You’re our top priority—always. NerdWallet, Inc. is an independent publisher and comparison service, not an investment advisor. Our articles, tools, and other content are free resources meant for informational and self-help purposes only, not personalized investment advice. We can’t guarantee the accuracy or suitability of any information for your unique situation. Examples are hypothetical, and we recommend consulting qualified professionals for specific investment guidance. Our estimates rely on past market performance, which does not guarantee future results. We believe everyone should confidently make financial choices. While we don’t feature every company or product, we’re proud to offer objective, independent, clear, and free guidance and tools. We earn revenue from partners who compensate us, which may affect product placement but never our researched recommendations. Partners cannot pay for favorable reviews. Here is our partners list. **Cryptocurrency Basics: Pros, Cons, and How It Works** Cryptocurrency (“crypto”) is a digital currency used for purchases or trading, with Bitcoin as the most widely known. Most products featured are from advertising partners who compensate us for certain website actions, but our opinions remain independent. Learn how we make money here. We do not provide advisory or brokerage services nor recommend buying or selling specific stocks or investments. This investing information is educational. *Last updated May 8, 2025 • 8 min read* **Expert Review Process** Our content undergoes rigorous fact-checking and editorial review for accuracy, timeliness, and clarity by writers, editors, and outside experts. - *Written by Andy Rosen*, former NerdWallet writer specialized in cryptocurrency, taxes, and alternative assets, with 15+ years of experience. - *Reviewed by Michael Randall*, CFP®, EA, senior wealth advisor passionate about investment and tax planning. - *Edited by Chris Davis*, Managing Editor experienced in stock market and cryptocurrency coverage. **What is Cryptocurrency?** Cryptocurrency, like Bitcoin, is a digital currency functioning as an alternative payment or speculative investment, secured by cryptographic techniques without central banks. Examples include: - Bitcoin: Enables peer-to-peer payments without a central authority. - Ethereum: Supports transactions and decentralized apps via its blockchain. - Altcoins: Various cryptocurrencies leveraging blockchain for diverse uses. - Meme coins like Dogecoin: Joke currencies with notable market caps but few serious uses. **Why Invest in Crypto?** People invest hoping the currency’s value rises. Increased use or demand can drive prices up, allowing profits. Ethereum’s “Ether” is needed to run apps on its blockchain, so growing use may increase demand. Some view Bitcoin more as a new monetary system than a traditional investment. **How Cryptocurrency Works** Supported by blockchain, a tamper-resistant ledger recording ownership and transactions, cryptocurrencies prevent double spending and fraud.

Units are called coins or tokens, used as currency, stores of value, or in specific software applications. **Creation of Cryptocurrencies** Bitcoin uses energy-intensive mining—solving complex puzzles to validate transactions and earn new coins. Others, like Ethereum (transitioning), use proof of stake, where holders “stake” coins to validate transactions with less energy consumption. Most people buy crypto via exchanges. **Many Cryptocurrencies** Thousands exist, with varying values and uses. Starting with well-known coins like Bitcoin or Ethereum is prudent, though volatility and market events—such as the 2022 FTX collapse—can heavily impact prices. **Are Cryptocurrencies Securities?** This remains unclear. Securities like stocks and bonds represent tradable value and ownership or debt. Regulators consider crypto similarly, but recent court rulings may require clearer legislation defining crypto regulation. **Pros and Cons** *Pros:* - Historically, some coins have risen significantly in value. - Removes central banks’ control over money supply. - Offers financial access in underserved communities. - Blockchain technology promises security and reduced fees. - Opportunities to earn through staking. *Cons:* - Many crypto projects are unproven with limited adoption. - Price volatility is high; substantial gains and losses occur. - Volatility undermines use as payment currency. - Bitcoin mining consumes vast energy. - Regulatory uncertainty persists. - Transaction fees can be costly and variable. **Legal and Tax Issues** Cryptocurrencies aren’t legally required to be accepted as currency (“legal tender”), except in El Salvador. In the U. S. , crypto is treated as property for tax purposes—capital gains tax applies when selling or using crypto, and income tax applies upon receipt. **Is Crypto a Good Investment?** Crypto is high risk and should be a small portfolio part—commonly no more than 10%. Prioritize retirement savings, debt payoff, and diversified investments first. Due diligence is essential, reviewing usage metrics, white papers, leadership, major investors, and development stages. Beware of fraud. **Frequently Asked Questions** - *How does blockchain work?* A distributed network maintains a tamper-proof shared ledger. Consensus mechanisms like proof of work and proof of stake ensure accuracy. - *What is proof of work?* Users (miners) solve energy-intensive puzzles to validate transactions, earning rewards while securing the network. - *What is proof of stake?* Users stake their coins to validate transactions and earn rewards, with penalties for dishonest behavior; it’s less energy-intensive. - *How do you mine cryptocurrency?* Mining involves special hardware solving complex calculations, often requiring substantial investment. Joining mining pools can increase reward chances. - *How do you cash out crypto?* Typically via centralized exchanges: connect your wallet, transfer crypto, sell it, and withdraw funds to your bank. Fees and taxes may apply. **Strategic Bitcoin Reserve** In March 2025, an executive order initiated plans for a U. S. government “Strategic Bitcoin Reserve” of seized bitcoins, plus a “Digital Asset Stockpile” for other cryptocurrencies. Legislation to establish these reserves is pending. --- This summary preserves the original content's key details and structure while enhancing clarity and conciseness. Please let me know if you would like it adjusted for a specific use or audience.