What is cryptocurrency?

It is a form of digital money that exists as records in a decentralised database — the so-called blockchain.

Each cryptocurrency transaction is a separate 'link' in this chain, which cannot be altered once recorded. As data is stored on thousands of computers around the world, such a system has no single centre. This is why the blockchain is so difficult to hack or counterfeit.

The first cryptocurrency, Bitcoin, was introduced in 2009 and remains the most well-known to this day. However, hundreds of others have emerged since then, including Ethereum, Litecoin, Ripple, Solana, Toncoin, and many more.

So, what gives cryptocurrency value? On the one hand, it is the trust of the community and the demand in the market, and the limited number of coins. On the other hand, technological capabilities allow some cryptocurrencies not only to replace money but also to create new types of financial products, contracts, and services.

History of emergence

To understand the invention of cryptocurrencies, it is necessary to go back to the period of the severe financial crisis in 2008. At that time, banks around the world lost confidence, governments bailed out giant corporations at the expense of their citizens' taxes, and ordinary people lost their savings. It was at this point that the idea of a currency independent of banks emerged.

On 31 October 2008, a technical manifesto titled 'Bitcoin: A Peer-to-Peer Electronic Cash System' appeared on the internet. The author is a person or group of people operating under the pseudonym Satoshi Nakamoto. To this day, no one knows exactly who it was. The document itself explained how to create a genuine digital currency system that does not require a bank and operates solely through cryptography and mathematics.

In January 2009, the first block on the Bitcoin network — the so-called Genesis Block — was launched. For the first few years, Bitcoin was largely disregarded by most people. In 2010, programmer Laszlo Hanyecz made the first commercial transaction, using 10,000 BTC to buy two pizzas. At the time, that was worth just a few dollars. Today, those bitcoins are worth hundreds of millions.

Since 2011, other cryptocurrencies — the so-called 'altcoins' — have started to appear. In 2015, the world saw the launch of the Ethereum platform, which not only allows users to send money but also to create decentralised applications and smart contracts. This was a real technological breakthrough.

Despite its ups and downs, cryptocurrency has evolved from an idea conceived by programmers into an asset discussed by world leaders, included in the portfolios of hedge funds and debated by governments.

The main types of cryptocurrency

Bitcoin

Bitcoin was the first cryptocurrency. It circulates via a decentralised network of thousands of computers that validate transactions using complex calculations — a process known as 'mining'.

A key feature of Bitcoin is its limited supply. In total, no more than 21 million coins can be in circulation. This threshold is embedded in the code, cannot be changed, and creates a scarcity similar to that of gold.

Unlike fiat currencies, which can be printed without limits, Bitcoin is not subject to inflation, making it attractive for long-term capital preservation.

Ethereum

If Bitcoin is considered digital gold, then Ethereum is a digital platform. This is the simplest way to explain the difference between these two of the most famous cryptocurrencies. Ethereum acts as the technological foundation for creating decentralised applications and contracts, as well as an entire digital economy.

It was launched in 2015 by programmer Vitalik Buterin and a team of developers who realised that the blockchain could be used to do more than just record transactions, as with Bitcoin. This led to the concept of smart contracts — autonomous programmes that execute automatically according to set conditions, without intermediaries.

For example, you can enter into a conditional contract with someone whereby, if one party fulfils their obligations, the system itself transfers payment. There is no need for notaries, banks, or arbitrators. This approach has opened up huge opportunities in finance, insurance, real estate, digital creativity and company management.

There are thousands of projects based on Ethereum, including:

• DeFi (decentralised finance): lending and exchanging platforms, and ways to make money from staking, all without banks.
• NFTs: Tokens that certify ownership of digital objects, ranging from art to virtual land.

Ethereum also has its currency, Ether (ETH), which is used to pay transaction and action fees on the network. Essentially, it is the fuel that powers the entire platform. As more people use Ethereum, the demand for Ether increases.

