Quick answer
Cryptocurrency is a form of digital money secured by cryptography and recorded on a blockchain — a shared public ledger maintained by a global network of computers. Unlike traditional money, it is not issued or controlled by any government or central bank. Bitcoin, launched in 2009, was the first; today there are thousands of different cryptocurrencies serving different purposes.
What is cryptocurrency, in plain English?
Cryptocurrency is digital money. It exists only electronically — you cannot hold it in your hand like a coin or a banknote. But unlike the digital money in your bank account, it is not managed by any bank, company, or government. Instead, it runs on a shared network of thousands of computers around the world, all following the same rules.
The word 'crypto' comes from cryptography — the branch of mathematics used to secure information. Cryptography is what makes it possible for cryptocurrency transactions to be secure and verifiable without needing a bank to act as a trusted middleman.
Bitcoin, created in 2009 by an anonymous person or group using the name Satoshi Nakamoto, was the first cryptocurrency. It was designed to allow two people to send value to each other anywhere in the world without involving a bank, payment processor, or government. Since then, thousands of other cryptocurrencies have been created, each with different features and purposes.
How does cryptocurrency actually work?
When you send cryptocurrency to someone, your transaction is broadcast to a global network of computers. Those computers verify that you actually own the crypto you are trying to send (using cryptography to check your digital signature), and then record the confirmed transaction on the blockchain.
Every transaction ever made is recorded chronologically in blocks, and those blocks are chained together — hence 'blockchain'. Once a transaction is added to the blockchain, it cannot be altered or deleted. Thousands of computers hold an identical copy of the entire blockchain at all times.
Because so many independent computers all hold the same record, no single person, company, or government can change it. To falsify a transaction, you would need to simultaneously alter the record on thousands of computers worldwide — computationally impossible for most attacks.
Think of the blockchain like a public noticeboard in the town square that thousands of people photograph every minute. You can add a new notice, but you can't remove or change an old one — too many people already have a copy.
Where does cryptocurrency come from?
New units of most cryptocurrencies are created through a process called mining (for older cryptocurrencies like Bitcoin) or staking (for newer ones). Understanding both helps explain why cryptocurrency is not infinite — most have a hard limit on total supply.
- 01
Mining (Proof of Work)
Computers called miners compete to solve complex mathematical puzzles. The first to solve it earns the right to add the next block of transactions to the blockchain and receives newly created cryptocurrency as a reward. This is how new Bitcoin enters circulation. Mining uses significant electricity, which is one of the main environmental criticisms of Bitcoin.
- 02
Staking (Proof of Stake)
A more energy-efficient alternative used by Ethereum and many newer blockchains. Instead of solving puzzles, participants lock up ('stake') their own cryptocurrency as collateral to earn the right to validate transactions. They earn rewards for honest behaviour and risk losing their stake for dishonest behaviour. Ethereum switched from mining to staking in 2022, reducing its energy use by approximately 99.95%.
- 03
Fixed supply caps
Bitcoin has a hard cap of 21 million coins — no more will ever be created. This cap is written into the Bitcoin code and cannot be changed without the agreement of the entire network. Around 19.7 million Bitcoin have already been mined. Scarcity is often cited as one reason for Bitcoin's value.
What are the main types of cryptocurrency?
Not all cryptocurrencies are the same. They serve very different purposes, and understanding the main categories helps you make sense of the space.
- Bitcoin (BTC)
- The original cryptocurrency, created in 2009. Primarily used as a store of value — sometimes called 'digital gold'. Has a fixed supply of 21 million coins. The most widely recognised and held cryptocurrency worldwide.
- Ethereum (ETH)
- A programmable blockchain that allows developers to build applications on top of it. Powers most DeFi protocols, NFT platforms, and decentralised apps. The second-largest cryptocurrency by market value.
- Altcoins
- Any cryptocurrency other than Bitcoin. There are thousands — including Solana, Cardano, Polkadot, and Avalanche — each with different technical designs and intended uses.
- Stablecoins
- Cryptocurrencies designed to maintain a stable value, usually pegged to the US dollar. Examples include USDT (Tether), USDC (USD Coin), and DAI. Used widely in DeFi to avoid price volatility while still operating on blockchain networks.
