What are cryptocurrencies and how do they work?

Cryptocurrencies are digital currencies that use blockchain technology to ensure secure, transparent and intermediary-free transactions. Introduced with Bitcoin in 2009, today there are thousands of cryptocurrencies, each with different functions, used for payments, investments and technological applications.

Although cryptocurrencies have no legal value and cannot be used as a unit of account to measure the value of things, as happens with the euro, the dollar or other traditional currencies, they can still be used to purchase goods and services.

But how do they work? How and where are they stored? And which are the most widespread and used cryptocurrencies for payments and investments? In this guide, we will answer all the most common questions, also exploring the future prospects of the sector and the cryptocurrencies with the greatest potential for 2025-2026.

What are cryptocurrencies

Cryptocurrencies are digital currencies that use cryptography (from the Greek "Kryptos", which means to hide) to ensure the security, immutability and transparency of operations. All transactions are recorded in a decentralized way without the intervention of banks and governments.

According to the Banca d’Italia, cryptocurrencies are "decentralized digital currencies created on the Internet, which constitute a digital representation of value and are used as a means of exchange or held for investment purposes".

Unlike traditional currencies, which depend on intermediaries to ensure the regularity of transactions and, very often, influence the value of the currency, cryptocurrencies are designed to be independent. In fact, they are decentralized and not controlled by governments and financial institutions - and this is one of the reasons why many still struggle to accept them.

Cryptocurrencies, or at least most of them, are designed to introduce new units of money into the system, but with quantitative limits imposed to avoid inflation and to increase their value. In the case of Bitcoin, for example, mining will stop when 21 million units are reached.

How do cryptocurrencies work?

Cryptocurrencies work thanks to a decentralized system based on blockchain technology, which allows transactions to be recorded and verified in a secure and transparent way, without the need for a central body.

Most cryptocurrencies are created through mining, a process that involves the resolution of complex mathematical problems by high-performance computers, which, as a reward, obtain new digital coins. This system prevents the duplication of money, solving the double spending problem, or the risk that the same unit of cryptocurrency is used multiple times.

As an alternative to mining, users can purchase cryptocurrencies through brokers and store them in digital wallets, tools that allow you to send, receive and manage your crypto assets. Cryptocurrency transfers occur through peer-to-peer (p2p) technology, a distributed network system in which all nodes have equal authority, eliminating the intermediation of banks or financial institutions.

Where are cryptocurrencies? Blockchain and regulation

Unlike traditional currencies, cryptocurrencies do not exist in the form of physical money nor are they registered in the databases of banks or financial institutions. Instead, there is a single large digital register: the blockchain.

This technology acts as a public and decentralized ledger, in which all transactions made with a given cryptocurrency are stored. Each operation, once validated by the network through the 50%+1 consensus of the nodes, is transformed into a block and added to the chain, thus creating an immutable history of transactions.

Since blockchain is accessible to all participants in the network, it guarantees transparency and security, preventing retroactive changes to data: once started, each transaction is considered irreversible.

However, the lack of a central authority poses challenges in terms of regulation: governments and financial institutions are still trying to establish effective regulations to guarantee the legality and protection of users, without compromising the decentralized essence of these digital currencies.

The most famous (and important) cryptocurrencies to know

Bitcoin is the reference digital currency for investors, with a dominance - the ratio between its market capitalization and the overall capitalization of all cryptocurrencies - that currently exceeds 60%. This data highlights the central role of Bitcoin in the sector. However, alongside BTC, an ecosystem of altcoins has developed, some of which have gained space thanks to innovative technologies and specific use cases. Below we list the most famous cryptocurrencies.

Bitcoin

Created in 2009, Bitcoin was the first decentralized cryptocurrency to enter the market thanks to the mysterious Satoshi Nakamoto. Bitcoin owes its success to its scarcity (with a limited supply of 21 million units) and its decentralized system. The approval of Bitcoin spot ETFs has accelerated adoption, facilitating the entry of institutional investors and consolidating its role in the global financial landscape.

Today it can boast a price that hovers around 80,000 dollars, after having reached a record value of 108,000 dollars a few months ago. Here you can learn more about how to buy Bitcoin and become part of this futuristic reality.

Ethereum

The great rival of Bitcoin. The exchange rate between Ethereum and the dollar (ETH/USD) is currently trading at $1,800, but has attempted to cross the $4,000 threshold several times. Ethereum is a platform that, in addition to acting as a cryptocurrency, has introduced the concept of smart contracts, allowing the creation of decentralized applications.

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Binance coin (BNB)

In addition to Bitcoin and Ethereum, it is worth noting the rise of another digital currency, Binance Coin (BNB), which has achieved amazing performances: launched in 2017 as a currency to be used on Binance, one of the main cryptocurrency exchange platforms, BNB has gone from a value of a few cents to almost 800 dollars in December 2024. Its value is currently around 600 dollars. Born to reduce trading fees, Binance Coin is now also used for other financial services.

Solana (SOL)

In recent years, Solana (SOL) has also established itself, known for its transaction speed and scalability.

