What Is Cryptocurrency and How Does It Work
Cryptocurrency is digital money that is not issued by any bank or state and whose movements are recorded on a public blockchain. You do not prove ownership with a contract with a bank, but with a private key: whoever holds the key can send the coins on. The rules – how many coins will ever exist and how payments are verified – are set by the network's code, which all of its computers follow.
How cryptocurrency works: from wallet to block
- The wallet creates a key pair. The public key becomes an address that you give to others; the private key (often in the form of 12 or 24 words) you keep secret.
- Payment: the wallet builds a transaction "from my address to this address" and signs it with the private key.
- Verification: the network's nodes check the signature and that the coins have not been spent yet.
- Recording: a miner (in Proof of Work) or a validator (in Proof of Stake) includes the transaction in a new block of the blockchain. From that moment the payment is confirmed and cannot be reversed.
There is no intermediary anywhere in this process who could stop the payment – but also nobody to help you if you send coins to the wrong address or lose your key.
How it differs from money in a bank account
| Czech koruna in a bank account | Cryptocurrency (e.g. Bitcoin) | |
|---|---|---|
| Who issues it | the central bank, commercial banks | the network according to fixed rules; new coins are created by mining or staking |
| Who keeps track of balances | your bank | the public blockchain; every node has a copy |
| How you prove ownership | logging in to online banking | private key |
| Reversing a wrong payment | can be disputed | not possible |
| Value | stable, affected by inflation | set by the market; swings of tens of per cent are common |
| Legal tender in the Czech Republic | yes | no, legally it is a crypto-asset |
Coins, tokens and stablecoins
A coin has its own blockchain – Bitcoin, Litecoin, Kaspa. A token runs on someone else's blockchain, typically Ethereum. A stablecoin is a token pegged to a traditional currency, such as the dollar or the euro. Only coins of Proof of Work networks can be mined – tokens and stablecoins cannot.
Why it matters for miners
In Proof of Work networks, miners are the ones who write transactions into blocks and receive newly created coins in return. Mining income therefore depends on two things that no miner can influence: the coin's market price and how much hashrate everyone else sends to the network. How this works in practice is explained in the article What is cryptocurrency mining. You will need your own wallet for the coins you mine – and watch out for fake apps, see the fake wallet scam.
Related terms
- Blockchain – the ledger in which payments are recorded.
- Proof of Work vs. Proof of Stake – how new coins are created.
- Which cryptocurrencies can be mined – an overview by algorithm.
What next
This article is only a brief definition. How to read market cycles, how to buy and which risks to watch is covered in our comprehensive guide to the world of cryptocurrencies. The best-known coin is described in detail in the article What is Bitcoin.
Sources
Frequently asked questions
Is cryptocurrency legal in the Czech Republic?
What happens if I lose my private key?
Who sets the price of a cryptocurrency?
How is cryptocurrency created?
This text was prepared with the help of AI. Facts, figures and procedures were checked by Yegor.