- Tokens
- Digital assets built on top of an existing blockchain (rather than having their own blockchain). Many DeFi protocols issue their own tokens that grant holders voting rights or a share of protocol revenues.
- Memecoins
- Cryptocurrencies with no particular utility or technical innovation, often created as jokes or driven entirely by social media hype. Dogecoin (DOGE) and Shiba Inu (SHIB) are the most well-known. Extremely high risk.
Can you use cryptocurrency to buy things?
Cryptocurrency is increasingly accepted for payments, though it remains far from mainstream for everyday purchases. A small but growing number of businesses accept Bitcoin or other cryptocurrencies directly. Some countries — notably El Salvador — have made Bitcoin legal tender, meaning businesses are required to accept it.
More practically, many people use cryptocurrency via crypto debit cards that convert their holdings into local currency at the point of sale. Companies like Visa and Mastercard work with crypto platforms to issue cards that spend exactly like regular bank cards.
However, the volatility of most cryptocurrencies makes them impractical as a medium of exchange for everyday purchases. If you pay £10 for coffee in Bitcoin today and Bitcoin doubles in price tomorrow, that coffee effectively cost you £20 in hindsight. Stablecoins, which maintain a fixed value, solve this problem and are increasingly used for payments and remittances.
Is cryptocurrency the same as digital banking?
No — and the difference is fundamental. When you have money in a bank account, the bank holds it on your behalf, keeps records of who owns what, and is responsible for security and dispute resolution. The bank is a trusted intermediary between you and the financial system.
Cryptocurrency removes that intermediary. The blockchain itself maintains the records, and cryptography (not a bank) proves ownership. There is no customer service department, no fraud protection, and no deposit insurance scheme covering crypto assets.
This creates real benefits — you can transact globally without permission, access financial services without a bank account, and maintain full custody of your own assets. But it also means full personal responsibility for security. Mistakes are generally permanent and unrecoverable.
What are the real risks of cryptocurrency?
Cryptocurrency carries substantial risks that are meaningfully different from traditional investments. The Financial Conduct Authority (FCA), the UK's financial regulator, has consistently warned that people who invest in crypto should be prepared to lose all their money.
- 01
Price volatility
Cryptocurrency prices can move by 20–50% in a single day and have fallen by more than 80% during major market downturns. Bitcoin fell from roughly $69,000 in November 2021 to around $16,000 by the end of 2022. Past performance is no guide to future results.
- 02
No regulatory protection
In most countries, cryptocurrency is not covered by deposit protection schemes like the FSCS in the UK or the FDIC in the US. If a crypto exchange collapses — as FTX did in November 2022, losing billions in customer funds — there is usually no compensation scheme.
- 03
Scams are widespread
The FCA reports that crypto is one of the most common vehicles for investment fraud. Common scams include fake celebrity endorsements, 'guaranteed return' schemes, romance fraud leading to crypto investment, and phishing attacks.
- 04
Technology risk
Smart contract code can contain bugs that allow attackers to drain funds. Dozens of DeFi protocols have been hacked, with losses running into the hundreds of millions of dollars. Even reputable, audited protocols are not immune.
- 05
Custody risk
If you hold crypto on an exchange, you rely on that exchange remaining solvent and secure. If you hold it yourself, you are responsible for keeping your private key or recovery phrase safe. Lose it, and your crypto is gone forever — there is no password reset.
- 06
Liquidity risk
Many smaller cryptocurrencies have thin trading volumes, meaning it can be difficult to sell at your chosen price. Large sell orders can move the market significantly against you.
The FCA has said it considers crypto assets to be high-risk investments and that consumers should only invest amounts they are prepared to lose entirely. Most people who trade crypto actively lose money. Promises of guaranteed or unusually high returns are hallmarks of scams.
Is cryptocurrency regulated in the UK and US?
Regulation of cryptocurrency varies significantly by country and is evolving rapidly. Here is where the two largest English-speaking markets stand:
In the United Kingdom, the FCA is the relevant regulator. Firms offering crypto services to UK customers must be registered with the FCA. Crypto assets are not considered legal tender in the UK and are not protected by the FSCS. The UK has been developing a comprehensive crypto regulatory framework, with major legislation expected to take effect through 2025–2026.
