What is cryptocurrency?

What exactly counts as a cryptocurrency?

The US Federal Trade Commission describes cryptocurrency as a type of digital currency that generally exists only electronically. There are no coins or notes. What exists is an entry in a ledger saying that a certain address controls a certain amount.

Official definitions focus on that ledger. The IRS calls a digital asset any digital representation of value recorded on a cryptographically secured, distributed ledger. The SEC's investor site uses the broader term crypto asset, covering things people call coins, tokens, virtual currencies and digital assets. In everyday speech, "cryptocurrency" usually means the first group: coins such as bitcoin and ether that are native to their own networks. The difference matters, and we untangle it in coins vs tokens.

Three ingredients show up in almost every cryptocurrency:

• A shared ledger. Usually a blockchain, copied across many independent computers.
• Cryptographic keys. A private key signs payments; a public address receives them.
• Rules everyone runs. Software that decides which payments are valid and, for many coins, how new units are created.

How does cryptocurrency work without a bank?

In a bank, one company keeps the ledger and decides whether your payment goes through. A cryptocurrency spreads that job across a network. NIST, the US standards body, describes blockchains as tamper-evident and tamper-resistant digital ledgers run in a distributed way, usually without a central authority.

When you send crypto, your wallet software signs a message with your private key. Computers on the network check that the signature is valid and that the funds have not already been spent. Valid payments are grouped into blocks and added to the ledger. On Bitcoin, the FAQ at bitcoin.org says a new block arrives about every 10 minutes on average. Our step-by-step guide to how crypto transactions work follows one payment from start to finish.

The Bitcoin white paper framed the goal clearly: a purely peer-to-peer version of electronic cash that would let online payments go directly from one party to another without a financial institution in the middle.

How is crypto different from money in your bank account?

Both live on screens, but the protections behind them are very different. The FTC's consumer guidance lists the main gaps; the table puts them side by side.

What is cryptocurrency used for?

People use crypto for different reasons, and it helps to separate them:

• Sending value across the internet without a bank in the middle, including across borders.
• Holding an asset whose supply follows fixed rules. Bitcoin's FAQ states that only 21 million bitcoins will ever be created.
• Paying for activity on a network. On Ethereum, fees are paid in ether; see what is Ethereum.
• Using applications such as lending and trading services built on blockchains, covered in our DeFi guide.

For US tax purposes, the IRS treats digital assets as property, not currency. Selling, swapping or spending crypto can therefore trigger a taxable gain or loss, which we cover in how crypto is taxed.

What are the biggest risks of cryptocurrency?

The FTC warns that crypto values can change rapidly, even hour to hour, and that there is no guarantee a fallen price will recover. Volatility hits harder than many beginners expect, because losses and gains are not symmetrical.

Other risks are less visible:

• Irreversible mistakes. Send to the wrong address and there is usually no one to call.
• Custody. If an exchange holding your coins fails or is hacked, the FTC notes the government has no obligation to help you get money back.
• Scams. The FTC points out that only scammers demand payment in crypto up front or promise guaranteed profits. See common crypto scams.

For a deeper look at price swings, read volatility explained.

What mistakes do beginners make with cryptocurrency?

• Thinking the app is the money. If an exchange holds your coins, you hold a promise from that company. Learn the difference in crypto wallets explained.
• Treating crypto like a bank balance. No deposit insurance, no chargebacks, no fraud department that can reverse a transfer.
• Sharing a recovery phrase. Anyone who asks for it is trying to take your funds.
• Assuming crypto is anonymous. Bitcoin's own FAQ says it is not anonymous and cannot offer the same privacy as cash.
• Putting in money you need soon. Bitcoin.org itself advises treating bitcoin as a high-risk asset and never storing money you cannot afford to lose.