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Cryptocurrency Basics

What is cryptocurrency?

While you may have heard names like Bitcoin and Ethereum, you might not truly understand what they are. Despite the spotlight on cryptocurrencies—such as Bitcoin reaching new highs above 15 million yen—few people really grasp their fundamentals or mechanisms.

This article breaks down the essential characteristics of cryptocurrencies and clearly explains how they differ from everyday money and electronic money. With a value system independent from legal tender and global, around-the-clock trading, cryptocurrencies are redefining our financial concepts.

Cryptocurrency: Definition and Legal Position

Cryptocurrencies are digital assets that function as a type of money exchanged over the internet. Unlike traditional bills and coins, they have no physical form and exist only as electronic data.

Japan’s Payment Services Act defines cryptocurrency with three main characteristics:

1. It holds economic value, can be used for payments at merchants, and exchanged for standard money (like yen or dollars)
2. It is electronically recorded and transferable via devices like computers or smartphones
3. It is different from government-issued money or electronic money

Previously known as “virtual currency,” the legal term was changed to “crypto-asset” in May 2020, aligning with the international standard “Crypto-Asset.” In practice, both terms remain in use in news and casual conversation.

The name “crypto-asset” reflects the underlying cryptography that secures transactions—this cryptographic technology is the backbone supporting cryptocurrencies.

Cryptocurrency vs. Fiat Currency

The main differences between cryptocurrencies and conventional money (like yen or dollars) are who issues them and how their value is supported. Fiat currencies are issued by central authorities—governments or central banks—and their value is backed by national economic strength and trust.

Most cryptocurrencies, however, have no specific issuer. Instead, their networks are collectively maintained by participants, and their value is set by market supply and demand without any government guarantees.

Because cryptocurrencies aren’t overseen by governments or banks, they’re less exposed to political or economic intervention. This means they’re less affected by national monetary or economic policy. On the other hand, their prices swing widely, so investors need to approach them with caution.

Also, while fiat currencies exist as physical cash or coins, cryptocurrencies are purely digital and can only be used with an internet connection.

Cryptocurrency vs. Electronic Money

Both cryptocurrencies and electronic money are digital, but they differ fundamentally. Electronic money is simply digitized fiat currency, while cryptocurrency is a new and independent asset class.

Electronic money—like Suica, PASMO, or nanaco—is issued by companies and always pegged to fiat money, so 1,000 yen in e-money equals 1,000 yen, with no price changes.

By contrast, cryptocurrencies are priced by market supply and demand, so many people hold them for investment. For instance, the value of one Bitcoin could swing from 1 million yen today to 1.1 million or 900,000 yen tomorrow.

Electronic money is a closed system, usable only at affiliated merchants, but cryptocurrencies are open systems, usable globally wherever accepted. This highlights a fundamental difference in their underlying philosophies.

The Technology Powering Cryptocurrency

How do cryptocurrencies actually function?

The core is a special technology called “blockchain.” While it may sound complicated, the basic idea is simple: this innovation enables secure, trustworthy transactions with no central authority.

This section explains the technology behind cryptocurrencies in accessible terms, minimizing technical jargon. Understanding these foundations reveals why cryptocurrencies have intrinsic value and widespread attention.

What Is Blockchain Technology?

Most cryptocurrencies are built on blockchain technology—a kind of database that stores transaction records in “blocks,” then links those blocks together in a chain.

Each block contains multiple transaction records plus information from the previous block. This design makes altering data extremely difficult: to change one block, you’d have to rewrite all subsequent blocks, making tampering virtually impossible.

In simple terms, blockchain is “a system where everyone checks each other’s records to build trust.” Traditional banking relies on a trusted third party, but with blockchain, technology itself guarantees trust.

The breakthrough is that everyone shares the same records and can verify their accuracy, even without a central authority. This enables a transparent, fair system that doesn’t depend on any single organization.

How Distributed Ledgers Work

Conventional banking centralizes transaction and balance records. All the data sits on bank servers, so if those servers fail, the entire system stops.

