What is cryptocurrency? How crypto works, explained simply

Cryptocurrency is digital money that is secured by cryptography and recorded on a blockchain, a public ledger kept by thousands of computers instead of a bank. No central authority issues it or controls it: the network’s own rules decide how new coins are created and how transactions are confirmed. Bitcoin, launched in 2009, was the first cryptocurrency; today there are thousands, from Ether to stablecoins that track the US dollar or the euro.

What is cryptocurrency, in simple words?

Cryptocurrency is a digital currency that exists only as entries on a shared database. It has no physical form: there are no coins or notes, only records of who owns what. Instead of a bank or other financial institutions keeping your balance, the whole network keeps a copy of every balance, and everyone can check it.

What makes it “crypto” is the use of cryptographic techniques. Each user has a private key, a long secret number, that signs transactions and proves ownership. Anyone can verify a signature, but only the owner of the key can create one. That is why losing your private key means losing access to your crypto.

Regulators use different words for the same thing. The EU calls it a crypto-asset, other authorities say virtual currency or digital assets. The meaning is the same: a digital token of value recorded on a blockchain. Some tokens also count as financial assets under securities laws, and then the stricter rules for shares apply instead.

How does cryptocurrency work?

Cryptocurrency works by combining three pieces: a blockchain that records transactions, a network of computers that verify them, and wallets that hold the keys. Here is what happens when you send crypto:

1. You create a transaction. In your cryptocurrency wallet you enter the receiver’s address and the amount, and sign it with your private key.
2. The network checks it. Computers on the network verify transactions: they check the signature and that you have enough balance.
3. It is added to a block. Miners or validators bundle confirmed transactions into a block. On Bitcoin this happens through a process called mining, which uses processing power; on Ethereum, validators lock up coins instead. Read more about blockchain basics.
4. The block joins the chain. Once added, the transaction is part of the public ledger. Reversing it would mean redoing the work of the whole network.

You pay small transaction fees to the network for this, and how fast it confirms depends on the blockchain. Because there is no bank in the middle, crypto transactions work the same at night, at weekends and across borders.

How the bitcoin system stays secure

In the bitcoin system, miners use computer power to compete for the right to add each block, and the network rewards the winner with new bitcoin. Rewriting recent transactions would take more computer power than the rest of the network combined, so blockchain transactions get harder to reverse with every new block. Other cryptocurrency networks use different methods, such as proof of stake, to validate transactions and keep them secure.

Types of cryptocurrency and other digital assets

There are several types of cryptocurrency, and they behave very differently as cryptocurrency investments.

Everything other than bitcoin is often called an altcoin. Projects are usually ranked by market capitalization: the price of one coin times the number of coins in circulation. A high market cap tells you a coin is large, not that it is a good investment. Anyone can launch their own cryptocurrency token in minutes, which is why so many worthless coins exist. Our bitcoin and stablecoin entries go deeper.

Cryptocurrency vs a central bank digital currency

A central bank digital currency (CBDC) is not a cryptocurrency. It is digital money issued by a central bank and backed by the state, like cash in digital form. The European Central Bank is preparing a digital euro, which would be a CBDC. It would be legal tender, with the central bank in control, which is the opposite of how bitcoin works.

What is cryptocurrency used for?

Cryptocurrency is used mainly as an investment today, but also for payments, transfers and decentralized finance.

• Investing and crypto trading. Most people buy crypto hoping the price rises, either holding for years or trading short-term moves in the cryptocurrency market.
• Payments. Some online shops accept bitcoin or other coins, often through a payment provider that converts cryptocurrency payments to euros straight away. As a medium of exchange it competes with traditional payment methods and payment systems such as cards and SEPA transfers, which are cheaper and more stable for everyday use.
• Transfers abroad. Stablecoins that track the US dollar or the euro let you send value across borders without a bank’s foreign exchange rates, though you still pay network and exchange fees.
• Decentralized finance. On blockchains such as Ethereum, apps let you lend, borrow and swap crypto without a bank. That part of the cryptocurrency ecosystem largely falls outside MiCA and carries extra risk.

How to buy and sell cryptocurrency in the EU

You buy and sell cryptocurrency on a cryptocurrency exchange, an online cryptocurrency marketplace, or through a broker that offers crypto. In the EU, only use a platform licensed under MiCA, the EU’s crypto law: since 1 July 2026, only authorised firms may offer crypto services to EU residents.

A typical first purchase looks like this. You open an account, verify your identity, and deposit €100 from your bank accounts by SEPA transfer or iDEAL. You buy €100 of bitcoin and pay the platform’s trading fee, plus a spread if you use a simple “buy” button. You now own a fraction of one bitcoin. You can store cryptocurrency on the exchange, or move the purchased cryptocurrency to a digital wallet from one of many wallet providers. To get euros back, you sell and withdraw to your bank.

Our beginner’s guide and our guide on how to choose your first crypto exchange walk you through the details, including fees.

Cryptocurrency investing: why it matters to you

Cryptocurrency matters because it is now a mainstream investment you can buy in a few taps, and the EU has a full regulatory framework for crypto companies. But crypto investors face risks that savings accounts, shares and mutual funds don’t have.

• Price swings. Crypto prices can rise or fall by large amounts in a single day, and the whole crypto market often moves together. Many coins have lost almost all of their value. Only invest money you can afford to lose.
• No safety net. Crypto-assets are not covered by deposit guarantees or investor compensation schemes, and such assets can lose all their value. If a platform fails, there is no €20,000 or €100,000 safety net.
• Taxes still apply. In the Netherlands, crypto counts towards your box 3 wealth. In Germany, gains on crypto held for more than a year are tax-free, but shorter-term gains are taxed. Since 2026, the cryptocurrency industry in the EU has reported customer data to tax authorities under the DAC8 rules. This is general information, not legal or tax advice.
• Investor protection under MiCA. Licensed platforms must keep your crypto separate from their own, explain their fees, and handle complaints. They must also check where your money comes from, to prevent money laundering. That reduces, but doesn’t remove, the risk of security breaches and fraud.

Risks and crypto scams to avoid

The biggest risks involved in crypto are not only price falls but also scams and mistakes you can’t undo. Cryptocurrency transactions can’t be reversed by a bank, unlike most financial transactions, which makes them attractive to fraudsters.

• Fake investment schemes. Anyone promising fixed high returns, or asking you to send crypto to “unlock” a profit, is running a scam.
• Impersonation. Fake support agents, celebrities and “account managers” ask for your login or private key. Nobody legitimate needs your keys.
• Unlicensed platforms. An exchange without a MiCA licence may freeze withdrawals, and you have nowhere to complain.
• Lost keys. If you keep your crypto holdings in your own wallet and lose your recovery phrase, nobody can restore it.

The bottom line

Cryptocurrency is digital money run by a network instead of a bank, with bitcoin as the original and thousands of other digital assets after it. It can be a small, high-risk part of an investment mix. Buy it on a licensed platform, keep your amounts modest, and secure your account and keys.

Related terms

• Bitcoin
• Blockchain
• Altcoin
• Stablecoin
• Wallet