What Is Cryptocurrency and How Does It Work?

Cryptoassets are high-risk investments and may not be suitable for all investors. Their prices can be highly volatile, and you could lose some or all of the money you invest.

Cryptoassets are not regulated in the same way as traditional investments and are not covered by the Financial Services Compensation Scheme (FSCS). Protection from the Financial Ombudsman Service (FOS) is limited.

During periods of extreme market volatility, liquidity may be reduced, which can affect your ability to buy or sell crypto at your desired price.

You should take time to understand how crypto works and the risks involved before investing. For more information, visit IG’s Crypto Risks page.

What is cryptocurrency?

Cryptocurrency is a type of digital money designed to be used over the internet, operating without the control of a central authority like a bank or government. Instead, cryptocurrencies function on decentralised networks based on blockchain technology, which maintains security and integrity through distributed ledger systems.

Cryptocurrencies like Bitcoin, Ethereum, and others offer an alternative to traditional financial systems by enabling direct peer-to-peer transactions without intermediaries.

Key features:

Exists only digitally - no physical coins or notes
Allows direct person-to-person transfers worldwide
Often has lower fees than traditional banking
Records all transactions on a public ledger (blockchain)

How does blockchain work?

Blockchain is the technology that powers cryptocurrencies. It is essentially a chain of data blocks, where each block contains a comprehensive set of transactions that network participants can view and verify.

It works like this:

Transactions are grouped into "blocks"
Network computers verify these blocks
Verified blocks link to previous blocks, forming a "chain"
This chain creates a permanent, tamper-resistant record

Each block in a blockchain contains three key elements: the data (transactions), a unique identifier called a hash, and the hash of the previous block.

The verification process relies on a network of computers (nodes) that validate transactions according to the rules of the blockchain protocol. For example, in the Bitcoin network, all transactions are verified according to the Bitcoin Protocol without any central authority overseeing the activity.

Why this matters to you: Blockchain makes cryptocurrency secure without needing a bank to verify transactions.

What's the Difference Between Coins and Tokens?

In the cryptocurrency ecosystem, there's an important distinction between coins and tokens, which serve different purposes and have different characteristics.

Feature	Coins	Tokens
Purpose	Work as money	Provide access to services
Examples	Bitcoin, Ethereum	LINK, USDT, USDC
Own blockchain	Yes	No (built on existing blockchains)
Best for	Payments, storing value	Accessing platform features

Each type of cryptocurrency serves different purposes and offers unique benefits, allowing you to choose options that align with your specific needs and investment strategies.

What types of cryptocurrencies exist?