A significant milestone in the project's development was its transition from a Proof-of-Work to a Proof-of-Stake algorithm in 2022. This reduced the network's power consumption by over 99%. Since then, Ethereum has not required mining; instead, validators are now selected through staking — that is, by storing ETH tokens — in exchange for the right to validate transactions and receive rewards.

From an investment perspective, Ethereum is a scarce asset with a gradually decreasing supply and a functional use. While it is less stable than Bitcoin, it has high growth potential due to the constant development of the ecosystem.

Stablecoins

In the volatile world of cryptocurrencies, where prices can fluctuate by tens of per cent in a day, there is a distinct asset class that remains stable. These are stablecoins — cryptocurrencies that are pegged to the real value of traditional currencies or assets, typically the US dollar. Their main purpose is to provide stability in a highly volatile environment.

The best-known stablecoins are USDT (Tether), USDC (USD Coin), DAI and TUSD. For example, the value of one USDC token should always be approximately equal to that of one US dollar. Rather than being a speculative asset, it acts as an 'anchor' in the crypto ecosystem, similar to the way the dollar acts as a global reserve currency in a traditional economy.

There are several models for ensuring the stability of these coins:

• Fiat collateral (e.g. USDT, USDC). The issuing company holds real dollars or other assets in a bank to back each token at a ratio of 1:1. In other words, for each USDC, there must be $1 in the account. The reliability of such tokens depends on the company's transparency and auditing of reserves.

• Cryptocurrencies (e.g. DAI). Tokens are issued against other cryptocurrencies, typically ETH. To create 100 DAIs, a user must deposit $150 worth of ETH, for example. If the price of ETH falls, the system will automatically liquidate the position.

• Algorithmic stablecoins: Here, the exchange rate is maintained by mathematical mechanisms, such as issuing or burning tokens.

Many users see stablecoins as a way of keeping funds in the crypto environment without having to revert to traditional currency.

Altcoins

Anything that is not Bitcoin is an altcoin.

While bitcoin was created as a digital currency, altcoins often emerge with broader or specialised purposes. Ethereum, for instance, has opened up the world of smart contracts and decentralised applications.

Investors choose altcoins primarily because of their growth potential. In the early stages of development, such projects have a smaller market capitalisation and therefore offer a higher return if they are successful. Many people may remember how some altcoins grew by tens or even hundreds of times in 2020–21.

Additionally, altcoins enable investors to participate in emerging sectors such as fintech (DeFi), gaming (GameFi), logistics, cybersecurity, and data management. Thus, crypto investing is becoming a means not only of generating financial returns but also of supporting innovation.

NFTs and tokens

What is an NFT?

NFT stands for 'non-fungible token'. Unlike Bitcoin or Ether, where each unit has the same value and properties, each NFT is unique. They represent digital ownership of a specific, one-of-a-kind object. This could be:

• A digital image.
• Music or video.
• An item from a video game or virtual real estate.
• It can even be tweets, memes or documents.

Ownership of an NFT is recorded on a blockchain such as Ethereum or a compatible network such as Polygon or Solana. This means that NFTs can be freely bought, sold or used in the digital environment. This includes metavillages, games and digital exhibitions.

Investors recognise several value propositions in NFTs:

• Collector value, as with art. For example, NFTs from the Bored Ape Yacht Club or CryptoPunks series have sold for millions of dollars.
• Functional value: NFTs can provide access to events, services, or clubs. They act as a kind of 'key' or membership card.
• Copyright tool: Artists, musicians, and other creators can sell their work directly to buyers, retaining full control and receiving royalties on resales automatically.

What are tokens?

They are digital units that exist within a particular blockchain platform, usually Ethereum, Solana, or Avalanche. As well as NFTs, they can fulfil various functions.

• Utility tokens provide access to project functions. For instance, an exchange token might reduce trading commissions.
• Governance tokens give voting rights in decentralised autonomous organisations (DAOs).
• Reward tokens are used to reward active users or miners.
• Service tokens are used for platform operations; GAS tokens are an example of this in Ethereum.

Why do people invest in cryptocurrency?

