Cryptocurrencies

Few topics divide investors like crypto. To some it’s the future of money, to others a bubble with no intrinsic value. This lesson won’t try to convince you of either. It explains what you buy when you buy crypto – and which risks really matter.

What a cryptocurrency is#

A cryptocurrency is a digital asset whose ownership is recorded not by a bank but in a decentralised database – the blockchain. Thousands of computers worldwide keep identical copies of this ledger. New entries are confirmed under fixed rules, and once confirmed, transactions are practically impossible to change.

The pioneer is Bitcoin, described in a 2008 paper under the pseudonym Satoshi Nakamoto and launched in early 2009. Its main features:

• Fixed supply: There will never be more than 21 million bitcoin. New coins are created as a reward for “mining”; that reward halves roughly every four years (the halving).
• No central authority: Nobody can print more bitcoin, freeze accounts or change the rules alone.
• Public and pseudonymous: All transactions are visible but not directly tied to names.

There are thousands of other crypto assets. The second largest, Ethereum, is a platform for programs (“smart contracts”), used for example in decentralised finance. Most smaller coins and tokens are short-lived, and many are simply worthless.

How do you value Bitcoin?#

Here lies the crucial difference from stocks and bonds. A stock is a claim on future profits, a bond on interest and repayment. You can argue about what those claims are worth, but they exist.

Bitcoin generates no income. Its value depends entirely on how many people want to own it in future and what they will pay. Supporters compare it to gold: scarce, hard to seize, independent of central banks – “digital gold”. Critics reply that gold has been accepted as a store of value for thousands of years, Bitcoin for about fifteen, and that nothing anchors its price from below.

Volatility: crypto swings hard#

No major asset swings like Bitcoin. Several times it has lost 70% to more than 80% from its peak, only to set new records later:

Smaller coins usually fall even further in such phases and often never recover. How much recovery an 80% loss requires is something you can calculate in the lesson on volatility and drawdowns: 400%.

The real risks#

Beyond price swings, crypto carries risks stock investors don’t usually face:

• Custody: If you hold coins yourself, you need a wallet and must keep your private key safe. Lose it, and the money is gone forever. If you leave coins on an exchange, you’re trusting that exchange.
• Exchange failures and fraud: Mt. Gox lost around 850,000 bitcoin in 2014. FTX, once one of the world’s largest exchanges, collapsed in November 2022 after misusing customer funds; its founder was sentenced to 25 years in prison in 2024.
• Failed designs: The algorithmic stablecoin TerraUSD and its sister token Luna lost practically all of their roughly $40 billion value within days in May 2022.
• Regulation: Governments can change the rules on trading, taxes or custody. The EU’s MiCA regulation, in force since 2024, now requires crypto service providers to be licensed.

How to invest#

Stablecoins: the bridge#

Stablecoins are tokens designed to hold a fixed value, usually $1. The big ones, Tether (USDT) and USD Coin (USDC), hold reserves in cash and short-term Treasuries. They’re used mainly to move between crypto assets without returning to traditional money. Their safety depends entirely on the quality of the reserves and the honesty of the issuer. The US passed a federal framework for payment stablecoins, the GENIUS Act, in 2025.

Summary#

Cryptocurrencies are digital assets on decentralised ledgers. Bitcoin is scarce and independent of central banks, but generates no income – its price is pure expectation. Swings are extreme, and custody, fraud and regulation add further risks. If you invest, keep it to a small amount you could write off entirely, and think carefully about where and how your coins are stored.