A cryptocurrency is a digital asset that exists on a blockchain: a shared record of ownership that is copied across many computers rather than kept by one bank or company. Bitcoin, launched in 2009, was the first. Thousands of others have followed, and many of them are not really currencies at all. They are tokens, platform fuels, or just speculative assets with a price on a screen.
The word "crypto" refers to the cryptography used to secure the records. It does not mean the asset is hidden or secret, and it does not mean it cannot lose value. A cryptocurrency is best understood as a digital item whose ownership is recorded by a network, with a price set by people who buy and sell it.
What makes a cryptocurrency different
Traditional money is recorded by banks and governments. Your bank balance is a figure in the bank's own database, and a transfer means the bank changes two numbers. You trust the bank to keep the records right.
A cryptocurrency is recorded on a blockchain. The record is a chain of blocks, each containing a list of transactions, with each block linked to the one before it. Many computers around the world each hold a copy of the chain, and they follow rules about which new blocks to accept. Changing an old record would mean changing the copies on most of those computers, which is extremely hard on a large network.
The result is that the network, not one company, keeps the record. That is the main idea behind cryptocurrencies. The guide on how a blockchain works goes through the mechanics step by step.
What a cryptocurrency is used for
People use cryptocurrencies for different things, and the purpose matters for whether a project has real demand behind it.
- Payments and transfers. Some people send money across borders with crypto, sometimes faster or cheaper than a bank transfer. Fees and speed depend on the network.
- Storing value. Some holders treat bitcoin as a digital store of value, in the same way others hold gold. This view is debated, and the price is volatile.
- Running applications. Some blockchains let developers build apps, lending markets, games and other services. The coin is used to pay for activity on that network.
- Trading. Most cryptocurrency activity is buying and selling for a price change. This is where most of the volume and most of the volatility come from.
A coin can serve more than one of these at once, and a project's stated purpose does not guarantee that anyone uses it that way.
Coins and tokens
People often use the words "coin" and "token" as if they were the same. They are not quite the same. A coin is native to its own blockchain, such as bitcoin on the bitcoin network. A token is issued on top of an existing blockchain by a project, and it depends on that chain to work. The guide on coins and tokens explains the difference in more detail.
Both can have a price, both can be traded, and both can fail. The distinction tells you what you are actually holding, which is useful when you ask who is responsible for the network and what happens if it stops working.
How the price is set
A cryptocurrency's price is the most recent trade on the exchanges that list it. Because many exchanges trade the same coin, the price on one exchange can differ slightly from another. Price sites take the trades they follow and show a single price, along with figures such as the market capitalization and the trading volume. The guide on how crypto prices are calculated explains this step by step.
Prices are set entirely by supply and demand. There is no company that guarantees a price, no yield paid by the coin for simply holding it, and no central bank that stands behind it. That is one reason cryptocurrency prices can move very sharply.
Market capitalization and supply
Market capitalization is the price multiplied by the number of coins in circulation. It gives a rough sense of how large a coin is compared with others. But circulating supply, the number of coins available to trade, is not always easy to know. Some coins have a fixed maximum supply, others have no cap, and some have large amounts that are locked or not yet released.
A coin with a high price can be small if it has few coins in circulation. A coin with a low price can be large if it has billions of coins. Compare market caps with care. See the guide on crypto market cap and the one on circulating and total supply.
Worked example: a 100 purchase
Suppose you buy 100 worth of a coin priced at 2.00, so you receive 50 coins. A week later the price is 1.50. Your 50 coins are now worth 75, a loss of 25 before any fees.
If the price had risen to 3.00 instead, the same 50 coins would be worth 150, a gain of 50. Neither figure says anything about whether the coin is good. It says only that the price moved. The exchange fee you paid when you bought, and any fee you pay when you sell, reduce both results.
| Price per coin | Value of 50 coins | Gain or loss on the 100 paid |
|---|---|---|
| 2.00 (buy) | 100 | 0 |
| 1.50 | 75 | −25 |
| 3.00 | 150 | +50 |
The main risks
Volatility. Cryptocurrency prices often move far more in a day than stock indexes do. A fall of half in a few months is common in the history of this market, and a fall to near zero has happened to many coins.
Security. If you hold a coin yourself, losing the private key or seed phrase means losing the coin, and nobody can restore it. If you leave it on an exchange, you rely on that exchange staying solvent and secure. The guides on crypto wallets and seed phrases cover both.
Scams. Many cryptocurrency projects are fraudulent or abandoned. Promises of guaranteed returns, pressure to act quickly, and unknown people offering help are warning signs. The guide on crypto scams to avoid lists the common ones.
Rules. The legal status of cryptocurrencies differs by country and changes over time. Check the rules where you live, including tax, before you buy.
What to do next
If you are new, start by reading how the technology works, then how the market is measured, and only then how to buy. Keep the amount you can afford to lose small until you understand how a coin behaves in a fall. If you already hold a coin, check that you can access it, that you understand what it is for, and what it would take for it to stop working.
Key takeaways
A cryptocurrency is a digital asset recorded on a blockchain, a shared ledger that a network keeps rather than one company. Its price is set by trading, it has no guaranteed value, and its risks are large: volatility, security, scams and changing rules. Knowing what a coin is for, and what you are holding, matters more than the price on any given day.
This guide is for general information, not financial advice. See the disclaimer.