurrencies do not use mining or staking, they rely on centralised entities to control supply. While this allows fast transactions, it also raises concerns about decentralisation.

Who Controls Cryptocurrency Creation?

Unlike traditional money, which central banks print at will, cryptocurrency follows strict pre-programmed rules. No one can change these rules without the network’s approval.

For example:

  • Bitcoin has a maximum supply of 21 million coins. No one can create more after reaching this limit.
  • Ethereum reduces its coin supply through “burning.” This process permanently removes coins to control inflation.
  • Stablecoins like USDT create new tokens only when users deposit fiat money.

Because of these built-in limits, cryptocurrency is often called “hard money.” Governments cannot print more cryptocurrency like they do with paper money. However, this also means that understanding how new coins enter circulation is essential before investing.

Different cryptocurrencies use different methods for creation, but they all aim to maintain security and fairness.

  • Mining ensures strong security but consumes high energy.
  • Staking offers a greener alternative with lower costs.
  • Pre-mined cryptocurrencies allow faster transactions but rely on centralised control.

Each method impacts the value and trustworthiness of the cryptocurrency. Knowing how new coins come into existence helps investors make informed decisions and avoid scams.

Cryptocurrency vs Traditional Currency

Cryptocurrency and traditional currency serve the same purpose—they enable people to exchange value. However, they work in very different ways. While traditional money relies on central authorities, cryptocurrency operates through decentralised networks.

To understand the key differences, let’s break them down into the following categories:

  1. Control and Issuance
  2. Security and Transparency
  3. Transaction Speed and Cost
  4. Accessibility and Usage
  5. Inflation and Supply

1. Control and Issuance

Traditional currency—such as the dollar, naira, euro, and yen—is issued by central banks. Governments control its supply and can print more money whenever needed. These decisions affect inflation, interest rates, and the economy.

Cryptocurrency, on the other hand, is decentralised. No single entity controls it. Instead, new coins enter circulation through mining, staking, or pre-programmed releases. Bitcoin, for example, has a fixed supply of 21 million coins, meaning no government can print more to manipulate its value.

Key Difference:

  • Traditional money depends on government policies and can be printed at will.
  • Cryptocurrency follows strict blockchain rules, preventing uncontrolled creation.

2. Security and Transparency

Traditional banking systems rely on trusted institutions to verify transactions. Banks store transaction records privately and can freeze accounts if needed. However, this system is vulnerable to fraud, hacking, and corruption.

Cryptocurrency transactions use blockchain technology, a public ledger that records every transaction. Once recorded, transactions cannot be altered. This makes cryptocurrency highly secure and transparent.

However, if you lose access to your crypto wallet, no bank can recover it. Unlike traditional banking, where customer support can help, cryptocurrency users must secure their funds themselves.

Key Difference:

  • Traditional money is centrally managed and can be reversed or controlled.
  • Cryptocurrency is transparent and cannot be altered once recorded.

3. Transaction Speed and Cost

Sending traditional money across borders can take days. Banks use intermediaries (such as SWIFT) to process transactions, leading to delays and high fees.

Cryptocurrency transactions happen instantly or within minutes, depending on the network. There are no banks or middlemen, which makes international transfers faster and cheaper.

For example:

  • Bitcoin transactions take about 10 minutes, but fees can be high during network congestion.
  • Ethereum processes transactions in seconds, but fees vary based on demand.
  • Ripple (XRP) can settle transactions in just 3–5 seconds with minimal fees.

Key Difference:

  • Traditional money transfers can take days and involve high fees.
  • Cryptocurrency allows fast transactions with lower costs.

4. Accessibility and Usage

Anyone with a bank account can use traditional money. However, billions of people worldwide lack access to banking services. They cannot send money easily or use digital payments.

Cryptocurrency only requires an internet connection. No banks, IDs, or credit checks are needed. This makes it highly accessible, especially for people in developing countries.

However, not all businesses accept cryptocurrency yet. While adoption is growing, most daily transactions still rely on cash, credit cards, or digital banking apps.

Key Difference:

  • Traditional money is widely accepted but requires a bank account.
  • Cryptocurrency is easily accessible but not yet universally accepted.

5. Inflation and Supply

Governments control the supply of traditional money. When they print too much, inflation occurs, reducing the currency’s value. For example, in Venezuela and Zimbabwe, excessive money printing led to hyperinflation, making their currencies nearly worthless.