Advantages and disadvantages of crypto investing

Advantages

• High returns. One of the main reasons for the popularity of cryptocurrencies is the potential for substantial profits. In the early stages of development, many tokens increased in value by tens or even hundreds of times. For investors willing to take risks, this presents a genuine opportunity to substantially grow their capital.

• Accessibility for everyone: To start investing in crypto, you don't need a bank account, a broker, or a lot of start-up capital. All you require is a smartphone, an internet connection and $10–20.

• Decentralisation and freedom. Cryptocurrencies work independently of banks and governments. You control your funds. This is particularly important in countries with currency restrictions, financial censorship or weak banking systems.

• Globalisation. Cryptocurrencies have no borders. You can trade them 24/7 with no restrictions based on country or time of day. This creates high liquidity and constant market access.

Disadvantages and risks

• Volatility: Cryptocurrency prices can change very quickly. For example, a token that doubled in value in a week could fall by 80% in two days. This can lead to significant emotional and financial risks, particularly for beginners.

• Lack of regulation: So far, crypto markets have been operating in a semi-regulated environment. Although it offers freedom, it also creates opportunities for fraudsters, manipulators and unstable projects. The lack of regulatory oversight, in turn, brings serious legal uncertainty.

• There is a high threshold of technical understanding required. Wallets, private keys, smart contracts and tokenomics can all be complex for beginners. One wrong click (e.g. entering the wrong address or connecting to a fraudulent site) can result in the complete loss of funds.

• Security and fraud. The lack of centralised control means that you are your bank. If you lose your key or fall victim to phishing, there is no refund.

Cryptocurrency Investing Basics

How do I choose which cryptocurrency to invest in?

At the time of writing, there are over 25,000 cryptocurrencies. Most of these will never gain significant market share. Some will disappear as quickly as they appeared. This is why picking the right asset is one of the most important decisions an investor makes.

Start with the market leaders. For beginners, it is best to focus on proven assets such as Bitcoin (BTC) and Ethereum (ETH). These are the blue chips of the crypto market: they have the largest capitalisation and the highest liquidity, and are supported by most exchanges and services.

Research the project. If you are considering lesser-known cryptocurrencies (altcoins), it is essential to analyse them. Ask yourself key questions: What problem is being solved? Does the project have practical value or real demand? Who is the team? Are they experienced, open and active on social media? What is the tokenomics? How many coins are already in circulation, how many could be issued, and who owns them? How active is the community?

Don't be lazy — read the white paper (the project's technical document) to understand the details. If it's a copy of another project or uses general words without a clear business model, it's best to avoid it.

Check the liquidity and trading volume. Before investing, use CoinMarketCap or CoinGecko to check the project's capitalisation, daily trading volumes, and the exchanges on which it is listed. If a cryptocurrency does not have sufficient liquidity, it may be difficult to buy or sell at the desired price. Low trading volume means high risk for investors.

Don't chase the hype. Instead, look for undervalued projects or those with a clear development plan (roadmap), rather than just marketing.

Understand your goals. Ask yourself whether you want to hold the asset for a few years or if you plan to actively trade. If you are looking for long-term value, choose proven projects. If you want to speculate, learn about technical analysis and risk management, and never invest more than you can afford to lose.

Strategies: long-term and short-term

Long-term strategy (HODL)

This involves buying and holding cryptocurrency for years, despite fluctuations in the exchange rate. Investors who use this strategy are also called HODLers (from the internet meme 'hold' with a typo).

Benefits:

• Less stress and effort spent trying to catch the perfect moment.
• It is a historically profitable strategy for large assets (BTC, ETH).
• There is an opportunity to profit from general market growth (a bull run).

Disadvantages:

• It requires patience and resilience, as the price can fall by 70% or more.
• You miss out on opportunities to make money from short-term fluctuations.
• There is a risk of long-term stagnation of the asset (for example, many altcoins have not recovered from falls).

When to apply?

• This strategy is ideal if you lack the time or expertise to analyse the market daily.
• If you believe in the long-term growth of a particular asset.
• If you are investing over three to five years or more.