Dogecoin (DOGE)

Born as a joke from a meme, Dogecoin has become surprisingly popular thanks to the support of the community and influential people, including Elon Musk, who have favored its rise.

Obviously these are just some of the existing digital coins and the market today appears richer than ever: from Cardano to Polkadot. Once you understand what cryptocurrencies are and how they work, is it really time to invest in this sector?

Cryptocurrencies and stablecoins: the differences

Not all cryptocurrencies are subject to strong fluctuations in value: among digital currencies, stablecoins have made their way, cryptocurrencies anchored to stable reserve assets (such as gold) or to a currency (such as the dollar) and therefore less volatile. At least on paper: not all stablecoins have a raw material or a fiat currency as their underlying asset, and this can make them unstable.

The low volatility of stablecoins has favored their diffusion as a means of payment, especially in those countries characterized by high inflation. Furthermore, stablecoins are used for hedging operations in cryptocurrency wallets or as a bridge between fiat currencies and virtual currencies.

The main stablecoins available on the market and in order of market cap are:

• Tether (USDT)
• USD Coin (USDC)

Using cryptocurrencies as money, is it possible?

Cryptocurrencies are not only investment tools, but can be used to purchase goods and services directly. More and more businesses are accepting payments in Bitcoin, Ethereum and other cryptocurrencies on a voluntary basis, making them a real alternative to traditional money. Thanks to digital wallets, you can send and receive cryptocurrencies instantly, without going through banks or intermediaries.

Some platforms also offer crypto debit cards, which automatically convert cryptocurrencies into fiat currency at the time of payment. However, since cryptocurrencies are not units of account, they are subject to market volatility, making the payment function less stable than traditional currencies. This means that the value of a cryptocurrency transaction can change rapidly, affecting both buyers and merchants. To mitigate this problem, some cards also support stablecoins, which are pegged to fiat currencies such as the dollar, ensuring greater stability in payments.

With increasing adoption and integration into traditional payment networks, cryptocurrencies could become more widely used as money, offering greater financial freedom and reducing international transaction costs.

How to Use Cryptocurrencies

Using cryptocurrencies is simple and accessible to anyone. The first step is to create a digital wallet (wallet), which can be an app on a smartphone, software on a computer, or a physical device for added security. Once you buy cryptocurrencies through exchanges like Binance or Coinbase, you can use them for payments, transfers, or investments.

Some platforms allow you to earn interest on your crypto through staking or digital loans. Cryptocurrencies can also be used in online games, to buy NFTs , or to fund projects through decentralized finance (DeFi). However, it is essential to protect your assets with private keys and advanced security systems.

How to invest in cryptocurrencies

Investing in cryptocurrencies to earn money means being aware of the risks of a highly volatile and unpredictable market, where gains can be significant, but losses can be just as large. Before starting, it is essential to study the sector and choose a reliable crypto exchange. The most common strategies include buy and hold (long-term purchase), trading, to speculate on short-term price fluctuations, and staking, which allows you to earn passive returns. From 2024, it is possible to invest indirectly in Bitcoin and Ethereum through Spot ETFs, tradable instruments on the exchange (like stocks) that offer exposure to the crypto market without the need to interact directly with the blockchain.

Regardless of the strategy chosen, speculation is a central element in the cryptocurrency market and often causes rapid price changes. For this reason, those who decide to invest in this sector must adopt clear and prudent risk management.

The best cryptocurrencies of the near future: here’s what to know

In the coming years, some cryptocurrencies could dominate the market, standing out for their potential for growth and innovation.

Bitcoin remains the most famous and stable cryptocurrency, thanks to its status as "digital gold" and the growing interest from institutional investors, reinforced by the approval of spot ETFs in 2024. Political support and growing adoption globally could lead Bitcoin to new highs in the coming years.

Since its launch in 2015, Ethereum has maintained a leadership in the field of decentralized applications, thanks to its smart contracts and the transition to Proof-of-Stake, which reduces energy consumption. Innovations such as Layer 2 solutions, including Arbitrum and Polygon, could further improve its scalability, while the upcoming sharding promises to make Ethereum even faster and more efficient, solving problems of congestion and high costs.

Ripple (XRP) is a low-cost, programmable, borderless cryptocurrency designed to facilitate fast, low-cost international payments. Due to these features, it is attracting increasing interest among financial institutions. Its growth potential is significant, especially in an increasingly interconnected world, where the need for fast and efficient transactions continues to grow.

Dogecoin (DOGE), although born as a meme coin, has grown thanks to strong community support and public figures such as Elon Musk. Growing adoption as a means of payment, combined with renewed media interest, could continue to boost its value. However, its lack of advanced features compared to other cryptocurrencies could limit its expansion.

Shiba Inu (SHIB), despite being another meme coin, is gaining acceptance thanks to its integration into the Ethereum ecosystem. This technology allows it to use smart contracts and participate in platforms such as ShibaSwap and NFTs, creating the conditions for growth over time.

Original article published on Money.it Italy. Original title: Cosa sono le criptovalute e come funzionano