Cryptocurrency often has a fixed supply or controlled issuance. Bitcoin, for example, has a strict limit of 21 million coins, making it resistant to inflation. Some cryptocurrencies, like Ethereum, use burning mechanisms to reduce supply over time.

Key Difference:

  • Traditional money is prone to inflation due to unlimited supply.
  • Cryptocurrency is often deflationary, with limited or controlled supply.

Both cryptocurrency and traditional money have advantages and disadvantages.

  • Traditional money is stable, widely accepted, and backed by governments.
  • Cryptocurrency offers decentralisation, security, and fast transactions but remains volatile.

While crypto adoption grows, traditional money will likely remain dominant for everyday transactions. However, many believe that cryptocurrency will play a bigger role in the future of finance.

How Does Cryptocurrency Work?

Cryptocurrency operates on blockchain technology, a decentralised system that records transactions securely. Unlike traditional money, which relies on banks, cryptocurrency transactions happen directly between users.

To understand how cryptocurrency works, let’s break it down into these key components:

  1. Blockchain technology
  2. Wallets and private keys
  3. Transactions and verification
  4. Consensus mechanisms

1. Blockchain Technology

A blockchain is a public ledger that stores transaction records across multiple computers. Each transaction is grouped into a block, and once verified, it is added to the chain of previous transactions. This system makes cryptocurrency secure, transparent, and resistant to fraud.

Each block contains:

  • A list of transactions
  • A timestamp
  • A unique code (hash) that links it to the previous block

Since blockchains are decentralised, no single entity controls them. Instead, they rely on a global network of computers to validate transactions. This prevents manipulation and ensures data integrity.

2. Wallets and Private Keys

To use cryptocurrency, you need a digital wallet. Wallets store your private and public keys, which are essential for sending and receiving funds.

  • The public key is like a bank account number. You share it with others to receive payments.
  • The private key is like a password. It must be kept secret because it grants access to your funds.

There are two main types of wallets:

  • Hot wallets: Connected to the internet, making them convenient but vulnerable to hacks. Examples include mobile apps and exchange wallets.
  • Cold wallets: Offline storage, offering stronger security. Hardware wallets like Ledger and Trezor are popular choices.

3. Transactions and Verification

When you send cryptocurrency, the transaction must be confirmed by the network. Here’s how it works:

  1. You enter the recipient’s public key and specify the amount.
  2. Your wallet signs the transaction using your private key.
  3. The transaction is broadcast to the network for verification.
  4. Miners or validators check if the sender has enough funds and if the transaction follows blockchain rules.
  5. Once approved, the transaction is recorded on the blockchain.

This process ensures that cryptocurrency transactions are irreversible and secure. Unlike banks, which can freeze accounts or reverse transactions, cryptocurrency transactions cannot be altered once confirmed.

4. Consensus Mechanisms

Since cryptocurrencies do not have a central authority, they rely on consensus mechanisms to validate transactions. The two most common methods are:

  • Proof of work (used by Bitcoin): Miners solve complex problems to add new blocks to the blockchain. This process requires high computational power.
  • Proof of stake (used by Ethereum 2.0 and Cardano): Users lock up their coins to become validators. The system selects validators based on the amount staked.

Both methods ensure that only legitimate transactions get recorded. While proof of work is more secure, proof of stake is faster and consumes less energy.

Cryptocurrency functions through blockchain technology, wallets, and a secure transaction process. Unlike traditional finance, it eliminates middlemen, making transactions faster and more transparent. However, users must protect their private keys and choose secure wallets to keep their funds safe.

Advantages of Cryptocurrency

Cryptocurrency has gained popularity because it offers several benefits over traditional financial systems. Many people see it as a more efficient and secure way to store and transfer value. Below are the key advantages of using cryptocurrency.

Decentralisation and Financial Control

Unlike traditional money, which governments and banks control, cryptocurrency operates on decentralised networks. No single entity can manipulate the system or freeze funds. Users have full control over their money, making cryptocurrency appealing in countries with strict financial regulations or unstable economies.

Lower Transaction Fees

Banks and payment processors charge high fees for transfers, especially for international transactions. Cryptocurrency eliminates intermediaries, significantly reducing transaction costs. A Bitcoin transaction, for example, can cost just a few cents or dollars, depending on network congestion.

