A cryptocurrency is a software token that can be transferred securely and verifiably from one person to another. Cryptocurrency transactions are recorded on a public distributed database, called a blockchain, that uses cryptographic verification methods to authenticate each transaction. Cryptocurrencies are decentralized, not controlled by a central bank or other authority, and have no intrinsic value besides their scarcity.
Thousands of separate cryptocurrencies were created during the cryptocurrency boom of the late 2010s and early 2020s, inspired by the success of early cryptocurrencies like Bitcoin and Ethereum. Each cryptocurrency has its own independent blockchain that records its entire history of transactions. Distributed groups of computers, often using specialized hardware and software, host the blockchain and process new transactions by appending data to it; those computers receive newly-created tokens as a reward for their work.
Cryptocurrency owners store their tokens in a secure, encrypted application known as a wallet. A wallet includes a public address, similar to a bank account number, used to send and receive tokens. It also uses a cryptographic secret key to unlock and access the wallet. For convenience, many people store their cryptocurrency on exchanges, which maintain online wallets and provide services to exchange tokens for money or other tokens.
A cryptocurrency blockchain processes transactions through either mining or staking. Mining involves groups of computers solving cryptographic puzzles while processing transactions and appending those transactions to the blockchain. Staking involves less computing power, requiring participants to lock up some of their tokens to prove their stake in the blockchain instead of solving puzzles. Bitcoin is the most popular mined cryptocurrency, and Ethereum is the most popular staked token.
The Risks of Cryptocurrency
Despite the name, cryptocurrencies do not generally function as currency. Cryptocurrencies have seen rapid swings in value from day to day that frequently change a token's purchasing power. Because of this volatility, few vendors accept Bitcoin directly, let alone smaller cryptocurrency tokens; most transactions first convert a cryptocurrency to a stable fiat currency like dollars or euros. It is much more common for enthusiasts to purchase tokens as a speculative investment, hoping that the token's value increases so that they may sell it later at a profit.
Cryptocurrency's anonymity and potentially high value make people's wallets tempting targets for fraud. Both locally-stored wallets and those hosted on exchanges are common targets. In addition to direct intrusion attempts, phishing emails and other scams are frequently used to trick people into granting access to their tokens. Ransomware hackers attack computer systems and hold files for a cryptocurrency ransom. Unfortunately, once a victim's cryptocurrency is in the attacker's wallet and the blockchain has recorded the transaction, it cannot be recovered.