What Is Cryptocurrency?

A cryptocurrency is a digital token whose ownership is recorded on a shared public ledger, called a blockchain, instead of in a bank’s private database. Nobody issues you a statement. Instead, thousands of independent computers around the world each keep a full copy of the ledger and follow the same published rules to decide which transactions are valid.

The first cryptocurrency, Bitcoin, was described in a nine-page paper published in 2008 under the name Satoshi Nakamoto and went live in January 2009. Thousands of others have been created since. Most have little in common with Bitcoin beyond the basic idea.

How it differs from the money in your bank

When you send money from a bank account, the bank checks you have the funds, subtracts from your balance, and adds to someone else’s. You are trusting the bank’s records, and behind the bank, a central bank and a legal system that can fix mistakes.

A cryptocurrency removes that middle layer:

• The ledger is public. Anyone can download it and check every transaction ever made.
• Ownership is proven with cryptography. A coin moves only when someone signs the transaction with the matching private key, a long secret number. Whoever holds the key controls the coins.
• The rules are enforced by software, not an institution. The network’s computers reject any transaction that breaks the rules, such as spending coins twice.
• There is no customer service. A confirmed transaction usually cannot be reversed by anyone, including you.

That last point is the trade-off at the heart of crypto. Removing the middleman removes the middleman’s power to block you, but it also removes the middleman’s ability to rescue you.

Where the “crypto” comes from

The name refers to cryptography, the mathematics of codes. Two pieces do most of the work:

1. Digital signatures let you prove you hold a private key without revealing it. That is how the network knows a transaction is genuinely yours.
2. Hash functions turn any data into a short fingerprint that changes completely if a single character changes. Blockchains chain these fingerprints together so that past records cannot be quietly edited. The next article, How Does a Blockchain Work?, explains this step by step.

Coins, tokens, and stablecoins

You will see these words used loosely. Roughly:

• A coin is the native asset of its own blockchain, such as bitcoin on the Bitcoin network or ether on Ethereum. It is used to pay transaction fees on that network.
• A token is an asset created on top of someone else’s blockchain by a program (a “smart contract”). Most of the thousands of cryptoassets in existence are tokens.
• A stablecoin is a token designed to hold a steady value, usually one US dollar. See What Are Stablecoins?.

What gives it value?

Nothing guarantees a cryptocurrency’s price. It is worth what other people are willing to pay for it at that moment. People pay for different reasons: some value a fixed, predictable supply (Bitcoin’s is capped at 21 million coins), some need the coin to use a network, and many are simply speculating that the price will rise.

That is why prices can move 10 percent or more in a day, and why many tokens that were once popular are now worth close to nothing.

What it is not

• It is not legal tender in most countries, including Canada and the US. Tax authorities generally treat it as property or a commodity, so selling or spending it can trigger a tax bill.
• It is not anonymous by default. Bitcoin addresses are pseudonymous: they don’t carry your name, but every transaction is public forever, and exchanges collect identity documents.
• It is not insured. Coins held on a crypto platform are not protected the way bank deposits are.

The short version

Cryptocurrency is a way to record who owns what without a bank, by having many independent computers keep the same ledger and check each other’s work. It is a real and clever piece of engineering. It is also volatile, unforgiving of mistakes, and heavily used for speculation. The rest of this site explains the machinery so you can judge it for yourself.

Next: How Does a Blockchain Work?