Fast and Borderless Transactions

Traditional international transfers take days because banks must verify and process payments through multiple intermediaries. Cryptocurrency transactions occur in minutes or seconds, regardless of location. This makes it ideal for cross-border payments and remittances.

Security and Fraud Prevention

Blockchain technology secures cryptocurrency transactions by making them immutable. Once a transaction is recorded, no one can alter or reverse it. This reduces fraud, identity theft, and chargeback scams, which are common in traditional payment systems.

Additionally, users have unique private keys to access their funds, preventing unauthorised access. However, losing a private key means losing access to the funds, as no institution can recover them.

Financial Inclusion

Millions of people worldwide do not have access to banks. Cryptocurrency allows anyone with an internet connection to send, receive, and store money without needing a bank account. This is especially useful in developing countries where financial services are limited.

Transparency and Public Access

All cryptocurrency transactions are recorded on a public ledger, meaning anyone can verify them. Unlike traditional banking, where only financial institutions control transaction records, blockchain provides complete transparency. This reduces corruption and builds trust among users.

Ownership and No Third-Party Restrictions

Banks can impose withdrawal limits, freeze accounts, or deny transactions based on policies. Cryptocurrency removes these restrictions. As long as users keep their private keys safe, they have full control over their funds without needing permission from any institution.

Cryptocurrency provides greater financial freedom, lower costs, and enhanced security compared to traditional banking. While risks exist, its advantages make it an attractive alternative for individuals and businesses. However, users must handle their funds responsibly to avoid potential losses.

Cryptocurrency Fraud and Scams

While cryptocurrency offers many benefits, it has also become a target for fraudsters. The lack of regulation, irreversible transactions, and anonymous nature of crypto make it attractive for scammers. Many people have lost money due to fake investment schemes, phishing attacks, and Ponzi schemes. Understanding common cryptocurrency scams can help users protect their funds.

Ponzi and Pyramid Schemes

Ponzi and pyramid schemes promise high returns with little or no risk. They rely on new investors’ money to pay earlier investors, creating the illusion of profits. Once recruitment slows, the scheme collapses, and most participants lose their money.

One of the most famous crypto Ponzi schemes was BitConnect, which promised daily returns of 1%. The platform collapsed in 2018, causing investors to lose billions of dollars.

Fake Initial Coin Offerings (ICOs)

During the crypto boom, many new projects raised money through initial coin offerings (ICOs). While some were legitimate, many were scams. Fraudsters created fake whitepapers, made false claims, and disappeared after collecting investors’ money.

To avoid ICO scams, investors should:

  • Verify the team’s background and experience.
  • Read the project’s whitepaper carefully.
  • Check if the project has working technology, not just promises.

Phishing Attacks

Phishing scams trick users into revealing their private keys or login credentials. Scammers create fake websites that look like real crypto exchanges or wallets. When users enter their details, scammers steal their funds.

Signs of a phishing scam include:

  • Emails or messages asking for login details.
  • Fake websites with slightly misspelled domain names.
  • Unsolicited offers promising free cryptocurrency.

Fake Giveaways and Airdrops

Scammers often impersonate celebrities or crypto influencers, claiming to give away free cryptocurrency. They ask users to send a small amount of crypto first to “verify” their wallets. Once users send money, they receive nothing in return.

A common trick is the Twitter (now X) giveaway scam, where scammers pose as famous figures like Elon Musk and promise to double any Bitcoin sent to them.

Rug Pulls and Exit Scams

In a rug pull, developers launch a new cryptocurrency or DeFi project, attract investors, and then disappear with the funds. These scams are common in decentralised finance (DeFi) and meme coin projects.

Signs of a potential rug pull:

  • A new token with no clear purpose or utility.
  • Developers hiding their real identities.
  • No independent audits or security reviews.

Fake Cryptocurrency Exchanges and Wallets

Some scammers create fake crypto exchanges that offer high returns or low trading fees. Once users deposit money, they cannot withdraw it. Similarly, fake wallet apps steal private keys and drain funds.

To avoid fake exchanges and wallets:

  • Use only well-known platforms like Binance, Coinbase, and Kraken.
  • Verify website URLs before entering login details.
  • Download wallet apps only from official websites.

Cryptocurrency scams are increasing, but users can stay safe by being cautious. If an offer sounds too good to be true, it probably is. Always verify information, avoid suspicious links, and never share private keys. With proper knowledge, users can protect their investments and enjoy the benefits of cryptocurrency securely.

