How does cryptocurrency work? A beginner’s walkthrough
A wallet holds the private keys that control your cryptocurrency. Sending it signs a transaction that the network verifies and records in a block.
Vahe HakobyanEditor-in-chief
Updated Oct 5, 20263 min readFact-checked
On this page
- A wallet's private keys, not the app, control your coins.
- A confirmed transaction cannot be reversed, so check the address first.
- A block explorer shows any transaction by its public hash.
Cryptography secures each record, and the network's computers must agree on it before a transfer counts. Networks reach that agreement in different ways: the Ethereum blockchain switched from proof of work to proof of stake in September 2022.
What you need before you start
A wallet stores your private keys, and whoever holds those keys controls the cryptocurrency. It also shows a public address that you give to anyone who sends you funds. The private key and the recovery phrase that rebuilds it stay with you.
How a crypto transaction works
A transaction starts with the recipient's public address and an amount. Your wallet signs it with your private key and broadcasts it, and computers on the network check the signature before adding it to a block. Busy periods mean longer waits.
- 1Choose the coin and sendOpen your wallet, select the cryptocurrency, and choose the send option.
- 2Paste the receiving addressEnter the recipient's address and the amount, and compare the first and last characters with the address you were given.
- 3Check the network feeThe fee usually goes to whoever processes the transaction, though some networks burn part of it. Paying more usually confirms sooner, but demand can still delay things.
- 4Sign and broadcastYour wallet signs the transaction with your private key and sends it to computers across the network.
- 5Wait for confirmationThe network verifies it and adds it to a block. Bitcoin aims for a new block about every 10 minutes; other networks target other times.
- 6Check the explorerCopy the transaction hash from your wallet into a block explorer to see the transaction and its status.
What to do after you transact
Back up your recovery phrase again if you added an account, and store the copy offline. Keep records of every transaction for tax reporting. The IRS treats cryptocurrency as property, so selling, trading, or spending it can be taxable.
Frequently asked questions
Yes, usually. A confirmed transaction cannot be reversed, so funds sent to an address you do not control are generally gone. Check the address before you sign.
You lose access to the coins, because the keys control them. For a self-custody wallet, no support team can usually restore a lost phrase.
No. You can buy or receive cryptocurrency without mining. Mining is one way new coins enter circulation.
Most public blockchains are pseudonymous rather than anonymous. Anyone can view the transactions, and analysts can sometimes link an address to a person.
