How cryptocurrency and blockchain work: the basics, Bitcoin and the risks
A cryptocurrency is a digital asset that works without a central bank or intermediary, using a distributed-ledger technology called blockchain. This explainer sets out, on the basis of sources only, how cryptocurrency and blockchain work, Bitcoin's history, mining, wallets and keys, stablecoins and the main risks. This is not financial advice.
A cryptocurrency is a digital asset that uses cryptography and blockchain (a distributed ledger) to carry out secure transactions. It is designed to work directly between parties (peer-to-peer), without a central bank or a traditional financial intermediary. Below the system is set out as sourced facts only; because crypto assets are highly volatile, this is not financial or investment advice.
What a cryptocurrency is
Ordinary money (such as the dollar or the som) is issued and controlled by a state and its central bank. A cryptocurrency, by contrast, is maintained not by a single central authority but by a network of computers spread around the world. Transactions are verified by that network and written to a shared, public ledger. For this reason cryptocurrency is often described as "decentralized."
How blockchain works
A blockchain is a continuously growing list of records ("blocks") linked and secured using cryptography — that is, a distributed ledger. Transactions are grouped into blocks, confirmed by the network and chained to the preceding blocks. Because each block carries the cryptographic "fingerprint" of the one before it, altering data that has already been written is computationally very hard to do unnoticed.
Bitcoin: the first cryptocurrency
The idea of Bitcoin was set out in 2008 in a paper titled "Bitcoin: A Peer-to-Peer Electronic Cash System," whose author is given as the pseudonymous Satoshi Nakamoto. The network launched in January 2009. Bitcoin's total supply is capped at 21 million units — a hard limit built into the software. Bitcoin uses a method called "proof-of-work."
Mining, proof-of-work and proof-of-stake
Confirming new transactions is called "mining." In a proof-of-work system, miners verify transactions by solving complex computational puzzles; this consumes large amounts of electricity. An alternative method is "proof-of-stake," in which the network is secured by the share of the currency that users own. Ethereum, the second-largest cryptocurrency, switched from proof-of-work to proof-of-stake on 15 September 2022 ("The Merge"), cutting its energy use by about 99.95 percent.
Wallets, public and private keys
Cryptocurrency is held using a "wallet." Each user has a public address (which can be shared with others) and a private key (which is never disclosed). To send funds, the transaction is signed with the private key. A crucial point: if the private key is lost or stolen, the funds cannot be recovered — cryptocurrency has no "reset password" or central help desk as a bank does.
Stablecoins and smart contracts
A stablecoin is a type of cryptocurrency whose value is pegged to some reference asset, such as the US dollar, to reduce price swings. A smart contract is a program that runs automatically on a blockchain, executing itself when set conditions are met; the best-known platform for smart contracts is Ethereum.
Risks and caution
The US Securities and Exchange Commission (SEC) warns that crypto assets are exceptionally volatile and speculative, with a real risk of losing the entire amount invested. The SEC also notes that the field is rife with fraud — bogus coin offerings, Ponzi and pyramid schemes, and outright theft. Other risks: transactions are irreversible; funds on crypto platforms are not covered by government deposit insurance (such as FDIC in the US); regulation is uncertain; and proof-of-work networks use a great deal of energy.
Legal status
In most countries cryptocurrency is not legal tender — that is, the law does not compel anyone to accept it to settle taxes or debts. In 2021 El Salvador became the first country to declare Bitcoin legal tender (the law took effect on 7 September 2021). However, in 2025, under an agreement with the International Monetary Fund, El Salvador repealed Bitcoin's status as mandatory legal tender; the country's official currency remains the dollar.
Conclusion
Cryptocurrency and blockchain are a fast-moving, technically complex and high-risk field. They make it possible to move money outside the central bank, but the risk of price swings, fraud and total loss is very high. For this reason regulators advise acting only with money one can afford to lose, and only on the basis of full information.
