What is cryptocurrency? A beginner's guide for Canadians

Key details

• What is cryptocurrency? It's a type of digital asset secured by cryptography on a decentralized network called a blockchain. This structure allows for secure peer-to-peer transactions without a central authority like a bank.
• How does crypto work? Cryptocurrencies exist on a blockchain, which is a public, unchangeable ledger made of "blocks" of transaction data. These blocks are linked together chronologically and secured by cryptographic hashes, making the history of transactions extremely difficult to alter.
• How is crypto different from regular money? Unlike traditional (or "fiat") currencies controlled by central banks, most cryptocurrencies are decentralized. This means changes to the network are often governed by its community of users and developers rather than a single institution.
• What is the core benefit of crypto? The technology enables faster, cheaper, 24/7 global transactions and offers a new level of transparency and security compared to traditional financial systems.

Should you be paying attention to cryptocurrency?

Cryptocurrency has evolved from a niche interest into a global asset class. At its core, cryptocurrency is a broad term for digital assets that exist on decentralized networks, known as blockchains, which are secured using advanced cryptography.

These assets—often called crypto, tokens, or digital currencies—can be transferred between users as a direct exchange of value or used to perform various functions on their specific network.

To truly understand crypto, however, you first have to understand the foundational technology it’s built on.

How does crypto work? The blockchain, explained

All cryptocurrencies exist on a blockchain. A blockchain is a distributed, public ledger operated by a global network of individual computers called nodes. Think of it as a shared, digital record book that is incredibly secure.

• Blocks and chains: A blockchain consists of "blocks," which are bundles of transaction data. Each block contains a timestamp and a "cryptographic hash" (a unique, complex code) of the previous block, which links them together in a chronological chain.
• Immutability and security: Once a block is added to the chain, its data cannot be altered without changing its unique hash. Since the next block in the chain references the previous block's hash, any unauthorized change would "break" the chain. This break would be immediately noticed by the decentralized network of nodes, making blockchain data effectively immutable, or unchangeable.
• Decentralization: This security is enhanced by decentralization. Because thousands of nodes around the world maintain a copy of the blockchain, no single entity can control or manipulate the data.

How are new cryptocurrencies created? Mining vs. staking

To add new blocks to the chain, the network must agree on which node gets to do it. This is managed by a "consensus mechanism". The two most common types are:

• Proof-of-Work (mining): Used by networks like Bitcoin, nodes compete to solve a complex mathematical problem. The first node to solve it wins the right to post the next block and earns a reward in crypto. This process is called mining.
• Proof-of-Stake (staking): Used by networks like Ethereum and Solana, nodes (or "validators") put up a large amount of crypto as collateral—they "stake" their assets. The network then chooses a validator to post the next block, and if they operate truthfully, they are rewarded.

How do you store cryptocurrency? An introduction to wallets

When you acquire crypto, you can store it in a personal crypto wallet. A wallet holds a collection of blockchain addresses where your assets reside. Every address has two keys:

• Public key: This is used to generate your public address, which you can share with others to receive funds.
• Private key: This key is secret and is required to access your assets or send them to others. Whoever controls the private key is the ultimate owner of the assets at that address.

What are the different types of cryptocurrency?

The word "crypto" is an umbrella term for thousands of different assets, each designed for a specific purpose. They can be grouped into several key categories.

• Native tokens: These are the foundational coins of a blockchain, used for transaction fees and rewarding network participants (e.g., Bitcoin ($BTC), Ethereum ($ETH)).
• Utility tokens: These tokens give users access to a specific product or service on a blockchain, like paying for smart contract execution or data services (e.g., Chainlink ($LINK)).
• Governance tokens: A type of utility token that grants holders voting rights on changes to a protocol (e.g., Maker ($MKR)).
• VRCAs (stablecoins): Value-Referenced Crypto Assets are tokens designed to match the value of an underlying asset, usually the U.S. dollar (e.g., $USDC). They offer the speed and low cost of blockchain transfers without the price volatility of other crypto assets. While commonly called "stablecoins," Canadian regulators note there is no guarantee they will maintain a stable value.
• Memecoins: These tokens are created with no intended utility, often based on internet trends and jokes. Their value is driven by community hype and speculation (e.g., Shiba Inu ($SHIB)).

Crypto ETFs (Exchange-Traded Funds)

Beyond holding digital assets directly in a crypto wallet, there is another popular way for Canadians to gain exposure to the asset class: through crypto ETFs.

A crypto ETF is an investment fund that trades on a traditional stock exchange, like the TSX. Instead of holding the cryptocurrency yourself, you buy shares of the fund, which holds the underlying crypto (like Bitcoin) on your behalf.

Why trade crypto ETFs? This provides a convenient and regulated way to add cryptocurrency exposure to a traditional investment portfolio, often within tax-sheltered accounts like a TFSA or RRSP.

Start trading crypto ETFs at Questrade. You can trade a variety of Canadian-listed crypto ETFs right in your self-directed investing account . And because they trade like any other ETF, you can buy them commission-free.

What are the benefits of crypto technology?

Blockchain technology offers several key advantages over traditional financial systems.

• Decentralization: Most blockchains are not controlled by a single entity like a central bank. Instead, network participants are involved in decisions that affect the protocol and its token.
• Transaction speed and visibility: Blockchain transfers are typically faster, cheaper, and operate 24/7. Transactions are also visible on public blockchain explorers in real-time, offering a level of transparency not seen in traditional wire transfers.
• Immutability and security: The cryptographic structure of blockchains ensures that once a transaction is recorded, it is permanent and cannot be reversed or blocked by an external party.