Short-term strategy (trading)

This approach involves actively trading cryptocurrency: buying and selling within hours, days or weeks, depending on the chosen style (day trading, swing trading, etc.). The goal is to profit from volatility.

Advantages:

• You can make quick profits.
• The market is open 24/7, so there are constant opportunities.
• You can earn money when the market rises and falls (through shorting).

Disadvantages:

• High level of risk – you could lose everything in one trade.
• It requires technical analysis, time and emotional stability.
• Transaction commissions can eat into your profit.

When should it be used?

• If you have experience or are willing to learn about technical analysis.
• If you have the time to follow the market daily.
• You are ready to make quick decisions and implement strict risk management strategies, such as setting stop-losses.

Combined approach

For most investors, a mixed strategy works best. The majority of the capital is invested in long-term assets such as BTC and ETH, while a smaller portion is invested in short-term deals or promising altcoins.

This approach allows you to:

• Maintain stability.
• Test the market.
• Gradually learn and adapt.

Example:

• 70% long-term holding of Bitcoin/Ether.
• 20% to speculate on altcoins weekly.
• 10%: exploring new areas such as NFTs and DeFi.

Diversifying a crypto portfolio

In traditional investing, there is an adage: ‘Don't put all your eggs in one basket.’ This advice carries even more weight in the world of cryptocurrencies. The market is extremely volatile, unpredictable, and technically complex.

The crypto market is cyclical. While some projects sleep, others demonstrate growth. A balanced portfolio enables you to navigate both bullish and bearish market phases more smoothly.

So, how exactly should you diversify?

• By asset type. Distribute your investments across different categories: BTC, ETH, altcoins, etc.
• By industry (sector). Similar to the stock market, crypto projects can be categorised by sector, such as finance (DeFi), infrastructure (blockchains and oracles), gaming and metaverses (GameFi), privacy and data storage.
• By risk. One model is: 60–70% stable assets with large capital (BTC, ETH), 20–30% promising altcoins, and 5–10% high-risk projects.

How can you buy and store cryptocurrency?

Cryptocurrency exchanges

A crypto exchange is an online platform where buyers and sellers of cryptocurrency can meet. This is where you can buy, sell and exchange digital assets. When choosing an exchange, consider factors such as security, commissions, support and capital survival.

Exchanges come in two main types.

Centralised exchanges (CEX)

These are run by a company responsible for the interface, security, liquidity, and customer support. They are suitable for beginners who want to conveniently buy cryptocurrency with fiat money without the hassle of DeFi.

Advantages:

• Easy registration and interface.
• Funding can be done via bank card or SEPA.
• There is a large selection of coins.
• High liquidity and fast order execution.
• Mobile apps and 24/7 support are often available.

Disadvantages:

• Verification is required (passport, selfies, address).
• You don't have full control over the assets because you don't own the keys.
• They are vulnerable to hacking or regulatory restrictions (some countries block exchanges).

Decentralised exchanges (DEXs)

These operate without a central authority, with all transactions taking place directly between users via smart contracts. They are best suited to experienced users who already have cryptocurrency in their wallet and want to access new opportunities.

Benefits:

• Full control over assets.
• Anonymity and no KYC required.
• Access to new tokens even before they are listed on major exchanges.
• They work without breaks or weekends.

Disadvantages:

• There is no support, so if something goes wrong, you're on your own.
• The interface is more complicated.
• They don't accept fiat — only exchange between tokens.
• There is a higher risk of errors (wrong network, fake token).

Cryptocurrency wallets and their varieties

A cryptocurrency wallet is a software or hardware tool that stores private keys, which are unique codes that give you access to your cryptocurrencies. You need such a wallet to receive and send digital money.

There are two main types of cryptocurrency wallets.

Hot wallets

These are wallets that are connected to the internet. They are convenient for daily use and quick transactions. Examples include:

• Mobile wallets (e.g. Trust Wallet, Coinbase Wallet).
• Web wallets (Binance Wallet and MyEtherWallet).

Advantages:

• Convenience and speed of access.
• Ease of use and intuitive interfaces.
• The possibility of integration with DeFi and NFT platforms.

