What is crypto?
Cryptocurrencies attract a lot of attention, but what are they, how do they work, and should you buy them?
Cryptocurrencies – or ‘crypto’ – are a novel form of currency that is acquired and exchanged digitally.
Cryptocurrencies are designed to operate outside the direct control of central banks or single entities. They are powered by cryptography and recorded on public, distributed ledgers called blockchains.
As of August 2026, CoinMarketCap counts nearly 58 million different forms of cryptocurrency with a combined market capitalisation of $2.65 trillion – roughly equivalent to the GDP of Brazil. Other sources put the total number of cryptocurrencies in existence in the tens of thousands; the discrepancy is likely a result of how loose a definition of cryptocurrency is being used.
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Some of the most popular cryptocurrencies are Ethereum, Solana and Binance Coin (BNB) but the best known by far is Bitcoin.
Invented in 2008, the price of a single Bitcoin didn’t pass $1 until 2011. As of 24 August, a single Bitcoin was worth $78,964.
That ballooning in price makes Bitcoin one of the best-performing asset classes over the period (possibly the best), and has led to crypto becoming a popular asset to invest in.
Critics, though, view crypto as an inherently valueless asset, and point to concerns that cryptocurrencies are often used by criminal organisations.
You might be thinking about investing in crypto, but before doing so it is important to understand how cryptocurrencies work and the risks involved.
How does crypto work?
Cryptocurrencies run on blockchain technology. A blockchain is effectively a decentralised database. It stores information across a network of computers or servers, and makes data immutable – meaning that it cannot be altered.
“While some networks are more decentralised than others, most aim to run on open protocols where anyone with an internet connection can participate,” says Rahul Bhushan, managing director at ARK Investment Management.
While often conflated, crypto and blockchain are two different things. Blockchain is the underlying technology, and it has other applications beyond cryptocurrencies. For example, it is often used in supply chain management: the ability to create immutable records of every stage of a supply chain can improve its efficiency and transparency. Crypto, on the other hand, refers specifically to the digital currencies that are traded using blockchain technology.
Each cryptocurrency has its own unique features, but in general they have to be ‘mined’. Crypto miners are effectively vast data centres that deploy massive amounts of computing power in order to solve complex cryptography problems – from which crypto derives its name. This process is often referred to as ‘proof of work’ and is the traditional way in which units of cryptocurrency come into existence.
Why is crypto so popular?
Some people associate crypto with illicit activities, but it can have several legitimate use cases.
Firstly, it can operate as a means of exchange that doesn’t rely on proprietary infrastructure (such as Mastercard’s or Visa’s technology). This can make it a cheaper means of exchanging money internationally, and blockchain technology is viewed by many as a more secure method of exchange.
Secondly, it is perceived to be a hedge against inflation. Fiat currencies tend to depreciate in value over time because central banks can (and do) push more currency into the supply. Cryptocurrencies, though, tend to be resistant to inflation because their supply is more limited.
There will, for example, only ever be 21 million Bitcoins mined thanks to how it was designed. The rate at which new Bitcoins come into existence also halves approximately every four years, in an event known as the Bitcoin halving, which further limits the supply of Bitcoin. As of March 2026 there were around one million more Bitcoins to mine – but because of the halving, it is expected to take until 2140 to mine them all.
Bitcoin is “often compared to digital gold because of its limited supply and potential as a store of value”, says Bhushan.
Crypto’s independence from central banks and the global economic system more broadly also makes it popular in some developing economies that are frequently stung by volatile shifts in currency exchange rates, especially against the dollar.
Should you buy crypto?
Cryptocurrencies are hugely volatile assets. Even the largest, stablest cryptocurrencies can be prone to sudden drops in valuation.
For example, after hitting its all-time high on 6 October 2025 Bitcoin lost half of its value by July 2026. Ethereum, the second-largest cryptocurrency by market cap, fell 66% over the same period.
Bitcoin and Ethereum are two of the more stable cryptocurrencies. Smaller, more niche ones can be even more volatile, and unlike Bitcoin and Ethereum, there is little mainstream institutional buy-in (in the form of crypto ETPs) to support demand.
Additionally, there are some security risks. Crypto buyers are often targets for scams, and exchanges like Coinbase make promising targets for cyber attackers.
So while investing in crypto has undoubtedly paid off for many people, particularly early adopters of Bitcoin, new entrants should proceed with caution and consider how much of their investment they would be prepared to lose in the event of a sudden crash in the price.
If you do decide to invest in crypto, the other question is how much of your portfolio to allocate.
In October 2025, the International Monetary Fund calculated the total market capitalisation of all crypto assets at $4.2 trillion. Around the same time, Goldman Sachs calculated the sum of all investable assets globally at roughly $250 trillion. So crypto accounts for approximately 1.7% of all global assets.
That figure can vary depending on how well the crypto market is doing, but in general allocating around 1-2% of your portfolio to crypto would mean its weighting in your portfolio would be in line with its global total (this is known as a market cap neutral allocation).
Dovile Silenskyte, director, digital assets research at asset manager WisdomTree, argues that a market cap neutral Bitcoin allocation, for example, can improve returns and Sharpe ratios (a metric that measures a portfolio’s return compared to its risk) when added to a traditional 60/40 portfolio.
This is largely because Bitcoin has a relatively low level of correlation with traditional assets.
“Risk is not driven by volatility alone. It is driven by how assets interact,” said Silenskyte. “Bitcoin’s portfolio contribution comes from diversification and asymmetry, not stability.”