How to Get Started with Cryptocurrency for Beginners

Getting started with cryptocurrency may seem overwhelming at first, but the process is straightforward when broken into simple steps. Before buying or investing in cryptocurrency, it is important to understand the basics, learn about security, and choose the right platforms.

1. Learn the Basics

Before making any financial commitment, beginners should research and understand key cryptocurrency concepts. This includes:

  • What cryptocurrency is and how it works
  • The role of blockchain technology
  • Different types of cryptocurrencies (Bitcoin, Ethereum, stablecoins, altcoins)
  • Risks and rewards associated with cryptocurrency investment

Reliable sources such as official project websites, whitepapers, and reputable financial news platforms can provide accurate information.

2. Choose a Secure Cryptocurrency Exchange

A cryptocurrency exchange is a platform where users buy, sell, and trade digital assets. Choosing a reputable exchange is critical to ensure security and avoid scams.

Important factors to consider when selecting an exchange:

  • Security features (two-factor authentication, encryption)
  • Supported cryptocurrencies
  • Trading fees and withdrawal limits
  • Customer support availability
  • User-friendly interface for beginners

Popular exchanges that meet security and usability standards include Binance, Coinbase, Kraken, and KuCoin.

3. Set Up a Crypto Wallet

A cryptocurrency wallet is used to store and manage digital assets. There are two main types of wallets:

  • Hot wallets (connected to the internet) – Convenient but more vulnerable to hacking. Examples: Trust Wallet, MetaMask.
  • Cold wallets (offline storage) – More secure for long-term holding. Examples: Ledger, Trezor.

For beginners, a hot wallet is an easy starting point, but serious investors should consider a cold wallet for better security.

4. Buy Cryptocurrency

Once an exchange and wallet are set up, users can purchase cryptocurrency. The process involves:

  1. Depositing funds – Most exchanges allow deposits via bank transfers, credit/debit cards, and even PayPal.
  2. Selecting the cryptocurrency – Beginners often start with Bitcoin or Ethereum due to their stability.
  3. Making the purchase – Users can buy crypto at market price or set a limit order for a preferred price.
  4. Transferring to a wallet – For better security, it is advisable to move assets from the exchange to a private wallet.

5. Secure Your Investments

Security is crucial in cryptocurrency. Beginners should follow these measures:

  • Enable two-factor authentication (2FA) on exchanges and wallets.
  • Never share private keys or recovery phrases.
  • Beware of phishing scams and fake websites.
  • Use a hardware wallet for storing large amounts.
  • Keep software and wallets updated to avoid vulnerabilities.

6. Start with Small Investments

The cryptocurrency market is highly volatile. Beginners should start with small investments they can afford to lose. Avoid putting all funds into one asset and consider dollar-cost averaging (DCA) to reduce risks.

Entering the cryptocurrency space requires knowledge, careful planning, and strong security practices. By learning the basics, using reliable exchanges, and securing investments properly, beginners can confidently navigate the crypto market.

How to Buy Cryptocurrency

Buying cryptocurrency is a straightforward process, but beginners must follow the right steps to avoid mistakes. The method you choose will depend on your location, preferred payment method, and the exchange you use. Below is a step-by-step guide on how to buy cryptocurrency safely.

1. Choose a Cryptocurrency Exchange

A cryptocurrency exchange is an online platform where users can buy, sell, and trade digital assets. It acts as a marketplace for cryptocurrency transactions. Some of the most trusted exchanges include:

  • Binance – Offers a wide range of cryptocurrencies and low fees.
  • Coinbase – Ideal for beginners due to its simple interface.
  • Kraken – Known for its strong security features.
  • KuCoin – Supports a large variety of altcoins.

When choosing an exchange, consider factors like security, trading fees, supported cryptocurrencies, and ease of use.

2. Create an Account and Verify Identity

Once you select an exchange, you need to create an account. The registration process usually requires:

  • Email address and password – For account setup.
  • Identity verification (KYC – Know Your Customer) – Most exchanges require users to verify their identity by submitting a government-issued ID, passport, or driver’s license.

This process helps prevent fraud and ensures compliance with financial regulations.

3. Deposit Funds

Before purchasing cryptocurrency, you must deposit money into your exchange account. Different exchanges offer various funding options, including:

  • Bank transfers – Often have lower fees but may take longer.
  • Credit/debit cards – Instant purchases but higher fees.
  • PayPal or third-party payment providers – Available on select platforms.
  • Peer-to-peer (P2P) trading – Allows users to buy directly from others, often with local payment options.

