Cryptocurrencies: What They Are, How They Work, and the Best Ways to Generate Income in 2026

What are cryptocurrencies and how do they really work? Beyond headlines about Bitcoin reaching new highs, there is a whole ecosystem of financial opportunities. By February 2026, the crypto landscape has matured significantly, attracting not only speculators but also institutional investors, governments, and small savers. Understanding how cryptocurrencies work is the first step in deciding whether to participate in this market.

Fundamentals: Understanding what cryptocurrencies are and how they work

Cryptocurrencies are digital assets that operate without traditional financial intermediaries. Unlike a bank transfer where a third party validates the transaction, here they function through decentralized networks based on blockchain, a distributed ledger technology that ensures security and transparency.

How different types of participation work:

There are multiple ways to participate in this ecosystem. Some users speculate on price changes (trading), others lock their assets to earn rewards (staking), while some simply accumulate coins hoping for long-term appreciation (HODL). The key to understanding how cryptocurrencies work is recognizing that there is no single “correct” way, but strategies tailored to different risk profiles.

Market figures (February 2026):

• Total market capitalization: approximately $1.6 trillion
• Bitcoin (BTC): $69,100 (-0.97% in 24h)
• Ethereum (ETH): $2,020 (-3.52% in 24h)
• Active users: over 700 million

Main avenues: How crypto participants generate income

Trading: How speculators operate in volatile markets

Traditional trading involves buying low and selling high, but there are various execution styles. Day trading opens and closes positions within the same day; scalping takes minutes or seconds; swing trading holds positions for days or weeks.

Realistic returns: An experienced trader can expect monthly returns of 5-10%, though statistics show most beginners initially lose money.

Immediate risks: This market is characterized by extreme volatility. A regulation announcement or a tweet from a public figure can reverse the movement in seconds. Leverage amplifies both gains and losses exponentially.

Practical example: Identifying Bitcoin at a key support level, buying at $69,000, and selling hours later at $70,500 generates a profit before fees. The challenge is correctly pinpointing those inflection points.

HODLing: Patience as a strategy

HODL (a term born from a typo in 2013) means buying strong assets and holding regardless of fluctuations. The Winklevoss twins invested $11 million in Bitcoin when it was worth $120 in 2013, enduring 80% drops, and today they are multimillionaires.

Historical profitability: Bitcoin and Ethereum have significantly outperformed other financial assets over the past decade. Those who bought in 2017 and still hold their positions have multiplied their investments several times.

Psychological challenge: The biggest difficulty is not liquidating during bear markets. Drops of 30-50% happen regularly in bear cycles.

Effective DCA strategy: Instead of waiting for the perfect moment, investing fixed amounts monthly offsets price fluctuations over the long term.

Staking: Earning without glued to the screen

Staking works like a bank deposit with interest. Validators lock cryptocurrencies on Proof-of-Stake networks (like Ethereum, Solana, Cardano) to process transactions and receive rewards.

APY (Annual Percentage Yield):

• Ethereum: 3-4% annually
• Stablecoins: 5-10% annually
• Smaller cap projects: 15%+ (with significant risks)

How it works: Someone holding 32 ETH receives about 1 ETH annually. If ETH’s price rises, that interest automatically revalues.

Slashing risk: Although rare, malicious validators can lose part of their staked funds.

DeFi and liquidity farming: Complex yields

Decentralized Finance allows lending assets to automated markets. A user supplies tokens to a liquidity pool and earns transaction fees from others.

Potential yields: In new protocols, yields can reach 50-100% APY, but with correlated risks.

Impermanent Loss: When the relative price of two tokens in a pool varies significantly, liquidity providers may end up with less value than if they simply held the tokens.

Recommendation: Starting with stablecoin pools reduces risk, though yields are lower.

Airdrops: Free gains without initial investment

Some projects give tokens to early users. In 2020, Uniswap distributed 400 UNI tokens to anyone who used their protocol. At peak, those tokens were worth over $16,000.

Nature of airdrops: They require time and research, not money, but there’s a risk of spending hours without reward.

Critical warning: Never connect wallets to suspicious sites promising free airdrops.

NFTs: Speculation on unique assets

Non-Fungible Tokens enable creating, selling, and buying digital art. The market is highly speculative, with examples of purchases at $200 resold for $200,000, though these are exceptions.