In the United States, multiple regulators have overlapping jurisdiction. The SEC (Securities and Exchange Commission) considers many tokens to be securities. The CFTC (Commodity Futures Trading Commission) considers Bitcoin and Ethereum to be commodities. Crypto exchanges operating in the US must comply with anti-money laundering (AML) and know-your-customer (KYC) rules. The regulatory landscape is actively contested, with ongoing enforcement actions against several major exchanges.
In both countries, crypto profits are generally taxable. In the UK, most crypto disposals are subject to Capital Gains Tax. In the US, the IRS treats crypto as property and taxes gains accordingly. Record-keeping is essential.
Always check the regulatory status of any crypto firm you use. In the UK, you can check the FCA register at register.fca.org.uk. Unregistered firms offering crypto services to UK customers are operating illegally.
Frequently asked questions
What is the difference between cryptocurrency and regular money?
Regular money (also called fiat currency) is issued by governments and managed by central banks and commercial banks. It exists in physical form (coins and notes) or digitally in bank accounts. Cryptocurrency is digital-only, decentralised — meaning no central authority controls it — and secured by cryptography rather than trust in an institution. With crypto, you can self-custody your assets with no bank involved.
Is cryptocurrency real money?
Cryptocurrency functions as money for many people — it can be used to buy goods and services, transfer value, and store wealth. However, most countries do not recognise it as legal tender (El Salvador is an exception). Legally and practically, it sits in a category of its own: a digital asset that shares some properties of money but lacks others, such as government backing and universal acceptance.
How many cryptocurrencies are there?
As of 2026, there are well over 20,000 different cryptocurrencies listed across various data platforms. However, the vast majority are very small, illiquid, and of questionable legitimacy. The 10 largest cryptocurrencies by market capitalisation account for the majority of the total market value.
Can I lose all my money in cryptocurrency?
Yes. Many cryptocurrencies have lost all or nearly all their value. Even well-established cryptocurrencies like Bitcoin have fallen 80%+ during market downturns. Additionally, scams, hacks, exchange collapses, and loss of access to your wallet are all real ways people have lost their entire crypto holdings. Only invest amounts you are fully prepared to lose.
Do I have to pay tax on cryptocurrency gains?
In most countries, yes. In the UK, profits from selling, swapping, or gifting crypto are generally subject to Capital Gains Tax. Mining, staking rewards, and receiving crypto as income may be subject to Income Tax. In the US, the IRS treats crypto as property — every transaction is a taxable event. Always consult a qualified tax adviser for your specific situation and keep detailed records of all transactions.
What is the safest cryptocurrency?
No cryptocurrency is 'safe' in the sense that traditional savings are safe. Bitcoin and Ethereum are the most established, most liquid, and most widely used — which makes them relatively less risky than the thousands of smaller alternatives. But both have experienced severe price crashes. 'Safer' in crypto usually means larger market cap, longer track record, more liquidity, and more regulatory clarity — not absence of risk.
Is Bitcoin the same as cryptocurrency?
Bitcoin is a cryptocurrency — specifically the first and largest one. The word 'cryptocurrency' is the broader category. Bitcoin is one specific cryptocurrency, just as 'pound sterling' is one specific currency. All Bitcoin is cryptocurrency, but not all cryptocurrency is Bitcoin.
Can the government shut down cryptocurrency?
Governments cannot shut down a truly decentralised cryptocurrency like Bitcoin — the network operates globally across thousands of computers. However, governments can and do restrict or ban crypto trading, exchanges, and use within their borders. China has banned crypto trading outright. Individual governments can make crypto significantly harder to use through regulation, but they cannot destroy a blockchain network itself.
What is a cryptocurrency wallet?
A cryptocurrency wallet is software (or hardware) that stores your private keys — the cryptographic proof that you control your crypto. Your crypto itself lives on the blockchain; your wallet gives you the ability to access and move it. Wallets can be software apps (like MetaMask), hardware devices (like Ledger), or custodial accounts managed by an exchange (like Coinbase).
How do I buy cryptocurrency?
The most common way for beginners is through a centralised exchange such as Coinbase, Kraken, or Binance. You create an account, verify your identity (required by law in most countries), deposit money via bank transfer or card, and buy crypto. Alternatively, peer-to-peer platforms connect buyers and sellers directly. In the UK, only use exchanges registered with the FCA.