Blockchain, by contrast, uses a “distributed ledger” system: many computers across the network each hold a copy of the records. Thousands—or tens of thousands—of computers worldwide keep these records in sync.

Key benefits include:

• High availability—the system keeps running even if some parts fail
• Tamper resistance—no one can alter data unilaterally
• Transparency—anyone can verify the transaction history
• No single point of failure—making the system robust

In short, “sharing records among many, not just a few, creates a safer, more trustworthy system.” This distributed approach overcomes the vulnerabilities of centralized models.

Distributed ledgers also resist censorship—it’s technically difficult for any government or organization to block or delete transactions, a crucial feature of cryptocurrencies.

Security and Reliability

On blockchain, transactions are validated through consensus algorithms—mechanisms allowing network participants to agree on which transactions are legitimate.

For example, Bitcoin uses Proof of Work (PoW), where participants solve complex calculations to earn the right to create new blocks—a process called mining, with new bitcoins as rewards.

To take over the network, an attacker would need to control more than half its total computing power—a practically impossible task. The global scale and massive power of the Bitcoin network make attacks economically unfeasible.

Ethereum, in contrast, now uses Proof of Stake (PoS), where token holders who lock up their assets can validate transactions. PoS consumes less power than PoW, reducing environmental impact.

These technologies ensure a secure system with no central controller. In simple terms, “collective monitoring prevents fraud.”

Furthermore, blockchain’s cryptography authenticates senders and recipients, guarantees data integrity, and protects privacy. These safeguards provide high levels of security and reliability.

Major Types of Cryptocurrency

There are thousands of cryptocurrencies, including well-known ones like Bitcoin and Ethereum. Even if you’ve heard of them, you might not know what makes each unique.

The number of cryptocurrencies has exploded to tens of thousands, each with different purposes and technical features. Here are the key characteristics and distinctions of the most prominent cryptocurrencies:

Bitcoin (BTC)

Bitcoin, the world’s first cryptocurrency, was proposed in 2008 by the pseudonymous Satoshi Nakamoto and launched in 2009. The white paper “Bitcoin: A Peer-to-Peer Electronic Cash System” outlined a direct value transfer system with no need for banks.

Published just after the 2008 financial crisis, the white paper reflected a period of distrust toward centralized finance. Bitcoin’s creation marked the birth of a new, non-sovereign monetary system.

Key features of Bitcoin:

• Fixed maximum supply of 21 million coins, creating scarcity
• New blocks created about every 10 minutes
• Block rewards halve roughly every four years (“halving”)
• The world’s most recognized cryptocurrency and largest by market cap
• Longest operational history, with proven security

Known as “digital gold,” Bitcoin is valued for its scarcity—like gold, its capped supply makes it resistant to inflation and a store of value.

It’s also the most liquid crypto asset, trading across major exchanges worldwide. Bitcoin acts as the industry’s bellwether and is considered the “reserve currency” of the crypto market.

Ethereum (ETH)

Ethereum is a cryptocurrency and platform launched in 2015 by developer Vitalik Buterin. While Bitcoin focuses on payments, Ethereum introduced the breakthrough concept of the smart contract.

Smart contracts are self-executing agreements, coded to automatically carry out terms when specific conditions are met (e.g., “if A, then B”). They run without human intervention.

For example, you could use a smart contract to automatically pay for goods upon delivery, or release insurance payments when certain criteria are met. This enables complex transactions and decentralized applications (DApps).

Ethereum’s key features:

• Enables diverse apps via smart contracts
• Foundation for DeFi (decentralized finance) and NFTs (digital ownership)
• No hard cap on supply; issuance is variable
• Second-largest market cap after Bitcoin
• Active developer community with frequent upgrades

Ethereum is not just a currency—it’s a platform for building decentralized apps. Called the “world computer,” it offers a distributed computing environment on the internet.

Recently, Ethereum completed its transition from Proof of Work to Proof of Stake (“The Merge”) to dramatically reduce energy usage.

