What is cryptocurrency and how it works?

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Cryptocurrency is a digital revolution transforming America’s financial landscape. From New York to California, millions of Americans now own Bitcoin or Ethereum, while companies like Tesla and PayPal integrate crypto payments. But how does it work? Why do some call it the future of money, while others dismiss it as a bubble? Let’s break it down.

What is cryptocurrency?

Cryptocurrency is digital money secured by cryptography. Unlike the dollar, printed by the Federal Reserve, cryptocurrencies are created and governed by algorithms. Their foundation is blockchain, a technology The Wall Street Journal calls the “next-generation internet.”

Bitcoin (2009) was the first cryptocurrency, but others now popular in the U.S. include:

• Ethereum — A platform for smart contracts.
• USDC — A stablecoin pegged 1:1 to the dollar (issued by U.S.-based Circle).
• Solana — Ethereum’s “rival” with low transaction fees.

How Does It Work? A Beginner’s Guide to the Tech

Blockchain: Transparency Over Banks

Blockchain is a chain of data blocks recording transactions. Each block is verified by thousands of computers globally, not a single bank. For example, when you send $100 in Bitcoin to a friend, the transaction is recorded on the blockchain and becomes immutable.

Why Americans love it:

• Speed: Transfers from New York to London take 10 minutes, not 3 days.
• Savings: Fees are often lower than banks (especially for cross-border payments).
• Control: You hold your funds directly, no intermediaries.

2. Mining vs. Staking: Creating New Coins

• Mining (PoW): Computers solve complex math problems to validate transactions. Miners earn crypto as a reward. But in the U.S., costs vary: mining is profitable in Texas (cheap energy) but not in California.
• Staking (PoS): Instead of mining, users “lock” coins in a wallet to support the network. For example, staking Ethereum yields up to 5% annually.

3. Wallets: Your Digital Vault

• Hardware Wallets (Ledger, Trezor) — USB-like devices. Ideal for large holdings.
• Mobile Wallets (Coinbase Wallet, Trust Wallet) — Convenient for daily use.

Warning! Losing your private key = losing your money. In 2022, James Howells threw away a hard drive containing keys to 7,500 Bitcoin (worth ~$200 million today) — he’s still searching a landfill.

Why Does America Need Cryptocurrency?

Investing: From Garages to Wall Street

As of February 2023, approximately 20% of the adult population in the U.S., which amounts to over 50 million people, own cryptocurrency.

• Example: If you had invested $1,000 in Bitcoin in 2020, it would be $12,500 in 2025.
• Risk: The crypto market lost $2 trillion in 2022 after the TerraUSD and FTX collapses.

2. Tech Innovations: Beyond NFTs

NFTs (unique tokens) aren’t just digital art. In the U.S., they’re used by:

• Musicians (Kings of Leon released an album as an NFT).
• Athletes (NBA sells video highlights on Top Shot).
• Brands (Starbucks offers NFT rewards to customers).

3. Financial Freedom

• For Immigrants: Remittances to Latin America via crypto are 50-70% cheaper.
• For Businesses: Shopify stores accept crypto payments via BitPay.

Risks: The Dark Side of Crypto

Regulation: New Rules of the Game

• In 2024, the U.S. Securities and Exchange Commission (SEC) intensified its oversight of the crypto sector, filing 33 lawsuits against various crypto companies.
• In 2025, new tax reporting rules for cryptocurrency transactions are expected to increase transparency and regulatory control.

Tip: Before investing, check if a token complies with SEC regulations. For example, Bitcoin and Ethereum are currently classified as commodities.

Scams: How to Avoid Losing Money

• Phishing: Scammers create fake websites impersonating popular platforms like Coinbase or WalletConnect to steal user credentials.
• Pump & Dump Schemes: Organized groups, especially on Telegram, artificially inflate token prices before selling them off, causing a price crash.

Protection: Always enable two-factor authentication (2FA) and avoid storing all funds on centralized exchanges.

Taxes: The IRS Is Watching

Since 2014, the IRS classifies cryptocurrency as property, meaning:

• Selling crypto for profit incurs capital gains tax, which can be as high as 37%.
• Even buying a cup of coffee with Bitcoin is a taxable event.

Tip: Keep detailed records of all crypto transactions and consult a tax professional to ensure compliance.

Getting Started: A Step-by-Step Guide for Americans

Choose a Licensed Exchange

• Coinbase: Beginner-friendly (FDIC-insured dollar deposits).
• Kraken: Low fees.
• Gemini: Complies with NYDFS standards (New York).

Buy Cryptocurrency
Start small ($10-50) and diversify:

• 50% — Bitcoin and Ethereum (“blue chips”).
• 30% — Stablecoins (USDC, DAI).
• 20% — Altcoins (Solana, Polygon).

Transfer to a Wallet
A hardware wallet (e.g., Ledger Nano X) is the safest option.

Use Crypto in Daily Life

• Spend via crypto debit cards (Crypto.com Visa Card).
• Invest in Bitcoin ETFs (e.g., ProShares’ BITO).

The Future: What’s Next for Crypto in the U.S.?

Digital Dollar (CBDC)
The Federal Reserve continues to explore the possibility of introducing a digital dollar, but no final decision has been made. The issue has sparked active political debates, with some officials arguing that a digital dollar could give the government excessive control over citizens’ finances.
Institutional Adoption
Major financial institutions like BlackRock, Fidelity, and Citibank are actively developing cryptocurrency services, signaling market maturity and increasing trust in digital assets.
Green Mining
Following criticism from the public and environmental organizations, many mining companies are transitioning to renewable energy sources. For example, in Texas, about 58% of mining operations already use clean energy, helping to reduce the industry’s carbon footprint.

Conclusion

Conclusion: Should You Dive In?

Cryptocurrency isn’t gambling — it’s a tool. Like stocks, it demands education. Before investing:

• Study a project’s whitepaper.
• Follow SEC.gov and CoinDesk.
• Ignore “x100 overnight” promises.

As Coinbase CEO Brian Armstrong says: “Crypto is a financial system where code replaces trust.” If you’re ready to learn and take risks, this could be your ticket to a new era.

Sources used to write the article:
Binance
Wikipedia