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A Beginner's Guide to Cryptocurrency

by Jesse Campbell on
3/27/2025
in Personal Finance
Two men sitting on a bench and looking at the same phone.

Full disclosure: I have long been deeply afraid of cryptocurrency. To an extent, my discomfort is understandable: crypto seems fairly inscrutable to laymen and the only time I ever hear about crypto is usually in the aftermath of a scam or when the crypto market veers wildly in either direction.

But cryptocurrency is 1) legitimate, and 2) not going anywhere, so let's figure out crypto together: how it works, why it's worth anything, and the potential risks and rewards.

What is cryptocurrency?

Cryptocurrency is a form of digital or virtual currency that uses cryptographic techniques to secure transactions (more on this later).

Unlike traditional currencies issued by governments, cryptocurrencies operate on decentralized networks based on blockchain technology. Bitcoin is considered to be the first cryptocurrency and remains the most well-known today, but there are quite a few other coins out there, including Ethereum, Binance Coin, and Solana.

How is cryptocurrency created?

Cryptocurrency is created through various mechanisms, depending on the type of blockchain and consensus algorithm it uses. The two most common methods of cryptocurrency creation are mining and minting.

Mining (Proof of Work)

Mining is the process of generating new cryptocurrency coins by solving complex mathematical problems to validate transactions on a blockchain. It's used by cryptocurrencies like Bitcoin and Litecoin. Here's how it works:

  • Miners compete to solve cryptographic puzzles using powerful computers.
  • The first miner to solve the puzzle gets to add a new block of transactions to the blockchain.
  • As a reward, the miner receives newly minted coins. 

This process secures the network and ensures decentralization, but it requires high electricity consumption.

Minting (Proof of Stake)

With minting new cryptocurrency is created based on ownership and staking rather than computational power. Here’s how it works:

  • Users "stake" their existing coins by locking them in the network.
  • The blockchain selects a validator (similar to a miner) to confirm transactions and create new blocks.
  • Validators receive rewards in the form of newly minted coins or transaction fees.

Minting is more energy-efficient than mining and encourages long-term investment in the cryptocurrency.  

Why is cryptocurrency worth anything?

Traditional currency is typically backed by a physical asset, like gold. There's no physical asset securing crypto, so why is it even worth anything?

Supply and demand

The most expensive Pokemon card ever sold is a PSA 10 Illustrator Pikachu that sold for $5,275,000 in 2022. Why is a Pokemon card worth over $5 million? Because there was only one of them and someone was willing to pay that amount.

Like any asset, cryptocurrency's value is influenced by supply and demand. There are a limited number of coins, so if a lot of people want those coins, their value increases.

Some cryptocurrencies even have built-in scarcity mechanisms, such as Bitcoin’s halving event, which reduces the number of new coins entering circulation. This scarcity can create a perception of value, similar to precious metals like gold.

Utility

A cryptocurrency’s value is often tied to its usefulness. If a cryptocurrency enables smart contracts, decentralized finance (DeFi), or cross-border transactions, it becomes more valuable. For example, Ethereum is valuable because of its ability to support decentralized applications.

You may not personally need crypto for these kinds of transactions, but someone else likely does, which makes your coins valuable.

Decentralization and security

Cryptocurrencies that offer strong security, immutability, and decentralization tend to have higher value. The more secure and tamper-proof a blockchain is, the more confidence users have in its reliability.

Market speculation

Speculation plays a major role in cryptocurrency value. Media coverage, influencer opinions, and market hype can drive prices up or down quickly. Many investors buy cryptocurrencies based on future expectations rather than current utility.

In other words, sometimes a cryptocurrency's present value is largely based on what people think it'll be worth in the future. 

What are the benefits of cryptocurrency?

Beyond their value as an investment, crypto has some important and unique features:

  • Decentralization: Without central authorities, transactions can be faster, cheaper, and less prone to censorship.
  • Security and transparency: Blockchain technology provides a secure and transparent transaction history that's difficult to alter.
  • Financial inclusion: Cryptocurrencies provide access to financial services for unbanked populations in regions with limited banking infrastructure.
  • Global transactions: Cryptocurrencies enable seamless international transactions without the need for currency exchange or traditional banking delays.

What are the risks of cryptocurrency?

My personal fears about cryptocurrency aren't imaginary. There are some real risks that come with crypto:

  • Volatility: Cryptocurrency prices can be highly volatile, leading to significant financial losses for investors.
  • Regulatory uncertainty: Governments around the world are still developing regulations, which could impact the use and value of cryptocurrencies.
  • Security risks: Although blockchain is secure, individual wallets and exchanges can be hacked, leading to loss of funds.
  • Lack of consumer protections: Unlike traditional banks, there are limited protections in case of fraud or lost access to funds. If you're the victim of a crypto-based scam, you may have a much harder time getting any kind of justice.
  • Illicit use: Cryptocurrencies have been associated with illegal activities due to their anonymity and decentralized nature.

So, should you start investing in cryptocurrency? Only if you're comfortable with the risks and have a decent understanding of the space. The future of crypto is still unwritten. Some think it'll replace our current banking systems. Others think it may eventually fade away. Neither is going to happen immediately, though.

As with any investing or financial decision, do your research and try not to get swayed by short-term trends or hype cycles. 

Need help repaying debt or rebuilding your budget? MMI's powerful debt repayment tools can have you out of credit card debt in as little as 24 months. Begin your free online financial analysis and see what we can do for you.

Tagged in Financial technology, Banking

Jesse Campbell photo.

Jesse Campbell is the Content Manager at MMI, with over ten years of experience creating valuable educational materials that help families through everyday and extraordinary financial challenges.

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