Disadvantages:

• Increased risk of hacking and fraud due to network connectivity.
• Vulnerability to viruses and phishing attacks.
• Private keys may be stored on third-party servers (in the case of web wallets).

Cold wallets

These are devices or methods of storing private keys offline, without an internet connection. These include:

• Hardware wallets (e.g. Ledger Nano S/X, Trezor).
• Paper wallets (printed private keys or QR codes).
• Cold USB drives.

Advantages:

• Maximum security — keys cannot be stolen online.
• Suitable for long-term storage of large sums of money.
• They reduce the risk of human error when used online.

Disadvantages:

• Less convenient for frequent transactions.
• There is a possibility of loss or damage to the device or paper.
• It requires skill to set up and use properly.

The risks and safety of investing in cryptocurrency

Market volatility

Volatility is a measure of how significantly and quickly the price of an asset changes over time. A stable price indicates low volatility, and vice versa.

In the world of cryptocurrency, high volatility is commonplace. For example, the Bitcoin rate can rise or fall by 10–15% in a day, and some altcoins can rise or fall by 30–50% or more.

Cryptocurrencies are sensitive to news. Statements by famous people, changes in legislation, new technological developments and hacker attacks can instantly cause sharp movements in the exchange rate.

It is also worth considering that many market participants are speculators who buy and sell cryptocurrency to make quick profits. Such active trading amplifies price fluctuations. These fluctuations create opportunities for significant profits.

For instance, buying Bitcoin for $30,000 and selling it for $60,000 is a genuine scenario that has occurred on multiple occasions. However, sharp drops can also lead to the loss of a large part of the investment.

Cryptocurrency fraud and hacks

Due to its anonymity, technical complexity, and lack of centralised regulation, the crypto market has become an ideal environment for fraudsters. This is why every investor must understand basic fraud schemes and defence methods.

Phishing

This is perhaps the most widespread and successful fraudulent scheme, whereby attackers create fake crypto exchange or wallet websites.

How can you recognise it?

• An unusual URL (e.g. binannce.com instead of binance.com).
• Messages or emails asking you to ‘confirm your account’, ‘claim your rewards’ or ‘regain access’.
• Fake adverts on Google or social networks that lead to copies of official websites.

Fraudulent projects (scam coins/rug pulls)

Some tokens are created solely to collect money from investors. The developers promote the asset through marketing, raise funds, and then disappear. This is called a 'rug pull', literally 'pulling the rug out from under your feet'.

How can you recognise them?

• Look out for an anonymous team with no reputation.
• Promises of guaranteed profits.
• A lack of code or transparency.
• High levels of information noise.

Hacking attacks

Even major crypto exchanges can fall victim to hacking attacks. The most famous cases include: Mt. Gox, Coincheck and FTX. Such attacks can result in the loss of assets, which may not always be recoverable.

There is also a risk of personal wallets being hacked. If attackers obtain your private key or seed phrase, you instantly lose access to your funds.

Protection of personal data and assets

One of the main attractions of cryptocurrencies is the ability to have complete control over your money. However, this control comes with a downside: you are responsible for the security of your assets. There is no bank to restore access or police to block your account. Therefore, protecting your personal data and crypto assets is not just a technical issue, but the foundation of your financial independence.

To manage cryptocurrency, you need a private key — a digital code that confirms ownership of the coins. Wallets store this key in the form of a seed phrase — a set of 12 or 24 words that you receive when you create a wallet. If someone obtains these words, they will have full control over your wallet and be able to withdraw all your funds.

The golden rule is this: whoever owns the seed phrase owns your money.

• Never store it digitally (e.g. as a photo, screenshot, or document on a computer or in the cloud).
• Write it down by hand on paper and keep it in a safe place.
• Make multiple copies and keep them separate.
• Never enter the seed phrase anywhere except in the official wallet application.
• Never share the seed phrase with third parties. No exchange, tech support or wallet provider has the right to demand it.