Choose the method that best suits your needs based on speed, fees, and convenience.

4. Select the Cryptocurrency to Buy

Once funds are available, you can select the cryptocurrency you want to purchase. The most common options include:

  • Bitcoin (BTC) – The first and most widely accepted cryptocurrency.
  • Ethereum (ETH) – Supports smart contracts and decentralized applications.
  • Stablecoins (USDT, USDC, BUSD) – Pegged to traditional currencies to reduce volatility.
  • Altcoins (ADA, SOL, XRP, etc.) – Alternative cryptocurrencies with different use cases.

5. Choose a Purchase Method

Exchanges typically offer different order types:

  • Market Order – Buys cryptocurrency at the current market price.
  • Limit Order – Allows users to set a specific price for buying.
  • Recurring Purchases – Automates regular crypto purchases (useful for dollar-cost averaging).

For beginners, a market order is the fastest option, while a limit order allows more control over the purchase price.

6. Store Cryptocurrency in a Secure Wallet

After buying cryptocurrency, it is best to transfer it to a personal wallet for better security. There are two main types:

  • Hot wallets – Online wallets that are convenient but more vulnerable to hacks. Examples: MetaMask, Trust Wallet.
  • Cold wallets – Hardware wallets that store cryptocurrency offline for maximum security. Examples: Ledger, Trezor.

Avoid keeping large amounts of cryptocurrency on exchanges, as they can be hacked.

7. Monitor Your Investment

Cryptocurrency prices can be volatile. After purchasing, it is important to:

  • Track prices using CoinMarketCap or CoinGecko.
  • Stay updated with market trends and news.
  • Secure funds by enabling two-factor authentication (2FA) on accounts.

Buying cryptocurrency is easy, but it requires careful planning to ensure safety. Choosing the right exchange, verifying identity, and using a secure wallet are key steps to protecting your investment. Beginners should start small and gradually build their understanding before making larger purchases.

How to Store Cryptocurrency

Storing cryptocurrency securely is crucial to protecting your investment. Unlike traditional money, cryptocurrency does not have a central authority that can recover lost or stolen funds. This makes it essential to choose the right storage method and follow security best practices.

1. Understanding Cryptocurrency Wallets

A cryptocurrency wallet is a tool that allows users to store, send, and receive digital assets. Wallets store private keys, which are needed to access and manage cryptocurrency. Losing a private key means losing access to funds permanently.

There are two main types of wallets:

  • Hot wallets – Connected to the internet, offering convenience but higher risk of hacks.
  • Cold wallets – Offline storage, making them more secure for long-term holding.

2. Hot Wallets (Online Wallets)

Hot wallets are ideal for frequent transactions and short-term storage. These wallets are software-based and accessible via mobile apps, web platforms, or desktop applications.

Popular hot wallets include:

  • MetaMask – Used mainly for Ethereum and other ERC-20 tokens.
  • Trust Wallet – Supports multiple cryptocurrencies and is easy to use.
  • Exodus – A user-friendly desktop and mobile wallet.
  • Exchange wallets (Binance, Coinbase, Kraken, etc.) – Convenient but less secure because exchanges control the private keys.

Pros of hot wallets:

  • Easy access to funds.
  • Free to use and quick to set up.
  • Convenient for trading and transactions.

Cons of hot wallets:

  • Vulnerable to hacking and phishing attacks.
  • Depend on internet access and can be targeted by malware.

3. Cold Wallets (Offline Storage)

Cold wallets are the safest way to store cryptocurrency because they are not connected to the internet. They are ideal for long-term investors who want to protect large amounts of crypto.

Popular cold wallets include:

  • Ledger Nano S/X – A highly secure hardware wallet supporting multiple cryptocurrencies.
  • Trezor – Another trusted hardware wallet known for its strong security features.
  • Paper wallets – Private keys printed on paper and stored in a safe place.

Pros of cold wallets:

  • Immune to online hacking attempts.
  • Ideal for long-term storage and large investments.
  • Private keys remain offline, reducing risk.

Cons of cold wallets:

  • Less convenient for frequent transactions.
  • Can be lost or damaged if not stored properly.

