What is a cryptocurrency? Definition, how it works, examples

A cryptocurrency is digital money, or a digital asset, recorded on a shared ledger that many computers keep in sync and secured by cryptography, with no central bank or company in charge of that ledger. That is the short answer to “what is cryptocurrency”. You hold it through a secret key and send it without a bank in the middle. The rules on how many units exist and how payments get approved are written into software that anyone can inspect.

Bitcoin came first, in January 2009. On 14 October 2026, CoinGecko listed 22,258 cryptocurrencies.

This lesson follows our guide to stablecoins and how they hold their peg and puts the earlier pieces, from the blockchain to Bitcoin and Ethereum, into one picture. The starting point is the wording that EU, US and UK regulators have written into their rules.

What is cryptocurrency? A plain definition

Strip away the jargon and a cryptocurrency is an entry in a database. The difference from the balance in your banking app is who keeps that database. A bank runs its own ledger, and you trust it to be right. A cryptocurrency network spreads copies of the same ledger across many independent computers, and a set of rules decides which new entries are valid. Nobody can quietly edit a balance, because every other copy would disagree.

Two things hold the system together. Cryptography proves that a payment really comes from the owner of the coins. A consensus mechanism, a procedure all participants follow, settles the order of payments so the same coin cannot be spent twice.

MiCA, the IRS, the SEC and the FCA use almost the same words

Lawmakers took years to settle on a definition, and they ended up close to one another. The EU’s pool di un market maker automatico divergono, rispetto a tenere semplicemente gli stessi token. Diventa definitiva al prelievo.">Il MiCA (Markets in Crypto-Assets) è il regolamento europeo 2023/1114 che fissa regole comuni per gli emittenti di cripto-attività, le stablecoin e i prestatori di servizi per le cripto-attività (CASP) in tutta l’UE. Si applica pienamente dal 30 dicembre 2024.">Markets in Crypto-Assets Regulation, Regulation (EU) 2023/1114, known as MiCA, defines a crypto-asset in article 3 as “a digital representation of a value or of a right that is able to be transferred and stored electronically using distributed ledger technology or similar technology”. The US tax authority and the UK conduct regulator say much the same.

Put side by side, the four texts share one core: a unit of value that exists only as a record on a distributed ledger. None of them mentions an issuer who promises to pay you back.

Crypto, crypto-asset, digital asset: why regulators avoid the word currency

In everyday speech “crypto”, “cryptocurrency” and “coin” mean the same thing. Regulators prefer “crypto-asset” or “digital asset”, and the choice is deliberate. A currency, in the legal sense, is money a state recognises, such as the dollar, the pound or the euro. Bitcoin is not that anywhere in the US, the UK or the EU. “Asset” also covers the many tokens that were never meant to be money, such as a token that gives access to a service, which MiCA calls a utility token.

The IRS goes furthest: for US tax purposes, digital assets are property, not currency. Paying for a coffee in bitcoin is, in tax terms, a sale of property.

How cryptocurrency works: ledger, keys and consensus

Every cryptocurrency, from bitcoin to a token launched last week, is built from the same parts: a ledger, keys, a way for the network to agree, and supply rules.

A shared ledger replaces the bank’s database

MiCA describes a distributed ledger as a store of transaction records shared across, and synchronised between, a set of network nodes using a consensus mechanism. A blockchain is the most common type. Transactions are grouped into blocks, and each block points to the one before it, so changing an old entry would mean rewriting everything after it. Our beginner guide to how a blockchain works goes through blocks, nodes and hashes step by step.

On public networks such as Bitcoin and Ethereum, anyone can run a node, download the whole history and check it. A bank ledger is seen only by the bank, its auditors and its supervisors.

You own a private key, not a file

Nothing sits on your phone that you could call “the coin”. The coins exist only as entries on the ledger. What you hold is a private key, a very long secret number that lets you sign transactions moving those entries. The SEC puts it bluntly on investor.gov: “Crypto wallets do not store crypto assets themselves; instead, they store the ‘private keys’ or passcodes for your crypto assets.”

A wallet is a key manager. It can be a phone app or a small hardware device, run by you or by an exchange on your behalf, and most wallets let you back up the key as a list of words called a seed phrase. Our guide to crypto wallets, custodial and self-custody compares the options.

