What is cryptocurrency?

A ledger nobody owns

Your bank balance is an entry in your bank’s database. The bank decides what counts as a valid payment, and it can freeze, reverse or correct entries. A cryptocurrency replaces that private database with a public one. Thousands of computers, called nodes, each keep a full copy of the ledger and check every new entry against the same published rules. Nobody can add a payment that breaks the rules, and nobody can quietly edit the past.

New entries are added in batches called blocks, each linked to the one before it, which is where the word blockchain comes from. What is a blockchain? explains how the linking works and why old entries are so hard to change.

Bitcoin, launched in January 2009, was the first system to make this work without a trusted operator. Thousands of other cryptocurrencies have followed. A handful are widely used; most are small, and many have failed.

What owning crypto actually means

Coins never sit inside a wallet app. The ledger records which address holds what. Each address is derived from a pair of keys: a public key that others may see and a private key that must stay secret. To spend, your wallet signs a transaction with the private key, and every node can check that signature without ever seeing the key itself.

Most wallets generate all their keys from a single seed phrase of 12 or 24 words. Write it down once, on paper and offline, and you can restore the wallet on a new device if the old one breaks. Anyone else who gets those words can do the same.

If you buy on an exchange and leave the coins there, the exchange holds the keys and owes you a balance. That is convenient, but it means trusting the exchange. Exchanges vs self-custody explains the difference, and self-custody basics covers holding crypto yourself.

Coins, tokens and stablecoins

• Native coins belong to a blockchain and pay its fees: bitcoin (BTC) on Bitcoin, ether (ETH) on Ethereum.
• Tokens are created by programs called smart contracts on an existing chain. On Ethereum and compatible chains most follow the ERC-20 standard. Anyone can create one in minutes, including copies that borrow a famous name.
• Stablecoins are tokens designed to hold a steady value, usually one US dollar, backed by reserves held by an issuer or by crypto collateral. See stablecoins explained.
• NFTs are tokens where each one is unique, used for collectibles, tickets and in-game items.

Because anyone can issue a token with any name, the name and ticker prove nothing. What identifies a token is the network it lives on and its contract address.

What people use it for

• Sending value across borders without a bank in the middle, at any hour, often settling within minutes.
• Holding an asset with a fixed supply. No more than 21 million bitcoin will ever exist, and no central bank can create more.
• Saving and paying in dollars through stablecoins, in places where the local currency is unstable or banking is hard to reach.
• Financial apps that run as code, such as exchanges and lending markets that operate without a company holding customer funds.
• Speculation. A large share of trading is simply betting on prices.

The risks to understand first

• Volatility. Crypto prices have repeatedly fallen by more than half within months, and small coins can go to zero. Only put in money you could lose without it changing your life.
• Irreversible payments. A payment to the wrong address, the wrong network or a scammer cannot be recalled.
• Scams. Fake investment platforms, impersonated support staff and look-alike addresses all rely on that irreversibility. How to spot crypto scams shows the signs.
• Custody failures. Exchanges and lenders have collapsed and frozen customer withdrawals, most prominently FTX in November 2022.
• Rules and taxes. In many countries selling, swapping or spending crypto can be a taxable event. Keep records from your first purchase; what records to keep lists them.

This guide explains how crypto works. It is not financial advice.

Look before you buy

You can learn a lot without spending anything. Open the Bitcoin network dashboard and watch new blocks arrive, roughly every ten minutes. Compare coins by size and recent moves on the markets page, and look up any unfamiliar word in the glossary. When you are ready to go further, read what is Bitcoin? and what is Ethereum?, then how to buy crypto safely.