4. Best Practices for Securing Cryptocurrency

To prevent loss or theft, follow these security measures:

  • Keep private keys and recovery phrases safe – Never share them with anyone.
  • Enable two-factor authentication (2FA) – Adds an extra layer of security for exchange accounts.
  • Use strong passwords – Avoid common words and use a password manager.
  • Beware of phishing scams – Only enter login details on official websites.
  • Regularly update wallets and software – Ensures protection against vulnerabilities.

Choosing the right cryptocurrency wallet depends on how you plan to use your funds. Hot wallets are best for frequent transactions, while cold wallets provide maximum security for long-term storage. By following security best practices, users can protect their cryptocurrency and reduce the risk of theft or loss.

What Can You Buy with Cryptocurrency?

Cryptocurrency is no longer just an investment asset. Many businesses and individuals now accept it as a form of payment. While adoption varies by country and industry, people can use cryptocurrency to buy goods, pay for services, and even book travel. Below are some of the things you can purchase with cryptocurrency.

1. Online Shopping

Several e-commerce platforms accept cryptocurrency for payments. Some allow direct crypto transactions, while others use third-party payment processors.

  • Overstock – One of the first major retailers to accept Bitcoin.
  • Newegg – An electronics retailer that supports crypto payments.
  • Shopify stores – Many merchants using Shopify accept cryptocurrency.
  • BitPay – A payment processor that enables businesses to accept Bitcoin and other cryptocurrencies.

2. Travel and Accommodation

Many travel companies and airlines accept cryptocurrency for flights, hotels, and rental services.

  • Travala – A travel booking platform that supports Bitcoin, Ethereum, and other cryptocurrencies.
  • Expedia (via Travala) – Allows crypto payments for hotel bookings.
  • AirBaltic – One of the first airlines to accept Bitcoin for tickets.

3. Gift Cards and Vouchers

Gift card services allow users to convert cryptocurrency into digital gift cards for popular brands. These can be used at stores that do not directly accept crypto.

  • Bitrefill – Lets users buy gift cards for Amazon, Google Play, and Apple.
  • Gyft – Offers gift cards for major retailers using Bitcoin.

4. Food and Beverages

Several restaurants and food delivery services now accept cryptocurrency payments.

  • Burger King (Venezuela and Germany) – Has tested Bitcoin payments in select locations.
  • Pizza Hut (Venezuela) – Accepts crypto payments for food orders.
  • Delivery services (via BitPay and other processors) – Some food delivery platforms enable Bitcoin payments.

5. Cars and Luxury Goods

High-end brands and dealerships have embraced cryptocurrency as a payment method.

  • Tesla – Briefly accepted Bitcoin for car purchases and may do so again in the future.
  • BitCars – Specialises in selling luxury vehicles for cryptocurrency.
  • Luxury watches and jewellery – Some brands, like Franck Muller, accept Bitcoin.

6. Real Estate

Property purchases with cryptocurrency are becoming more common. Some real estate firms and private sellers accept Bitcoin and other digital assets.

  • Propy – A blockchain-based real estate platform that facilitates crypto transactions.
  • Real estate developers – Some companies accept Bitcoin for high-value properties.

7. Subscriptions and Digital Services

Various online platforms accept cryptocurrency for premium services and digital content.

  • Microsoft – Accepts Bitcoin for Xbox Store credits.
  • ExpressVPN – Allows users to pay for VPN subscriptions with cryptocurrency.
  • Twitch – The streaming platform has supported crypto donations.

Cryptocurrency can be used for a wide range of purchases, from daily essentials to luxury assets. While mainstream adoption is still growing, businesses continue to integrate crypto payment options. As regulatory frameworks evolve, cryptocurrency may become even more widely accepted in the future.

Is Cryptocurrency Safe? (How to Invest in Cryptocurrency Safely)

Cryptocurrency offers opportunities for profit, but it also comes with risks. Unlike traditional investments, cryptocurrency markets are highly volatile, and there are no central authorities to recover lost funds. To invest safely, users must understand potential risks and take steps to protect their assets.

1. Understanding the Risks

Investing in cryptocurrency carries several risks, including:

  • Market volatility – Prices can rise or fall drastically in a short time. Bitcoin, for example, has seen its value drop by over 50% multiple times in a year.
  • Scams and fraud – Fake investment platforms, Ponzi schemes, and phishing attacks target crypto investors.
  • Regulatory uncertainty – Some governments have imposed restrictions or bans on cryptocurrency trading.
  • Loss of funds – If private keys are lost, cryptocurrency cannot be recovered. Unlike banks, crypto wallets do not have password recovery options.