Proof of work and proof of stake decide which payments count

With no bank approving payments, the network needs another way to agree on them. The Bitcoin whitepaper that Satoshi Nakamoto published in October 2008 proposed proof of work. Computers called miners compete to solve a costly puzzle; the winner adds the next block and the others check it. Rewriting history would take more computing power than the rest of the network combined. The paper describes the coin itself in one line: “We define an electronic coin as a chain of digital signatures.”

Ethereum used proof of work until 15 September 2022, when it switched to proof of stake in an upgrade known as the Merge. Validators now lock up ether as a deposit and take turns proposing and confirming blocks; cheating costs them part of that deposit. Ethereum.org puts the drop in the network’s energy use at about 99.95%.

How cryptocurrency is created: mining, staking and issuers

On proof-of-work networks, each new block pays the miner a reward in freshly created coins. That is what “cryptocurrency mining” means. Proof-of-stake networks pay validators staking rewards instead.

Many tokens are never mined at all. A company or a smart contract creates them, all at once or on a schedule, before they are sold or handed out. Stablecoins work differently again: the issuer mints new tokens when a customer deposits dollars or euros and destroys them when the customer redeems.

Supply rules are written in code

Bitcoin’s rules cap the supply: according to bitcoin.org, only 21 million bitcoins will ever be created. The block reward is cut in half every 210,000 blocks, an event called the halving. The fourth halving came at block 840,000 on 20 April 2024 and lowered the reward from 6.25 to 3.125 BTC; the next is expected around 2028. Our lesson on what Bitcoin is and how its supply works covers the details.

Other networks chose other rules. Ether has no fixed maximum supply, and the number of stablecoins in circulation simply follows deposits and redemptions. A coin’s supply schedule is one of the first things worth reading in its documentation.

What backs a cryptocurrency, and what does not

Most of the large cryptocurrencies are backed by nothing outside their own network. Stablecoins are the main exception.

Bitcoin and ether have no issuer to pay you back

Nobody owes you anything when you hold bitcoin. No company will buy it back at a set price, and no government stands behind it. Its price is whatever the next buyer will pay. The fixed supply and the use of the network feed into that price, but nothing sets a minimum. Ether is in the same position, even though Ethereum applications need ether to pay their fees.

Central bankers draw a harsh conclusion. In its Annual Economic Report of 29 June 2025, the Bank for International Settlements said unbacked cryptoassets “have established themselves as a speculative asset rather than a means of payment”. Supporters answer that gold has no issuer either. For a beginner the practical point is simpler: there is no floor under the price.

Stablecoins are backed by reserves held by a company

Stablecoins such as USDT and USDC are different. A company holds cash and short-term government debt in reserve and promises to redeem each token for one dollar. MiCA calls a stablecoin that tracks one official currency an e-money token, and one that tracks other assets or a basket an asset-referenced token. The backing is only as good as the reserves and the company that holds them.

Not legal tender, not a bank deposit

Crypto is not money in the legal sense in the US, the UK or the EU. Shops and creditors are not obliged to accept it. Nor is it a bank deposit: if a crypto platform fails, deposit guarantee schemes do not step in, and the FCA warns UK consumers that it is “highly unlikely” they would be covered by the Financial Services Compensation Scheme. You can still pay with crypto where a merchant agrees. That is a private arrangement, not a right.

Cryptocurrency vs fiat money, digital currency and CBDCs

“Digital currency” is a wider term than cryptocurrency. Most of the money you use is already digital: it is the balance on your bank account. What sets crypto apart is the issuer, or rather the lack of one.

Fiat money is money whose value rests on the state that issues it and on the law that makes it legal tender. Crypto turns that model around. The BIS describes it as rejecting trusted intermediaries such as central banks in favour of a dispersed network of self-interested record keepers.

The digital euro is not a cryptocurrency

A central bank digital currency, or CBDC, is digital cash issued by a central bank. It may use some of the same technology, but on the question that matters it is the opposite of crypto: a public authority issues it and stands behind it. The European Central Bank decided on 30 October 2025 to move its digital euro project to the next phase. If the law is adopted in 2026, a pilot could start in mid-2027 and the Eurosystem should be ready for a potential first issuance in 2029. The ECB says the issuance decision will only be taken once the legislation is adopted. Talks between the European Parliament and the EU Council began in July 2026; as of October 2026 the regulation was still being negotiated and no digital euro had been issued.

