How The Cryptocurrency Market Really Works

Investing in cryptocurrency is a divisive topic — but it’s worth knowing about the emerging (and volatile) new asset class. Chances are you’ve heard of cryptocurrency, even if you’ve never invested (or fully know how it works). While these digital assets have been around for a while, they’ve gone mainstream in the past few years.

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If you’re not exactly sure what cryptocurrency is or how the crypto market works, you’re not alone. In this guide, we’ll dive into the cryptocurrency market, highlighting its similarities and differences with traditional stocks and other investments.

What Is Cryptocurrency?

Cryptocurrency is a digital currency backed by a blockchain, which uses a network to record and verify transactions. It was first created in 2009, one year after the Great Recession began, explained Jeff Owens, co-founder of Layer1 blockchain Haven1.

“The financial crisis destroyed faith in the traditional financial system. At the time, Bitcoin was designed as a form of peer-to-peer payment that eliminated the need for intermediaries such as banks,” Owens said.

Unlike fiat currency (such as the U.S. dollar or the euro), cryptocurrency is decentralized, functioning completely independent of banks. This makes crypto a potential alternative to traditional currencies.

“Without the facilitation by banks or governments, crypto works by one person directly paying another person digitally via blockchain, a public ledger,” noted David Kemmerer, CEO of CoinLedger, a cryptocurrency tax software company.

Unlike bills and coins, cryptocurrency doesn’t physically exist. However, it derives value from its users through supply and demand. Most cryptocurrencies have stringent monetary policies, including having a fixed number of tokens that can be created, or restrictions on the number of new tokens that can be created. This helps maintain their value.

Since its inception, cryptocurrency has grown beyond just a decentralized payments network into a viable alternative investment option, said Owens.