In the UAE, the Virtual Assets Regulatory Authority (VARA) defines a virtual asset (which includes cryptocurrency) as a digital representation of value that can be digitally traded or used for exchange, payment, or investment. Explore our guide on how crypto works, the different types available, how to buy and store it, alongside the risks and rewards involved.
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Before we begin, it’s worth noting that this is a simplified overview – the full explanation would consume several books.
Cryptocurrency is a type of digital currency that uses cryptography for security. Unlike traditional fiat currencies issued by governments and central banks, cryptocurrencies operate on decentralised networks based on blockchain technology.
The primary use cases for cryptocurrency include peer-to-peer transactions, investment and trading, powering decentralised applications (dApps) such as smart contracts, DeFi (decentralised finance) and NFTs (non-fungible tokens).
Cryptocurrency as a financial concept was launched with the first coin ever – Bitcoin – in 2009. Created by the anonymous individual or group under the pseudonym Satoshi Nakamoto (whose origin remains a debated mystery), Bitcoin marked the beginning of a global financial innovation phenomenon, inspiring thousands of alternative cryptocurrencies and the development of the broader blockchain ecosystem.
Cryptocurrency works on a type of technology called distributed ledger technology (DLT) – blockchain as one of the most famous types – remains the foundational infrastructure behind virtually all cryptocurrencies.
For context, a blockchain is a distributed digital ledger that records all transactions across a network of computers (nodes). Each transaction is grouped into a ‘block,’ and these blocks are linked together in chronological (time from creation) order to form a continuous chain – hence the name blockchain.
When a cryptocurrency transaction is made, it is broadcast to the network where it awaits verification, which ensures that the transaction is legitimate. Once verified, the transaction is added to a block, which is then appended to the existing blockchain – this process creates a permanent and tamper-proof record of all transactions.
Public and private keys are the way to access your crypto assets. A public key acts like a digital address that others use to send you cryptocurrency, while your private key is a secret code that allows you to access and control your funds. Keeping your private key safe is critical, as just as any password, anyone with access to it can control your cryptocurrency.
To maintain the integrity and security of their blockchain, cryptocurrencies rely on consensus mechanisms. The two most common consensus mechanisms are:
A blockchain is a type of distributed ledger technology that records transactions in a secure, transparent and unchangeable way. A blockchain distributes copies of the ledger across a network of computers known as nodes.
Here’s how it works:
There are four core features of cryptocurrency:
Cryptocurrencies from the public blockchains operate without a central authority or intermediary, instead relying on a geographically disparate network of computers to manage and verify transactions, which reduces the risk of control or manipulation by any single entity.
All transactions are recorded on the blockchain (public ledger), which should remain permanently accessible to anyone. This allows users to verify transactions independently.
Once a transaction is added to the blockchain, it can’t be altered or deleted. This permanent record protects the integrity of the transaction history, because each block is cryptographically linked to the one before it with a hash.
Therefore, changing a single transaction would require recalculating ancestor blocks via gaining control of the majority of the network’s computing power (in PoW) or staked tokens (in PoS).
Blockchain security is primarily defined by how difficult it is to alter or tamper with legitimate transactions recorded on the chain. This resilience stems from cryptographic hashing, distributed consensus mechanisms and the immutability of past blocks, all of which make unauthorised changes computationally expensive and easily detectable.
Cryptocurrencies are created primarily through two processes – mining and staking.
Both methods serve to secure the network, verify transactions and introduce new coins into circulation.
Crypto mining is the process by which transactions are validated and added to a blockchain, primarily used by cryptocurrencies that rely on the Proof of Work (PoW) consensus mechanism, like Bitcoin.
Here’s how it works:
While this point has been made several times, it’s really important to hammer it home. Mining requires immense computational power and energy, as miners run high-performance hardware continuously to solve very complicated puzzles.
This energy-intensive process has raised environmental concerns, leading to growing interest in alternative consensus mechanisms like Proof of Stake that are more energy-efficient – though again, detractors view this mechanism as less secure.
Staking is the process used by cryptocurrencies that operate on the Proof of Stake (PoS) mechanism. Instead of relying on energy-intensive mining, staking involves holding and ‘locking up’ a certain amount of cryptocurrency in an address to support the network’s operations.
When you stake your coins (and while there are further complications) you essentially commit them as collateral to help validate new transactions and create new blocks on the blockchain. Validators are chosen to confirm transactions and add blocks based on the amount they already have staked and other factors like the length of time held. For Ethereum, however, validators are chosen at random.