From DigiCash to MiCA: a short history of cryptocurrency

Crypto did not appear from nowhere in 2009. Cryptographers had been trying to build electronic cash since the early 1980s, and the first attempts all relied on a company that could fail.

What Bitcoin added was a way to stop one digital coin being spent twice without a central referee. Proof of work did that job, and every network since has had to answer the same question in its own way.

Types of cryptocurrency, with examples

There is no official list of categories, and many projects fit more than one. These are the families a beginner meets first; a later lesson on altcoins looks at each in more depth.

Ethereum gets its own row because so much else runs on it. Our guide to Ethereum and smart contracts explains how one network can host thousands of separate tokens.

Coins and tokens are not the same thing

A coin is the native unit of its own blockchain: BTC on Bitcoin, ETH on Ethereum, SOL on Solana. A token is created on top of an existing blockchain by a smart contract. USDC, for example, lives on Ethereum and several other networks without a chain of its own. The difference changes who controls the supply and what can go wrong, and it is the subject of the next lesson, coins vs tokens: what separates them.

There are 8,000 to 22,000 listed cryptocurrencies, depending on the tracker

How many cryptocurrencies are there? It depends on who counts. On 14 October 2026, CoinGecko said it was tracking 22,258 cryptocurrencies across 1,510 exchanges. CoinMarketCap ranked 8,131 the same day, while the counter on its homepage showed 63.85 million “cryptos”.

The gap comes from listing rules. The 63.85 million figure counts every token ever detected on-chain, test tokens and abandoned projects included; on some networks, creating a token takes minutes and costs little. The ranked lists keep only assets with active trading and a minimum of data. Most of the tens of millions trade rarely or never.

What cryptocurrency is used for in practice

Most people who own crypto hold it as an investment. The ECB’s SPACE 2024 study of payment habits found that 90% of holders in the Netherlands kept crypto for investment only, against 82% in Germany and 57% in France. France stood out on payments: 25% of French holders used crypto for payments only, against 6% in Germany.

Outside speculation, four uses have real traction:

• Moving dollars on-chain. Stablecoins let people and companies send dollar value across borders at any hour, on networks that never close.
• Decentralised finance: lending, borrowing and trading through smart contracts instead of a broker, covered in our DeFi explainer.
• NFTs, unique tokens for art, collectibles or game items. The IRS counts them as digital assets, while MiCA leaves unique, non-fungible tokens outside its scope.
• Exchange-traded products that hold crypto. The SEC notes that many investors get their exposure this way, inside a regular brokerage account, with the same price risk and no keys to manage.

Who owns crypto: 17% of US adults, 9% in the euro area

Crypto has fewer users than its media coverage suggests. In the United States, 17% of adults said they had ever invested in, traded or used cryptocurrency, according to a Pew Research Center survey of 10,133 adults carried out from 7 to 11 February 2024. Pew found the share statistically unchanged since 2021.

The ECB’s SPACE study found that 9% of euro-area respondents owned crypto-assets in 2024, up from 4% in 2022, with peaks of 15% in Slovenia and 14% in Greece. In Italy, the share of people interviewed for Consob’s report on household investment choices who held crypto rose from 8% in 2022 to 18% in 2023.

The surveys measure different things, from “ever used” in the US to “owns today” in the euro area, so they cannot be ranked against each other.

The risks regulators warn about

Prices can fall hard, and the FCA says be ready to lose everything

Unbacked crypto has no floor under its price, and nobody has to buy your coins back at what you paid. The FCA’s consumer page on cryptoassets tells buyers to “be prepared to lose all your money”.

Hacks took more than $3.4bn from crypto firms in 2025

Coins left on a platform are only as safe as its security. More than $3.4bn was stolen from the crypto industry in 2025, according to Chainalysis figures reported by The Record in December 2025, and at least $2.02bn of it was linked to North Korean hackers. The largest single theft was the February 2025 hack of the Bybit exchange, about $1.5bn.