Taxation and legal aspects

In the cryptocurrency environment, freedom is both an advantage and a challenge. Bitcoin is not owned by any government or dependent on central banks, and transactions take place without intermediaries. But does this mean that cryptocurrencies are illegal? Not at all. In many countries, they are legal but not equated with official currency. Depending on the jurisdiction, they are treated as a digital asset, an investment instrument or even a commodity.

In the US, for instance, cryptocurrencies are considered property, meaning that sales or exchanges are subject to capital gains tax. In Ukraine, cryptocurrencies are recognised as intangible assets and can be declared and included in tax reporting.

What should be considered when examining individual jurisdictions?

• Definition of status. Different countries treat cryptocurrencies in different ways. Some recognise them as assets, as in Ukraine, while others equate them with securities, as in the US, for certain tokens. Some countries, like China, completely prohibit their use.

• Declaration of obligation. In most countries, if you make a profit from trading cryptocurrency, this income is subject to declaration and taxation. This applies even if the transactions took place overseas or on decentralised platforms.

• KYC/AML regulations: Exchanges are required to identify users (KYC — Know Your Customer) and report suspicious transactions (AML — Anti-Money Laundering). Therefore, most centralised platforms require documents when users register and withdraw funds.

• Consumer and investor protection. Due to the high number of frauds, governments are introducing regulations to protect users, such as banning the advertising of unregistered tokens and introducing transparency requirements for projects.

The peculiarities of taxation in different countries

USA

In the US, for example, cryptocurrency is considered to be property rather than currency. This means that any profits from cryptocurrency transactions are subject to capital gains tax.

Key rules:

• If you bought bitcoin for $5,000 and sold it for $7,000, the $2,000 profit is taxable.
• If held for less than a year, it is subject to short-term tax (from 10% to 37%).
• If held for more than a year, it is classed as long-term and taxed at 0% to 20%.
• Tax returns (Form 8949) must be filed even for loss-making transactions.

Germany

Germany has one of the most interesting approaches: Here, cryptocurrency is treated as private property, and profits are not taxed at all if you hold it for more than a year. What does this mean?

• If you bought bitcoin in January 2023 and sold it in February 2024, no tax would be payable.
• If it is sold earlier, however, the gain is taxed at your income tax rate.

This incentivises long-term investment.

Portugal

Until 2023, it was considered a tax haven for crypto investors, as cryptocurrency was not subject to any tax. However, a new regulation was introduced in 2023:

• If the cryptocurrency was held for less than a year, a 28% tax is levied on profits.
• If held for more than a year, there is a tax exemption.

Portugal remains an attractive destination for crypto migrants, especially when combined with its lenient tax residency requirements.

Emirates (UAE)

The United Arab Emirates is one of the most crypto-friendly jurisdictions.

• There is no tax on cryptocurrency income for individuals.
• Dubai is actively developing its crypto infrastructure and offering residency to start-ups and traders.

Regulation of the crypto market

US

There is no single crypto regulator in the US. Instead, several agencies claim jurisdiction.

• The SEC (Securities and Exchange Commission) treats many tokens as unregistered securities.
• The CFTC (Commodity Futures Trading Commission), however, considers bitcoin and ether to be commodities.
• The Financial Crimes Enforcement Network (FinCEN) requires exchanges to register as financial institutions and implement anti-money laundering (AML) policies.

This regulatory uncertainty often sparks litigation, as seen in the SEC v. Ripple (XRP) case.

European Union

In 2023, the EU adopted MiCA (Markets in Crypto-Assets), the world's first comprehensive legal framework for the cryptocurrency market.

MiCA's main provisions are:

• Uniform rules for all crypto-assets (except NFTs).
• Mandatory registration of exchanges and token issuers.
• Standards on transparency, capital, and user protection.

These measures have established the EU as one of the most favourable yet structured jurisdictions for cryptocurrencies.

Asia

The countries in Asia operate in different ways.

• Singapore is a progressive jurisdiction with clear rules and licences for crypto platforms.
• Japan has strict licensing requirements, but has fully legalised cryptocurrencies.
• China has officially banned trading and mining cryptocurrencies, but is actively developing a digital yuan (CBDC).