In return for staking, participants earn rewards, which are usually additional coins. These rewards incentivise users to contribute to the network’s security, efficiency and growth. Staking is usually more energy-efficient than mining and can generate passive income for long-term holders, making it an attractive option for many cryptocurrency investors.
There are many different ways to group cryptocurrency varieties, but some of the most popular include:
Bitcoin is cryptocurrency’s trailblazer and inarguably the most famous coin – many use the terms ‘crypto’ and ‘Bitcoin’ interchangeably. Introduced in 2009 by Satoshi Nakamoto, it serves primarily as a digital store of value and a medium of exchange. Bitcoin’s decentralised nature and limited supply have made it a significant player in the crypto market and it’s often referred to as ‘digital gold’.
Altcoins are all cryptocurrencies other than Bitcoin – for example, Ethereum and XRP. Many altcoins offer features or use cases that differ from Bitcoin, such as faster transaction speeds, smart contract functionality (Ethereum) or different consensus mechanisms. New altcoins are continuously being created in a constant evolutionary battle for use case value.
Stablecoins are cryptocurrencies designed to maintain a stable value by pegging to assets like the US dollar or other fiat currencies. Unlike Bitcoin and most altcoins, stablecoins aim to reduce volatility, making them useful for everyday transactions and as a more stable option during market swings. Common examples include Tether (USDT) and USD Coin (USDC).
Utility tokens provide holders access to a product or service within a specific blockchain ecosystem. Unlike Bitcoin, utility tokens are not primarily designed as a currency for medium of exchange but rather to fuel decentralised applications and platforms. Examples include Chainlink and Uniswap.
CBDCs are digital currencies issued and regulated by governments or central banks. Unlike decentralised cryptocurrencies, CBDCs are centralised and serve as a digital form of a country’s fiat currency. Examples include China’s Digital Yuan and the Digital Euro under development in the EU.
There are many reasons to consider diversifying into cryptocurrency. Note that this is not investment advice.
Many investors value the convenience of crypto exchanges like us, though you can also hold coins in your own self-custodied wallet.
Many people store their cryptocurrencies on centralised exchange platforms where they purchase them. This method is useful because it means you can quickly trade or sell your assets. However, keeping funds on exchanges does carry some risk – including hacking, platform insolvency or restricted access during outages. Users don’t have full control over their private keys via centralised exchange platforms, which means they rely on the centralised exchange’s security.
Crypto.com holds all customer crypto assets on a 1:1 backing basis, meaning every user deposit is matched by equivalent assets held in custody. These holdings are publicly verifiable via our independently attested Proof of Reserves page.
Fiat currency deposits are held with regulated banking partners in line with applicable regional regulations and Crypto.com’s custodial standards.
For greater control and security, many users store cryptocurrencies in self-custodial wallets outside the centralised exchanges. These include both hot wallets and cold wallets.
Hot wallets are connected to the internet, making them easy to use for frequent transactions and quick access. Examples include mobile apps, desktop wallets and browser extensions. However, because they’re online, they are also vulnerable to hacking and malware attacks – and can be vulnerable.
Cold wallets store your cryptocurrency offline, such as in hardware wallets like a Trezor, or paper wallets (where you physically write down your public and private keys on a piece of paper). Cold wallets usually offer much higher security but also suffer the risk of losing the private key, and are significantly less convenient for trading.
This is a generic, high-level overview, but the key differences between cryptocurrency and fiat include:
Key differences between cryptocurrency and stocks include:
As with all investments, crypto comes with some risks:
While the future remains speculative, there are several themes to consider:
Explore the Crypto.com Exchange for advanced trading features and tools.
Crypto disclaimer: The products offered by the Company may include assets that are volatile that you trade at your own risk. Nothing mentioned on this site is intended as or should be read as investment advice or recommendation. Cryptoassets prices can go up or down and returns cannot be guaranteed. Cryptoassets are volatile and therefore may not be suitable for you. You should undertake independent evaluation and take into account your level of experience, financial situation and risk appetite. You are solely responsible for your own investment decisions. Terms and conditions apply. For more information, please refer to our: (i) Financial Services Guide and Policy & Procedure Guide (FSG & PPG); (ii) Risk Disclosure Statement; (iii) Complaints Handling Policy.