Crypto fraud cost Americans $11.4bn in 2025, says the FBI

For ordinary users, fraud is a bigger threat than hacking. The FBI’s Internet Crime Complaint Center received 181,565 complaints involving cryptocurrency in 2025, with reported losses of $11.366bn, up 22% on 2024, according to its 2025 Internet Crime Report. That is more than half of the $20.877bn lost to all internet crime reported to the IC3. Crypto investment fraud alone accounted for $7.228bn.

The SEC describes the usual pattern: in relationship investment scams, a contact gains your trust over time and then steers you to a fake investment. It also warns about fraudsters posing as the SEC and about false claims of SEC approval. Our guide to spotting and avoiding crypto scams lists the warning signs.

Lose the key and the coins are gone

Self-custody gives you full control and full responsibility. If you lose your private key and the seed phrase that backs it up, nobody can reset it: the coins stay on the ledger, out of reach for good. If someone else gets the seed phrase, they can empty the wallet, and the transfer cannot be reversed. Our guide to storing a seed phrase safely covers backups.

A licence replaces the missing deposit guarantee

Since crypto on a platform is not a bank deposit, your protection comes from how the firm is regulated, for instance whether it keeps client assets apart from its own. In the EU that means a MiCA licence for crypto-asset service providers (CASPs). Our explainer on MiCA and CASP licences shows how to check a provider.

Cryptocurrency rules and tax in the US, UK and EU

Crypto is legal to buy and hold in the US, the UK and the EU. What varies is how the firms that sell it are supervised and how gains are taxed. What follows is general information as of October 2026, not tax advice.

United States: property for the IRS, a stalled market law in Congress

The IRS digital assets page is plain: “For U.S. tax purposes, digital assets are considered property, not currency.” Selling, swapping or spending crypto can create a capital gain or loss, short or long term depending on how long you held it. Every Form 1040 filer must answer a yes-or-no question on whether they received, sold, exchanged or otherwise disposed of a digital asset during the year. Brokers report transactions made from 1 January 2025 on the new Form 1099-DA.

On the market side, SEC Chair Paul Atkins set out a proposed token taxonomy in a speech on 12 November 2025 under “Project Crypto”. It separates network tokens, digital collectibles and digital tools, which he does not see as securities, from tokenised securities, which remain securities. It is his current thinking, not an adopted rule. Stablecoins got their own law, the GENIUS Act, signed on 18 July 2025 after a 308 to 122 House vote. The broader market-structure bill, the CLARITY Act, passed the House in July 2025, but a Senate cloture vote failed 49 to 50 on 15 September 2026.

United Kingdom: FCA marketing rules and capital gains tax

The FCA describes crypto as “largely unregulated in the UK”, with one big exception: the marketing of crypto is regulated. For tax, HMRC treats selling crypto, swapping it for another crypto, paying for goods or services with it and giving it away (except to a spouse, civil partner or charity) as disposals for capital gains tax. For 2026/27 the rates are 18% within the basic rate band and 24% above it, and the annual exempt amount is £3,000. The Self Assessment return has had a crypto section since 2024/25.

European Union, France and Italy: MiCA licences since July 2026

MiCA applies across the 27 EU countries. Since the transition ended on 1 July 2026 at the latest, a firm offering crypto services to EU clients needs a CASP licence from one national authority, which it can then use across the Union. In France, the old PSAN registration has given way to MiCA licences supervised by the AMF. In Italy, firms registered with the OAM could carry on until 30 June 2026 at the latest if they had applied for a licence.

Tax stays national. Italy taxes most crypto gains at 33% from 2026, with 26% kept for euro-denominated e-money tokens, under the 2026 budget law. France has its own flat-tax rules. Our French and Italian editions go into the detail.

Four checks before your first purchase

Our step-by-step guide to buying crypto covers the mechanics. Before you get there, four habits remove most of the risks above:

• Check the licence. In the EU, look the provider up in the ESMA register of CASPs; in the UK, check the FCA register; in the US, check the state and federal registrations the platform claims. Our guide to choosing a crypto exchange lists what else to compare.
• Decide who holds the keys before you buy: the exchange, or you with your own wallet.
• Start with an amount you could lose entirely without changing your plans.
• Treat any promise of guaranteed or fixed returns as a warning sign, and never move funds at the request of someone you met online.

Next lesson: coins vs tokens, or why USDC counts as a token and ETH as a coin, and what that changes for whoever holds them.