2. Choosing a Secure Exchange

A safe investment starts with using a trusted and regulated exchange. Some of the most secure exchanges include:

  • Binance – One of the largest exchanges with security features like two-factor authentication (2FA).
  • Coinbase – A user-friendly platform with strong regulatory compliance.
  • Kraken – Known for its high security and insurance for digital assets.

Before creating an account, check if the exchange has a good reputation and strong security measures.

3. Using a Secure Wallet

Investors should store their cryptocurrency in a secure wallet instead of leaving it on exchanges. There are two types of wallets:

  • Hot wallets – Connected to the internet, making them convenient but more vulnerable to hacking.
  • Cold wallets – Hardware wallets like Ledger and Trezor, which provide better security by storing assets offline.

For long-term holding, cold wallets are the safest option.

4. Protecting Private Keys

A private key is the most critical piece of information for accessing cryptocurrency. To keep it secure:

  • Never share private keys with anyone.
  • Store backup copies in a safe location.
  • Use a hardware wallet for extra security.
  • Enable multi-factor authentication (MFA) on all accounts.

5. Avoiding Scams and Fraud

To invest safely, be cautious of:

  • Too-good-to-be-true investment offers – Scammers promise high returns with no risk.
  • Fake giveaways and phishing sites – Always verify URLs before entering login details.
  • Unverified cryptocurrency projects – Research new tokens before investing to avoid rug pulls.

6. Diversifying Investments

Investors should avoid putting all their money into one cryptocurrency. A diversified portfolio reduces risk. Consider a mix of:

  • Stablecoins (USDT, USDC) – To reduce exposure to volatility.
  • Major coins (BTC, ETH) – These have stronger market positions.
  • Smaller altcoins – Higher risk, but potential for growth.

7. Staying Updated on Regulations

Cryptocurrency regulations change frequently. Investors should:

  • Follow government announcements regarding crypto laws.
  • Use exchanges that comply with financial regulations.
  • Be aware of tax obligations related to crypto profits.

Cryptocurrency can be a safe investment when managed correctly. By understanding risks, using secure platforms, protecting private keys, and staying informed, investors can minimise losses and safely participate in the crypto market.

Key Takeaways

  • Cryptocurrency is a digital currency that operates on blockchain technology, eliminating the need for banks or governments to process transactions.
  • Unlike traditional money, cryptocurrency is decentralised, meaning no central authority can manipulate its supply or freeze funds.
  • New cryptocurrencies are created through mining, staking, or pre-mining. Mining requires computational power, while staking allows users to earn rewards by locking up their coins.
  • Cryptocurrency offers several advantages, including lower transaction fees, fast international transfers, financial independence, and transparency.
  • Despite its benefits, cryptocurrency comes with risks. Scams, fraud, price volatility, and regulatory uncertainty are major concerns for investors.
  • To get started safely, beginners should:
    • Learn the basics before investing.
    • Choose a secure exchange and wallet.
    • Enable two-factor authentication (2FA) and protect private keys.
  • Cryptocurrency can be used to buy goods, pay for services, and even invest in real estate. However, mainstream adoption is still growing.
  • Security is crucial. Users should store large amounts of crypto in cold wallets, avoid sharing private keys, and stay vigilant against scams.
  • Investing in cryptocurrency requires careful planning. Diversification, research, and staying updated on regulations can help reduce risks and improve long-term success.

Disclaimer: This article is for informational purposes only and does not constitute financial or investment advice. Always conduct your own research before making any investment decisions.

Conclusion

Cryptocurrency has transformed the way people think about money. It offers decentralisation, security, and financial freedom that traditional banking systems cannot match. However, it also comes with risks, including scams, volatility, and regulatory challenges.

For those new to cryptocurrency, understanding how it works is the first step to using it safely. Choosing a secure exchange, using a reliable wallet, and protecting private keys are essential practices for safeguarding investments. Additionally, staying informed about market trends and regulations can help users make better financial decisions.

While cryptocurrency adoption is growing, it is still evolving. Some businesses accept it for payments, while others remain hesitant. As technology advances and regulations develop, cryptocurrency may become a more widely accepted financial tool.

