What is cryptocurrency and how does it work?
Cryptocurrency is digital money on a blockchain without a central bank. In the US, the IRS treats it as property, and the FDIC does not insure it.
Vahe HakobyanEditor-in-chief
Updated Oct 5, 20263 min readFact-checked
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Different cryptocurrencies serve different purposes. Some support apps, and others focus on payments.
How does cryptocurrency work?
A blockchain records every transaction on a shared list. You use a wallet to hold your private keys. A private key is a long code that proves control of the crypto at your address. The crypto itself stays on the blockchain.
- Wallet types: A wallet can be an app, a website, or a hardware device.
- Sending: You enter the recipient's address and the amount. The network broadcasts the transaction.
- Confirmation: Participants check the transaction against network rules. They agree on the order through consensus.
- Consensus types: Proof of work and proof of stake are two common consensus mechanisms.
- Timing: Confirmation times vary by blockchain. Some confirm in seconds, while others take minutes or longer.
How do people use cryptocurrency?
People use crypto for payments, transfers, and trading. The way you do it depends on the app or service you choose.
How is it different from regular money?
Regular money is issued by a central bank. For many cryptocurrencies, no central bank issues them. Supply rules vary. Some are set by network code, while others are set by an issuer. In the US, the IRS treats cryptocurrency as property for taxes.
What risks and limits should I know?
Crypto prices are volatile. A coin can lose a large share of its value in a short time. US consumer protections are not like bank deposit insurance. The FDIC insures bank deposits, but it does not insure crypto held at an exchange or in your own wallet.
Frequently asked questions
No. Bitcoin was the first cryptocurrency, created in January 2009 by a developer using the name Satoshi Nakamoto. Many others exist, including ether and stablecoins.
Yes. Cryptocurrency is legal in the United States, though different federal and state agencies regulate different activities. Rules depend on what you do with it.
Usually no. Most blockchain transactions are irreversible, so a wrong address can mean lost funds. If you sent to an exchange, contact support quickly, but recovery is not guaranteed.
A stablecoin is a cryptocurrency designed to hold a steady value. Many are pegged to the US dollar, which aims to avoid the price swings of bitcoin.