Other Leading Cryptocurrencies (Altcoins)

Every cryptocurrency except Bitcoin is called an “altcoin” (alternative coin), and each has unique features and goals.

• XRP: Created by Ripple Labs, XRP specializes in international payments. It offers faster, cheaper transfers than traditional banks, with settlements in seconds to minutes. XRP focuses on partnerships with financial institutions, and several banks and payment firms have piloted its system.

• Solana: Known for high speed and low fees, Solana processes tens of thousands of transactions per second. Its performance makes it popular for DeFi and NFT platforms—earning it the nickname “Ethereum killer.” Solana uses its unique “Proof of History” consensus mechanism.

• Cardano: A “third-generation” blockchain, Cardano was developed based on academic research, prioritizing security and sustainability. Its design is grounded in peer-reviewed research and formal verification methods. Cardano also uses an energy-efficient Proof of Stake system.

• Dogecoin: Originally a meme, Dogecoin gained real value thanks to celebrity endorsements. With a Shiba Inu mascot and a tight-knit community, Dogecoin works much like Bitcoin, but with faster block times and no supply cap.

These cryptocurrencies bring diversity to the field—some focus on payments, others on smart contracts or specific industries. Crypto assets have been developed for a wide range of use cases.

Other categories include stablecoins (pegged to fiat for price stability), privacy coins (emphasizing anonymity), and governance tokens (enabling participation in project decisions). Crypto assets have grown increasingly varied.

Key Features and Benefits of Cryptocurrency

How does cryptocurrency compare to cash, and what advantages does it offer?

This section connects the benefits and appeal of cryptocurrencies to practical, daily life. With crypto, you can do things that are difficult or costly with banks or cash.

Once you understand these advantages, you’ll see why cryptocurrencies attract global attention.

Global Transfers and Payments

One of crypto’s biggest advantages is simple, borderless transfers. Traditional international remittances often incur high fees and take days due to multiple intermediaries.

For example, sending money from Japan to the US by bank transfer can involve several fees—remittance, intermediary bank, and receiving bank—sometimes totaling thousands of yen. If weekends or holidays intervene, it can take over a week.

With cryptocurrency transfers, you get:

• Completion in minutes to hours, anywhere in the world
• Low fees due to fewer intermediaries (sometimes only a few hundred yen)
• Accessibility for the unbanked
• 24/7/365 availability
• Little or no foreign exchange fees

That’s why crypto is used for international remittances and sending money to family abroad. In developing regions with limited banking, crypto is a vital solution.

Some stores and online services now accept crypto payments, with lower transaction fees than credit cards (typically 3–5%), making crypto appealing for merchants.

24/7/365 Trading

Traditional assets like stocks and bonds trade only during exchange business hours. For example, Japanese stocks trade weekdays 9:00–15:00, US markets 9:30–16:00 local time.

Cryptocurrency markets, however, never close—you can trade 24/7/365, even on major holidays.

That means:

• Flexible investing, unconstrained by time or location
• Immediate response to global market developments
• Trading fits your work or lifestyle
• Quick reaction to news or price swings

This is especially valuable for international investors and those in different time zones. For side traders, being able to trade in the evenings or weekends is a major benefit.

But always-on trading also means prices constantly fluctuate, so investors may feel pressure to keep a close watch on the market.

Decentralized Systems With No Central Authority

Traditional financial systems rely on central banks and governments to manage money, with banks and payment processors intermediating transactions. These central entities can modify the money supply or approve or block transactions at will.

Cryptocurrencies, by contrast, are run by decentralized networks. For example, Bitcoin’s network is maintained by thousands of nodes worldwide, so no single person or group can control the system.

Benefits include:

• Less direct impact from government or financial institution policy changes
• Resistant to censorship or freezing
• Lower risk of total system failure
• Independence from country-specific political or economic risk
• Universal, discrimination-free access

In some countries, bank accounts can be frozen or money transfers restricted for political reasons, but cryptocurrencies are technically resistant to such interventions. In countries suffering from inflation, holding crypto can help offset rapidly falling local currency values.

