What is cryptocurrency?

A cryptocurrency is money that no single organisation issues, holds or can switch off. There is no bank behind it, no company whose servers you depend on, and nobody who can reverse a payment because they changed their mind. What replaces all of that is a published set of rules and a network of strangers who each check that everyone else is following them.

That is the whole idea. Everything below is how it is made to work in practice.

The problem that had to be solved first

Digital money is easy to send and hard to stop being copied. A file that represents ten euros can be duplicated as easily as any other file, and a copy is indistinguishable from the original. Send the same ten euros to two people and both payments look perfectly valid. This is called the double-spend problem, and it is the reason digital cash took so long to work.

The conventional answer is an authority. A bank keeps the only ledger that counts, and because there is exactly one of it, a balance cannot be spent twice. That works, at the price of the bank being able to see everything, freeze anything and fail.

Cryptocurrencies answer differently: everyone keeps the ledger. Every participant holds a copy of every transaction that has ever happened, so anyone can compute anyone's balance and nobody has to be trusted with the only copy. Spending the same coin twice fails because the second attempt contradicts a history that thousands of machines already agree on.

How a payment actually happens

A transaction is a small message saying this much, from this address, to that address. It is signed with a private key — a secret number only the sender holds — and anyone can check that signature against the matching public key without ever learning the secret. That is the cryptography the name refers to.

The signed message is broadcast to the network. It is not final yet. It becomes final when it is bundled with other recent transactions into a block, and that block is appended to the chain of every block that came before it. Each block carries a fingerprint of its predecessor, so rewriting an old one would invalidate every block after it. That chain of fingerprints is the blockchain, and it is what makes history expensive to rewrite rather than merely discouraged.

Who decides which block comes next

This is the part that differs between currencies, and the two main answers are worth telling apart because almost everything else follows from them.

Proof of work

Participants compete to find a number that, combined with the block they are proposing, produces a fingerprint below a target value. There is no clever way to find it — only guessing, billions of times a second. The first to succeed publishes the block and collects a reward. Verifying the answer is instant, which is the asymmetry that makes the scheme work: hard to produce, trivial to check.

The cost is electricity, and that is the point rather than a side effect. Rewriting history means redoing all that work faster than the rest of the network is doing new work, which is what makes an old block practically permanent.

Bitcoin uses proof of work. Its reward halves roughly every four years: it began at 50 bitcoin per block, and since the halving of April 2024 it is 3.125. That schedule is why the supply is capped at 21 million — the halvings converge, and after the last one the network is paid entirely by transaction fees.

Proof of stake

Instead of spending electricity, participants lock up coins of the currency itself as collateral. The protocol picks who proposes the next block, weighted by how much is locked. Propose something invalid and the collateral is destroyed.

The security argument is the same shape as proof of work — attacking the network has to cost more than it can yield — but the cost is capital at risk rather than energy burned. Ethereum ran on proof of work until September 2022 and has used proof of stake since, which cut its energy use by more than three orders of magnitude.

Neither mechanism is simply better. Proof of work buys its security from outside the system, in electricity, and is easier to reason about. Proof of stake buys it from inside, in the currency's own value, which is cheaper but ties the security to the price.

Bitcoin and Ethereum are not the same kind of thing

Bitcoin is deliberately narrow. It moves bitcoin, and its scripting is limited on purpose: the fewer things the system can do, the fewer ways it can be broken.

Ethereum is a network for running programs. A smart contract is code deployed to the chain that anyone can call and that executes identically on every machine — an exchange, a lending market or a game that runs without an operator who could change the rules. Calls cost gas, paid in ether, which both compensates the network and stops an infinite loop from running forever.

That difference explains most of the others. Bitcoin is judged on being unchangeable; Ethereum is judged on what people build on it.

Where the coins actually are

Nowhere, in the sense you might expect. The chain records that a certain address holds a balance; what you store is the private key that lets you sign for it. Lose the key and the coins remain visible to everyone, permanently, and are unspendable forever. There is no support line.

That is why the storage question is really a key-management question:

• A hardware wallet keeps the key on a dedicated device that signs without ever exposing it. The usual recommendation for anything you would mind losing.
• A software wallet keeps the key on your phone or computer. Convenient, and only as safe as that machine.
• Leaving coins on an exchange means the exchange holds the key, not you. You have a claim on a company, which is a different thing from holding the asset — and several exchanges have failed while holding customers' coins.
• A paper backup of the recovery phrase protects against a dead device, and against nothing else. Anyone who reads it has the coins.

Words you will keep meeting

Address — where funds can be sent. Public, and safe to share.

Private key / seed phrase — the secret that authorises spending. Whoever has it owns the coins, with no recourse.

Node — a machine holding a copy of the chain and checking new blocks against the rules.

Mining / validating — producing new blocks, under proof of work and proof of stake respectively.

Gas — the fee that pays for computation on a network like Ethereum.

Testnet — a parallel network with worthless coins, used to test without risk. Most faucets in the Earn catalogue hand out testnet coins for exactly that.

What this page does not tell you

It says nothing about prices, market capitalisations or which cryptocurrency to hold. That is deliberate. Those numbers change by the hour and a page that quoted them would be wrong within a day and misleading within a month — which is precisely what happened to the page this one replaces, still announcing a mining reward that two halvings had made obsolete.

Nothing here is financial advice. Cryptocurrencies can lose value quickly and permanently, several have gone to zero, and any promise of a guaranteed return is a promise nobody in this field is able to keep.