How Does cryptocurrency work ?

A Beginner's Guide

How Does Cryptocurrency Work? A Beginner's Guide
Written by Coursera Staff • Updated on Nov 29, 2023
Explore the world of cryptocurrency and how you can start buying, selling, and trading it. Learn about blockchain technology and how it tracks your digital assets.

[Featured image] A crypto investor is studying the cryptocurrency market on their computer.
Cryptocurrency is digital money that doesn’t require a bank or financial institution to verify transactions and can be used for purchases or as an investment. Transactions are then verified and recorded on a blockchain, an unchangeable ledger that tracks and records assets and trades.

If you’re interested in learning more about cryptocurrency, this guide explains how it works and what you need to know before buying a digital currency.

What is cryptocurrency?
Cryptocurrency, or crypto, is a digital payment platform that eliminates the need to carry physical money. It exists only in digital form, and although people mainly use it for online transactions, you can make some physical purchases. Unlike traditional money printed only by the government, several companies sell cryptocurrency.

Cryptocurrencies are fungible, meaning the value remains the same when bought, sold, or traded. Cryptocurrency isn’t the same as non-fungible tokens (NFTs) with variable values. For example, one dollar in crypto will always be one dollar, whereas the value of one NFT dollar depends on the digital asset it’s attached to.

Although government regulations are absent from the cryptocurrency market, they are taxable assets. You’ll need to file any profit or loss with the Internal Revenue Service.

Read more: Cryptocurrency: What Is It and How Does It Work?
How are cryptocurrencies created?
Mining is the term used to describe the process of creating cryptocurrency. Transactions made with cryptocurrency need to be validated, and mining performs the validation and creates new cryptocurrency. Mining uses specialized hardware and software to add transactions to the blockchain.

Not all cryptocurrency comes from mining. For example, crypto that you can’t spend isn't mined. Instead, developers create the new currency through a hard fork. A hard fork creates a new chain in the blockchain. One fork follows the new path, and the other follows the old. Crypto you can’t mine is typically used for investments rather than purchases.

Cryptocurrency vs. traditional currency
The government produces traditional currency in paper bills and coins you can carry with you or put in a bank. You can use it for purchases and other transactions that require cash. The government backs traditional currency, while cryptocurrency has no government, bank, or financial institution controls.

While you can hold traditional currency in a bank or financial institution, you store cryptocurrencies in a digital wallet. Banks insure money kept in bank accounts against loss, while crypto has no recourse in the event of a loss.