However, decentralization also means there’s no one to take responsibility if an issue arises. For example, mistaken crypto transfers are generally irreversible, unlike bank wires.

Lower Transaction Costs

Cryptocurrencies enable direct transactions without intermediaries, potentially reducing costs versus traditional finance. Banks, payment companies, and card issuers all take fees in legacy systems.

Cost reduction examples:

• Lower international remittance fees (from thousands to hundreds of yen)
• Reduced infrastructure costs for payment processing
• Lower costs for tracking and verifying transaction history
• Little or no foreign exchange fees
• Reduced intermediary commissions

This cost advantage is especially strong for cross-border payments. Conventional transfers involve multiple institutions, each taking a fee, but crypto enables direct transfers that cut out these middlemen.

For businesses, crypto payment fees can be lower than credit card charges (3–5%), which is especially meaningful for small businesses and those in emerging markets.

However, network congestion can sometimes raise fees—especially for Bitcoin and Ethereum. As transaction volume rises, limited block space means higher-fee transactions are prioritized, causing fee spikes.

To solve this, “Lightning Network” (for Bitcoin) and “Layer 2 solutions” (for Ethereum) have been developed to process transactions off the main blockchain.

Risks and Cautions of Cryptocurrency

Despite their advantages, cryptocurrencies also involve important risks. Be skeptical of “guaranteed profit” pitches.

This section highlights what to watch for when using or investing in crypto. Knowing these risks helps you engage with crypto more safely.

Before investing or using crypto, make sure you understand these risks thoroughly.

Price Volatility Risk

Cryptocurrencies are notoriously volatile, with prices frequently surging or plunging in a short time. This high volatility is a defining trait.

For example, Bitcoin has dropped over 20% in a single day and doubled in price within months. Such swings are rare in equity markets.

Key drivers include:

• Smaller market size, so large trades can move prices
• Sensitivity to regulatory changes or technology news
• Speculative trading and strong market sentiment effects
• Influence of celebrities or social media trends
• Lower trading volume than equities, making manipulation easier

Invest only what you can afford to lose, and be ready for sharp downturns. Stick to these principles: invest surplus funds only, never use living expenses, and never borrow to invest.

Rising prices may tempt you to invest more, but sudden crashes are possible. Stay rational—don’t let emotions dictate your decisions.

Security Risks (Hacking, etc.)

While the blockchain itself is highly secure, exchanges and personal wallets can be hacked. Vulnerabilities may exist in the surrounding infrastructure (exchanges, wallets, personal devices).

Major breaches have occurred, including a Japanese exchange losing about 58 billion yen in crypto in 2018.

Main risks include:

• Exchange hacks and asset theft
• Phishing schemes that steal login credentials
• Malware that captures wallet private keys
• SIM swap attacks bypassing two-factor authentication
• Social engineering attacks exploiting human weaknesses

To protect yourself:

• Enable two-factor authentication (preferably app-based)
• Use strong, unique passwords
• Use hardware wallets (offline storage) for large sums
• Keep security software updated
• Only click links from official sources
• Check exchange security before using their services

Never share your private key—this is like your bank PIN. If someone obtains it, they can steal your funds. In crypto, “Not your keys, not your coins” is a core principle.

Regulatory Risks

Crypto regulations vary widely by country and change frequently. Some nations ban crypto outright, and regulatory shifts can heavily impact prices and accessibility.

Recent examples include:

• China’s 2021 crypto mining ban, which caused a sharp drop in Bitcoin prices and forced miners overseas
• Japan’s 2020 Payment Services Act amendment, renaming “virtual currency” to “crypto-asset” and tightening custody rules
• Tax rule changes—crypto gains are taxed differently in each country and subject to revision

Such changes can dramatically affect crypto prices and usage. Major regulatory news—especially from large economies—can swing the entire market.

