What Is Cryptocurrency? How It Works and What You Own

Cryptocurrency is a digital asset recorded on a blockchain, a shared public ledger, and moved with a private key, a secret piece of data that proves a transaction came from the owner. Before you buy, find out who holds the private key for your coins: whoever holds it can move them, and a confirmed transfer typically cannot be reversed.

How does crypto work?

What is blockchain?

Canada's consumer agency describes (opens in a new tab) a blockchain as a visible online record of transactions, also called a ledger. Bitcoin's blockchain is a shared public ledger that the whole Bitcoin network relies on.

The network is a group of computers that store and share the ledger. Each computer is a node.

How transactions are confirmed

To be confirmed, a transaction must be packed into a block that follows strict cryptographic rules checked by the network. Each network has its own way of agreeing on which blocks count.

Bitcoin uses proof of work: mining is a distributed consensus system that confirms pending transactions by including them in the blockchain. Ethereum uses proof of stake: validators stake, or lock up, ETH in a smart contract to take part in confirming blocks.

What a transfer changes

Your wallet keeps a private key. The key signs each transaction, and the signature is mathematical proof that it came from the wallet's owner. Once the network confirms it, the transaction is recorded on the public ledger.

The public key works like an email address: you share it so people can send you crypto. Never share the private key with anyone.

Coins, tokens and stablecoins

A coin is native to its own blockchain, such as bitcoin on the Bitcoin blockchain. A token runs on a blockchain whose native coin is something else. Ethereum's documentation (opens in a new tab) gives wrapped bitcoin (WBTC) as an example: it is a token on the Ethereum network, an Ethereum version of Bitcoin and not the original asset on the Bitcoin blockchain.

As of October 2026, Canada's consumer agency says (opens in a new tab) stablecoins are another type of crypto asset. To try to keep a stable value, they may be tied to a currency like the US dollar, be backed by other crypto assets, or use algorithms that trigger purchases and sales. It also says some have not maintained a stable value.

Crypto ownership: what you hold when you buy

What do you own in a wallet of your own?

A wallet is an interface or app that lets you interact with your account. Ethereum's documentation puts it this way (opens in a new tab): you never really hold cryptocurrency, you hold private keys, and the funds stay on Ethereum's ledger.

Your private key signs transactions, so it gives you custody, meaning control, over the funds tied to your account. The provider of a self-custody wallet does not have custody of your funds. You are responsible for keeping your keys safe.

Wallets often give you a recovery phrase (also called a seed phrase) to write down somewhere safe. It is the only way to recover the wallet. Never share it with anyone, and never type it anywhere except to restore your own wallet in its official app or device. Read what a seed phrase is before you set one up.

Do you own crypto on an exchange?

On a centralized exchange, you are trusting the exchange with custody over your funds. It holds the keys. You log in with a username and password that you can recover in a traditional way.

The balance you see in the app is the company's record of your share. Read your platform's terms to see how it holds and records customer crypto.

As of October 2026, New York's financial regulator lets (opens in a new tab) licensed custodians keep customers' crypto in omnibus (pooled) wallets and internal ledger accounts that hold only customers' crypto, as long as records keep each customer's share evident and up to date. That is one state's guidance for licensed firms, not a description of every exchange.

Example with made-up numbers

The amounts below are invented and ignore fees. Coin X is not a real coin.

• You buy 0.01 Coin X on an exchange. The exchange holds the keys, and your balance is its record of your share.
• You withdraw 0.01 Coin X to a wallet you set up yourself. Once the network confirms the transfer, it is recorded on the blockchain.
• Now your private key controls the coins, and you are responsible for keeping it safe.

What protection you have if a platform fails depends on your country. Read how to store crypto safely.

Is crypto property? What the law calls it

As of October 2026, the main markets describe it differently:

• United States: the FTC describes (opens in a new tab) cryptocurrency as a type of digital currency that generally exists only electronically, and says cryptocurrency accounts are not backed by a government. This is consumer guidance, not a legal definition.
• United Kingdom: in England, Wales and Northern Ireland, the Property (Digital Assets etc) Act 2025 (opens in a new tab) says a digital or electronic thing is not prevented from being the object of personal property rights merely because it is neither a thing in possession nor a thing in action. It does not mention crypto by name. The Law Commission says (opens in a new tab) crypto-tokens could fall into a third category of personal property. The Act took effect on 2 December 2025.
• EU: MiCA defines (opens in a new tab) a crypto-asset as a digital representation of a value or of a right that can be transferred and stored electronically using distributed ledger technology or similar technology.
• Canada: crypto assets are not legal tender (opens in a new tab), and a government or central bank does not issue or oversee them.
• Australia: ASIC's information sheet now uses (opens in a new tab) the term digital assets and considers Bitcoin unlikely to be a financial product. Consumers are only protected by the financial services laws ASIC administers to the extent that digital assets and related services are subject to those laws.

Elsewhere, check your own country's financial regulator. Registration and tax are covered in how to buy crypto.

Three checks before you buy

• Who holds the keys: an exchange or a wallet you control? See how to store crypto safely.
• Which network: versions of the same asset can exist on more than one blockchain. See how to choose a withdrawal network.
• What the platform's terms say, and whether it is registered where you live. See how to buy crypto.

Common misconceptions

• "A mistake can be reversed." Cryptocurrency payments typically are not reversible (opens in a new tab). Once you pay, you can usually only get your money back if the person you paid sends it back. Read why crypto transfers cannot be reversed.
• "Crypto is anonymous." People talk about it that way, but the FTC says (opens in a new tab) the truth is not that simple. Transactions are typically recorded on a public ledger.
• "A token is the same on every network." Blockchains are built separately with different rules, so they cannot natively communicate and tokens cannot move freely between them (opens in a new tab).

Risks to understand

• Price swings. Crypto assets, including stablecoins, are risky investments (opens in a new tab) because their value may rise and fall suddenly and significantly.
• A lost private key. If you lose it, you lose access to your wallets and your funds.
• Platform failure. You could lose your money if a platform or wallet provider goes out of business or bankrupt. If one is hacked, thieves can steal keys and reach the crypto they protect.
• Scams. Read how to spot crypto scams before you send anything.

Before you buy, read the guide for your coin: how to buy Bitcoin or how to buy Ethereum. To compare the two coins first, read how Bitcoin and Ethereum differ, and for a small first order, buying a fraction of Bitcoin.