Main risks: Illiquidity (hard to find specific buyers), community dependence (value exists as long as the community sustains it), immature market.

Play-to-Earn: Earning while playing

Blockchain-based video games allow earning tokens or NFTs by completing missions. In developed economies, it generates extra income; in emerging markets, it has become a full salary.

Sustainability concerns: Most game economies are inflationary. When many players sell simultaneously, prices collapse.

Factors influencing profitability differences

Why does one strategy generate 5% annually while another promises 300% in a week?

Risk vs. reward: Bitcoin offers moderate returns because it’s established and secure. New tokens offer extreme profitability because they can disappear or collapse.

Liquidity and volatility: Small markets (new cryptocurrencies) are volatile. Low trading volume can spike prices; similar sales can crash them. Expert traders surf these waves; traditional investors tend to avoid.

Tokenomics: Bitcoin has a cap of 21 million coins (digital scarcity). Inflationary tokens (new coins daily) tend to depreciate. Long-term strategies favor scarce assets.

Market psychology: Fear (FUD) and greed (FOMO) drive prices more than technology. Experts buy during panic and sell during euphoria.

How to start without failing

Step 1: Choose a secure platform

Use established centralized exchanges with insurance funds (SAFU) and two-factor authentication (2FA). Adequate liquidity is critical to enter and exit without slippage.

Step 2: Identity verification (KYC)

Though tedious, Know Your Customer processes protect your funds in a regulated, secure environment.

Step 3: Define your strategy before investing

Will you trade daily? Long-term investing? Seek passive income? This decision shapes everything else.

Step 4: The golden rule of risk management

Never invest money you need for daily expenses. The market can drop 50% in a week. Start with amounts that would hurt your pride but not your life.

Step 5: Strategic diversification

The temptation is to bet everything on the trending coin promising x100. That’s gambling, not investing. A prudent portfolio has a solid base in Bitcoin (BTC) and Ethereum (ETH), with smaller percentages in experimental altcoins.

Investing with little capital: The power of decimals

A key advantage of cryptocurrencies over stocks or real estate is divisibility. You can buy fractions of Bitcoin as small as 0.00000001 BTC (one Satoshi).

Accessibility: Most exchanges allow starting with €10-20. With €50, you can build a diversified portfolio with BTC, ETH, and top 10 coins.

DCA strategy: Investing €20 weekly in BTC is smarter than waiting €1000 to invest all at once. You get a better average price without stress.

Gradual building: Start with BTC and ETH (highest survival probability). Increase investment only when you master operational skills.

Current market assessment in 2026

Cycle comparison: Unlike 2017 and 2021, today’s market is different. Institutional capital (funds, ETFs, corporations) has smoothed out extreme volatility. We may not see 30x multipliers in a month, but we gain stability.

Is it a good time? For long-term investors using DCA, it’s always a good time to start building wealth. Crypto cycles are predictable in nature, if not in timing.

Institutional and regulatory outlook

Investment leaders from BlackRock, Fidelity, and VanEck recognize that digital assets are the future of finance. They don’t speculate on prices tomorrow; they acknowledge that blockchain improves global transactional efficiency.

Regulation as a catalyst: Clear legal frameworks (like MiCA in Europe) remove uncertainty and allow large capital to enter the market.

Bitcoin as a safe haven: Figures like Larry Fink compare Bitcoin to gold. In the context of rising inflation and increasing government debt, owning a scarce, decentralized asset adds value to diversified portfolios.

Tax and security considerations

Basic tax implications:

• Cryptocurrency swaps trigger taxable events
• Trading gains are taxed as savings income (19-28% IRPF depending on amount)
• Income from staking, farming, and airdrops is considered Capital Income
• Deposits over €50,000 require Form 721

Operational security:

• Use exchanges that publish monthly Proof of Reserves (PoR)
• Always enable 2FA and anti-phishing codes
• For daily operations, keeping funds on exchanges is practical and secure
• Self-custody requires full responsibility for private keys

Conclusion: How cryptocurrencies fit into your personal strategy

Cryptocurrencies are neither a panacea nor a scam, but financial tools with unique features. Understanding what they are and how they work is essential before participating. The ecosystem will continue evolving, but the core principles remain: risk management, diversification, and continuous learning will determine success or failure.

There are no guaranteed returns. Analyze your financial situation, consult advisors if needed, and remember that in the crypto world, you have total freedom but also total responsibility.