Unclear regulations create legal risks for businesses and individuals. If rules are vague, activities considered legal today could be ruled illegal later.

Always check your country’s rules and keep an eye on regulatory trends. If you operate in multiple countries, learn the rules for each.

Fraud and Unsolicited Offers

The rise in crypto’s popularity has fueled scams and fraudulent offers, often spread via social media or dating apps, with increasing losses reported.

Watch for these warning signs:

• Pitches promising “guaranteed profits” or “certain appreciation”—no investment is risk-free, and such claims often signal fraud
• Ponzi schemes paying old investors with new investors’ funds—these collapse when new investments stop
• Scams involving fake or non-existent cryptocurrencies
• Repeated requests for extra fees to withdraw funds—scammers invent “taxes” or “fees” but never release your money
• Impersonation of celebrities to solicit investments

Be skeptical of “guaranteed profit” claims. Avoid unregistered businesses and suspicious offers. In Japan, only FSA-registered operators may provide crypto exchange services—check the Financial Services Agency’s website for the current list.

Even if a friend or family member makes a recommendation, do your own due diligence. If you have doubts, consult an expert or consumer protection center. Once sent, crypto is extremely hard to recover.

Regulation and the Future of Cryptocurrency

How are cryptocurrencies regulated worldwide, and what’s next for the industry?

This section covers rules in Japan and elsewhere, as well as the future potential of the technology, which is expanding beyond finance.

Understanding both regulatory trends and tech innovation will help you anticipate where crypto is headed.

Japan’s Regulatory Framework

Japan leads the world in developing clear crypto regulations. In April 2017, the revised Payment Services Act introduced mandatory registration for crypto exchanges—making Japan among the first to legally recognize crypto as a payment method.

The 2020 revision renamed “virtual currency” to “crypto-asset” and bolstered client asset protection, aligning with “Crypto-Asset” as the global standard and strengthening investor protections.

Japan’s main rules include:

• Mandatory registration for exchanges (FSA/Finance Bureau)—unregistered business is illegal
• Strict anti-money laundering measures—identity checks required for all new customers
• Most client assets must be kept in cold wallets (offline) to reduce hacking risk
• Crypto gains are taxed as miscellaneous income (up to 55%)
• Advertising and solicitation rules—banning exaggeration and requiring clear risk disclosure

Further reforms are under consideration, including bringing crypto into the Financial Instruments and Exchange Act (FIEA) while recognizing it as a unique asset class. This would further strengthen investor protection and clarify the legal position of crypto businesses.

Taxation is also a hot topic. Crypto gains currently face a top tax rate of 55%, much higher than the 20% on stock profits—fueling demands for tax reform.

Global Approaches

Countries take widely differing approaches to crypto—some proactive, others cautious or even prohibitive.

• United States: The SEC, CFTC, and other agencies regulate crypto. Approval of crypto ETFs is accelerating institutional adoption. Regulatory details often differ by state, making compliance complex.

• European Union (EU): The MiCA regulation establishes a unified crypto framework across the EU, standardizing services and boosting consumer protection.

• China: Bans crypto trading and mining outright, but is rolling out a central bank digital currency (the “digital yuan”). China restricts private crypto while promoting state-controlled digital money.

• El Salvador: In 2021, became the first country to adopt Bitcoin as legal tender, launching the “Chivo” digital wallet—though its real-world impact remains debated.

• Singapore: Maintains a crypto-friendly regulatory environment, attracting many crypto firms and fostering innovation with clear rules.

Regulatory priorities differ—some countries focus on consumer protection, others on stability or innovation. International cooperation (G20, FATF, etc.) is also advancing.

Web3, DeFi, and New Trends

Crypto is evolving beyond payments and investment, serving as core infrastructure for the digital economy. Blockchain applications are expanding rapidly across industries.

• Web3: The shift from centralized Web2 platforms to decentralized Web3. Today’s web is dominated by giants like Google and Facebook, but Web3 aims to return data ownership to users and build decentralized services—reducing platform dependency for a fairer digital economy.

