What Is Cryptocurrency? A Plain-English Beginner's Guide

Cryptocurrency is digital money that exists as entries on a shared public ledger called a blockchain, rather than as balances held by a bank. Ownership is proven with cryptographic keys, and a network of independent computers, not a central bank or company, checks and records every transaction. Bitcoin, launched in January 2009, was the first.

How is cryptocurrency different from money in a bank?

A bank balance is a record in the bank's own database, backed by the bank and, in many countries, by a deposit-insurance scheme. Cryptocurrency is recorded on a public ledger that anyone can inspect and that no single organisation controls. That one difference changes who issues the money, who can reverse a payment and what protection you have if something goes wrong.

How does cryptocurrency work?

Every cryptocurrency combines three building blocks. Understanding them explains why crypto can move without a bank in the middle, and why mistakes are hard to undo.

• Keys. A wallet generates a private key, a long secret number, and a public address derived from it. Signing a payment with the private key proves you own the coins at that address without revealing the key itself.
• Transactions and blocks. Signed payments are broadcast to the network and bundled into blocks. Each block contains a fingerprint (hash) of the previous one, so changing an old record would mean rewriting every block after it. That chain of blocks is the blockchain behind every cryptocurrency.
• Consensus. The network needs a rule for deciding which new block is valid. Bitcoin uses proof of work: miners compete to find a valid block, the target is one block roughly every ten minutes, and difficulty adjusts every 2,016 blocks. Ethereum has used proof of stake since September 2022, where validators lock up ETH as collateral and lose part of it if they cheat.

For a step-by-step example of one payment travelling from a wallet into a block, read how a cryptocurrency transaction works.

Why does cryptocurrency have value?

Cryptocurrency has no government guarantee and, unlike a share, usually gives no claim on a company's profits. A coin's price is simply what buyers and sellers agree on at a given moment. The factors they weigh include:

• Scarcity rules. Bitcoin's code limits supply to 21 million coins, each divisible into 100 million units called satoshis. Other projects can issue far more, or change their supply rules.
• Demand to use the network. On Ethereum, every transaction pays a fee in ETH, so activity on the network creates demand for the coin.
• Access and liquidity. The easier an asset is to buy, sell and hold, the more potential buyers it has. In January 2024 the US SEC approved the first spot bitcoin exchange-traded products, letting brokerage customers buy bitcoin exposure like a share.
• Speculation. Much trading is driven by expectations of future prices, which is a major reason crypto prices swing so sharply.

None of these factors puts a floor under the price. Cryptocurrencies can and do lose most of their value.

What is cryptocurrency used for?

• Sending value at any hour. A transfer settles on the blockchain in minutes, including weekends; you pay a network fee that varies with congestion.
• Holding digital dollars. Stablecoins such as Tether (USDT) aim to stay at $1 and are used to move money between platforms without converting back to a bank balance.
• Running applications. Smart contracts on networks such as Ethereum and BNB Chain run exchanges and lending markets without a company in the middle.
• Representing other assets. Tokens can track gold, shares or funds; see the main types of cryptocurrencies and tokens for how coins, stablecoins and tokenized assets differ.
• Speculative investment. Many people hold crypto as a small, high-risk part of a wider portfolio.

What are the risks of cryptocurrency?

• Volatility. Double-digit percentage moves in a single week are common, in both directions.
• Irreversible mistakes and fraud. A payment sent to the wrong address or to a scammer usually cannot be recalled. Learn the warning signs of a crypto scam before you send anything.
• Custody risk. Lose your keys and you lose the coins; leave coins with a platform and you depend on that platform staying solvent, as FTX customers learned when the exchange filed for bankruptcy in November 2022.
• No safety net. Crypto holdings are generally not covered by deposit insurance or investor-compensation schemes.
• Changing rules. Regulation and tax treatment differ by country and are still evolving.

How can a beginner get started with cryptocurrency?

Start by deciding how much you could lose without affecting your bills or savings goals. Then choose a route: a crypto exchange, a self-custody wallet, a regulated exchange-traded product through a broker, or a fund that buys a basket of tokens for you. Our guide to how to buy cryptocurrency compares the costs and trade-offs of each route.

Frequently Asked Questions