The Crypto Market Is a Hot Mess. Here’s What Investors Should Know About How…

The cryptocurrency market grew from less than $200 billion to nearly $3 trillion in 2021, attracting a flood of new crypto investors in the process.

But then it all came crashing down in the first half of 2022. While the crypto market is still worth about $900 billion, the risks have become abundantly clear over the last few months for investors who’ve been drawn to this emerging asset class. 

That’s why it’s more important than ever for investors to do their due diligence and understand what they’re investing in. If you’re thinking about investing in crypto, you may be wondering: What exactly is cryptocurrency? And how does it work?

Here’s what investors should know about it, and how to be smart with your crypto investments.

What Is Cryptocurrency?

Cryptocurrency is a form of digital currency that in theory can be used to purchase goods and services, but which in practice is more commonly bought and sold as investments or used to power decentralized finance (DeFi) software projects on various blockchains. 

Bitcoin was the first cryptocurrency, and in the years since its introduction, the number of coins available to purchase has grown to more than 19,000. Bitcoin was designed for digital payments, though investors have come to see it more as a store of value than a practical digital currency. It is often described as a form of “digital gold.” Bitcoin’s all-time high price was about $69,000 in November 2021, though a steep drop in 2022 has taken it down to around $20,000.

Ethereum is the second-biggest cryptocurrency, but unlike bitcoin it works more like a software platform. Developers buy into the ethereum network to build crypto-oriented apps and software programs. Ethereum also hit its all-time high price in November 2021, reaching $4,878. But like bitcoin, its value has dropped in 2022 and has recently been trading around $1,000.

What Is Blockchain, and How Is It Related to Crypto?

Cryptocurrencies are powered by blockchain networks. A blockchain is essentially a digital ledger made up of expanding blocks of data.

With a blockchain’s distributed ledger, records are be kept across multiple computers on a network. Each computer is called a node, and these nodes verify and store the data. As new transactions are completed, they are added to a “block” of data, and then that block is added to the chain. The entire ledger can be updated as new transactions occur.

Many crypto enthusiasts say blockchain technology has the potential to underpin the next evolution of the internet, sometimes called web3. It’s possible to use blockchain technology for gaming, finance, and other purposes. And, in order to complete transactions, you need to be able to pay the appropriate fee in the related cryptocurrency.

What Is the Value of Cryptocurrency and How Is It Determined?

The value of a cryptocurrency depends on several different factors. With so many cryptocurrencies, it can be difficult to figure out which are truly valuable.

Like many other assets, demand is one of the main drivers contributing to a cryptocurrency’s value. If more people use a coin or a blockchain associated with a coin, it’s more likely to see an increase in price. 

Well-established cryptocurrencies like bitcoin and ethereum are used by more people, so they have a higher perceived value. Because more people use those networks, the prices of bitcoin and ethereum are higher than other cryptocurrencies. Some experts also point to the first-mover advantage enjoyed by bitcoin and ethereum with regard to setting the market in the first place.

Supply can also influence the price of cryptocurrency, or at least investors’ perception of its value. Many experts say bitcoin is more likely to maintain its value…