• DeFi (Decentralized Finance): Financial services like lending, trading, and insurance delivered via smart contracts—open to all, transparent, and not reliant on banks. While DeFi’s total value locked has soared, challenges like security vulnerabilities remain.

• NFTs (Non-Fungible Tokens): Tech for proving digital asset ownership (art, music, game items). NFTs allow creators to monetize digital works and prove authenticity, though speculation and copyright issues persist.

• DAO (Decentralized Autonomous Organization): Organizations governed by token-holder voting, not centralized leadership—potentially more democratic and transparent than traditional models.

• Metaverse: Crypto powers virtual worlds, enabling the buying and selling of digital land, items, and services via crypto and NFTs, creating new digital economies.

These technologies promise to disrupt industries ranging from finance and entertainment to real estate, supply chains, and voting systems. However, challenges like technical complexity, uncertain regulation, security, and scalability still need to be addressed.

Summary

Cryptocurrency is a rapidly evolving asset class, shaped by technological innovation. Since Bitcoin’s launch, crypto has grown from an experiment to a global financial asset.

Its groundbreaking features—borderless instant transfers, 24/7 trading, and decentralized networks—have the potential to transform traditional finance.

But risks remain: volatility, security threats, regulatory uncertainty, and fraud can all lead to losses. Never ignore these risks when investing or using crypto assets.

Before engaging with crypto, understand the systems and risks, and take full responsibility for your actions. Don’t be swayed by “guaranteed profit” promises—do your own research and make rational choices.

Beyond investment, crypto serves as the backbone for Web3, DeFi, NFTs, and more. Watch how these technologies shape society and our daily lives.

The crypto landscape changes fast—keep up with new technologies, regulations, and market trends through trusted sources and continuous learning.

FAQ

What is cryptocurrency?

Cryptocurrency is a digital asset traded online. It can be exchanged for fiat currency and is secured by blockchain technology. You can purchase it through Financial Services Agency–registered exchanges.

How is cryptocurrency different from fiat money?

Cryptocurrency operates on decentralized technology and its value is set by supply and demand, not by government. Fiat money, issued and managed by governments, has its value linked to price levels.

How does cryptocurrency work? What is blockchain?

Cryptocurrency is powered by blockchain technology—a distributed ledger where multiple computers share and manage transaction records. Blockchains are highly tamper-resistant and require no central authority.

What types of cryptocurrency are there?

There are tens of thousands of cryptocurrencies, including Bitcoin, Ethereum, XRP, Dogecoin, and Cardano. Cryptos other than Bitcoin are known as altcoins and feature unique technology and uses. Stablecoins, designed for price stability, are also widely used.

How do I buy cryptocurrency?

To buy crypto, register an account with an exchange. After completing identity verification, fund your account by bank transfer or credit card, select the crypto and amount you want, and place your order. Steps may vary by exchange.

Is cryptocurrency safe? What risks are involved?

Crypto’s safety depends on how you manage it. Main risks include hacking, loss of private keys, market volatility, and regulatory changes. You can reduce your risk by securing your wallet and following best security practices.

What are the main uses of cryptocurrency?

Cryptocurrencies are used for international payments and transfers and traded as investment assets. They also provide the foundation for smart contracts and DeFi financial services.

Why do cryptocurrency prices fluctuate?

Crypto prices change based on supply and demand. Factors include investor sentiment, market size, trading volume, technology developments, and regulatory shifts.

Are cryptocurrencies taxed?

Yes—profits from crypto trading are taxable. Income tax is progressive, up to 45%, and with resident tax can total 55%. You may owe taxes when selling, exchanging, or earning staking rewards, so be sure to file your return.

What is the future outlook for cryptocurrency?

The outlook is strong—crypto markets are projected to reach $320 trillion by 2032 as technology advances and the digital economy grows. Bitcoin and Ethereum are expected to maintain leading roles, and institutional adoption is accelerating.