Ultimately, whether using cryptocurrency for investment, transactions, or savings, responsible management is key. By taking security precautions and investing wisely, users can benefit from cryptocurrency while minimising risks.

Want to partner with us to start or take your business to the next level? See how we can help you:

FAQ About Cryptocurrency

1. What is cryptocurrency?

Cryptocurrency is a digital or virtual currency that uses cryptography for security and operates on decentralised networks called blockchains. Unlike traditional currencies issued by governments, cryptocurrencies function without a central authority.

2. How does blockchain technology work?

Blockchain is a distributed ledger that records all transactions across a network of computers. Each block contains a list of transactions and links to the previous block, forming a chain. This structure ensures transparency and security, as altering any information would require changing all subsequent blocks, making the system resistant to tampering.

3. What are public and private keys in cryptocurrency?

A public key is like an account number that others use to send funds to you. A private key is a secret code that allows access to your cryptocurrency holdings. Keeping your private key secure is essential, as losing it means losing access to your funds permanently.

4. How can I buy cryptocurrency?

To purchase cryptocurrency, follow these steps:

  • Choose a reputable exchange – Platforms such as Binance, Coinbase, and Kraken are widely used.
  • Create an account – Register and complete any necessary identity verification.
  • Deposit funds – Use bank transfers, credit/debit cards, or other accepted payment methods.
  • Buy cryptocurrency – Select the cryptocurrency you want and execute the transaction.

5. How should I store my cryptocurrency safely?

Storing cryptocurrency securely involves using wallets:

  • Hot wallets – Connected to the internet and convenient for frequent transactions but more vulnerable to hacks. Examples include Trust Wallet and MetaMask.
  • Cold wallets – Offline storage solutions, such as hardware wallets (Ledger, Trezor), providing enhanced security for long-term holdings.

Always keep your private keys confidential and consider using a hardware wallet for large investments.

6. Are cryptocurrencies legal?

The legality of cryptocurrencies varies by country. Some nations fully legalise and regulate them, while others impose restrictions or outright bans. It is important to research the regulations in your jurisdiction before engaging in cryptocurrency activities.

7. How are cryptocurrencies taxed?

In many countries, cryptocurrencies are treated as taxable assets rather than currency. Selling, trading, or using cryptocurrency can result in capital gains tax or other financial obligations. It is advisable to consult a tax professional to ensure compliance with local laws.

8. What are the risks of investing in cryptocurrencies?

Investing in cryptocurrencies carries several risks, including:

  • Volatility – Prices can rise or fall significantly in short periods.
  • Security risks – Hacking, scams, and phishing attacks are common threats.
  • Regulatory uncertainty – Governments may introduce new regulations that affect cryptocurrency values.
  • Loss of access – Misplacing private keys or forgetting passwords can result in permanent loss of funds.

Conducting thorough research and only investing what you can afford to lose is essential.

9. Can I use cryptocurrency for everyday purchases?

While adoption is growing, not all businesses accept cryptocurrency. However, many online retailers, travel agencies, and even some physical stores now accept payments in Bitcoin and other cryptocurrencies. Additionally, crypto-backed debit cards allow users to spend cryptocurrency like traditional money.

10. What is the difference between Bitcoin and Ethereum?

Bitcoin was the first cryptocurrency, designed primarily as a digital alternative to money. Ethereum, while also a cryptocurrency, was developed to support smart contracts and decentralised applications (DApps). This allows for more complex functionalities beyond simple transactions.

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ABOUT THE AUTHOR

Aminat Sanni-Kamal

Aminat Sanni-Kamal is a legal professional and content strategist with over five years of experience in content creation, writing, and editorial management. As the Associate Managing Editor at Entrepreneurs.ng, she works with the editorial team in delivering high-impact content that informs, empowers, and inspires entrepreneurs and business enthusiasts across various industries. With a Bachelor of Laws (LL.B) degree and a Barrister at Law (B.L.) qualification, Aminat Sanni-Kamal combines a strong legal background with a passion for storytelling to produce content that is both insightful and sound. In this role, Aminat Sanni-Kamal ensures content excellence, manages editorial processes, and contributes to the platform’s growth by aligning strategic content with the needs of the entrepreneurial community. Aminat Sanni-Kamal is committed to fostering innovation and promoting entrepreneurial success stories, positioning Entrepreneurs.ng as a leading resource for actionable business knowledge and growth strategies.

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