What is Cryptocurrency? A Guide for Everyone

SUMMARY Cryptocurrency is digital money recorded on a blockchain, a shared ledger maintained by thousands of computers. Bitcoin, launched in 2009, was the first. You can buy cryptocurrency on exchanges or earn it through mining. Transactions are irreversible and values fluctuate wildly. The IRS treats cryptocurrency as property, requiring tax reporting on all transactions. Regulatory oversight is evolving, with legitimate uses including international transfers and smart contracts.

If you’ve heard about cryptocurrency and found yourself confused by terms like blockchain, mining and digital wallets, you’re not alone. I can tell you that cryptocurrency is less mysterious than it seems once you understand the basics. Let’s walk you through what cryptocurrency actually is, how it works and why it may matter to you.

The Basics: Digital Money on a Blockchain

At its core, cryptocurrency is digital money. Unlike the dollars in your bank account or the cash in your wallet, cryptocurrency exists purely as computer code. There are no physical coins or bills. Instead, ownership is recorded on a digital ledger that thousands of computers around the world maintain simultaneously. This distributed record-keeping system is called a blockchain, and it’s the technology that makes cryptocurrency possible.

Think of a blockchain as a massive shared spreadsheet that everyone can see but no single person or company controls. Every time someone sends cryptocurrency to another person, that transaction gets recorded as a new entry on this ledger. What makes it secure is that changing any past transaction would require altering the records on thousands of computers at once, which is virtually impossible.

The first and most famous cryptocurrency is Bitcoin, which launched in 2009. An anonymous person or group using the name Satoshi Nakamoto created it as an alternative to traditional government-issued currencies. The idea was to create a form of money that didn’t require banks, governments or other intermediaries. Since then, thousands of other cryptocurrencies have emerged, including Ethereum, Tether, Cardano and Solana, each with different features and purposes.

How to Get and Store Cryptocurrency

So how do people actually get cryptocurrency? There are several ways. The most common is simply buying it on an exchange, which is like a stock trading platform but for digital currencies. You can transfer regular money from your bank account and use it to purchase Bitcoin or other cryptocurrencies at the current market price. Popular exchanges include Coinbase, Kraken and Binance.

Another way to obtain cryptocurrency is through a process called mining, though this term is somewhat misleading. Cryptocurrency mining doesn’t involve pickaxes or hard hats. Instead, it refers to using powerful computers to solve complex mathematical problems that verify and record transactions on the blockchain. When your computer successfully solves one of these problems, you receive newly created cryptocurrency as a reward. However, mining has become so competitive and energy-intensive that it’s mostly done by specialized companies with warehouses full of custom-built computers.

Once you own cryptocurrency, you store it in a digital wallet. This isn’t a wallet in the traditional sense but rather a piece of software that holds the cryptographic keys needed to access and transfer your cryptocurrency. There are different types of wallets. Hot wallets are connected to the internet and convenient for frequent transactions but more vulnerable to hacking. Cold wallets are offline devices that look like USB drives and offer better security for long-term storage.

Understanding the Risks

One crucial thing to understand about cryptocurrency is that transactions are irreversible. If you accidentally send Bitcoin to the wrong address or fall victim to a scam, there’s no customer service department to call and no way to reverse the transaction. This is fundamentally different from traditional banking, where you can dispute charges or stop payment on checks. The decentralized nature of cryptocurrency that makes it resistant to government control also means there’s no authority that can step in to fix mistakes or fraud.

The value of cryptocurrency fluctuates dramatically. Bitcoin, for example, reached an all-time high exceeding $126,000 in October 2025, though it has since declined. This volatility happens because cryptocurrency value is determined purely by supply and demand in the market. Unlike traditional currencies backed by governments or gold, most cryptocurrencies have value only because people agree they have value. When enthusiasm is high, prices soar. When fear sets in, they can crash just as quickly.

Tax Obligations You Can’t Ignore

This brings us to an important legal consideration: taxes. Many people mistakenly believe that cryptocurrency transactions are anonymous and untraceable, leading them to think they can avoid taxes. This is wrong and potentially criminal. In the United States, the IRS treats cryptocurrency as property, not currency. This means that every time you sell, trade or even use cryptocurrency to buy something, you may trigger a taxable event. If your cryptocurrency increased in value since you acquired it, you owe capital gains tax on the profit. Failing to report these transactions can result in penalties, interest and potentially criminal prosecution for tax evasion.

The IRS has issued extensive guidance on digital asset reporting, requiring taxpayers to answer a specific question on their tax returns about whether they received or disposed of digital assets during the year. Starting with the 2025 tax year, new reporting requirements mean that brokerages must send Form 1099-DA reporting gross proceeds for digital asset sales, making it much harder to avoid reporting these transactions.

The Evolving Regulatory Landscape

The legal landscape around cryptocurrency is still evolving. Regulators are trying to figure out how existing laws apply to these new digital assets and whether new regulations are needed. Questions about which government agencies have jurisdiction, how to prevent fraud and money laundering, how to protect consumers and how to classify different types of cryptocurrency tokens are all being actively debated and litigated.

Some cryptocurrencies and related products have already faced legal trouble. The Securities and Exchange Commission brought 46 enforcement actions against cryptocurrency companies in 2023 and 33 in 2024, arguing that their tokens are actually unregistered securities and should be regulated as such. Other cases involve allegations of fraud, where promoters made false claims about cryptocurrency projects to lure in investors. The collapse of the cryptocurrency exchange FTX in 2022 and the subsequent criminal conviction of its founder Sam Bankman-Fried for fraud demonstrated that cryptocurrency businesses are not above the law.

However, the regulatory approach is shifting. In early 2025, the SEC under new leadership began dismissing some prominent enforcement actions and formed a Crypto Task Force to develop a more comprehensive regulatory framework. This suggests that while enforcement will continue against fraud and clear violations, regulators may be moving toward clearer rules rather than case-by-case enforcement.

Legitimate Uses Beyond Speculation

Despite the risks and regulatory uncertainty, cryptocurrency has legitimate uses beyond speculation. Some people use it for international money transfers because it can be faster and cheaper than traditional wire transfers. Others appreciate the privacy it can offer for legal transactions. Certain cryptocurrencies like Ethereum enable “smart contracts,” which are self-executing agreements written in code that automatically carry out their terms when conditions are met. This technology has potential applications in real estate, insurance and many other fields.

Practical Advice If You’re Considering Getting Involved

If you’re considering getting involved with cryptocurrency, whether as an investment, a payment method or just out of curiosity, here’s my advice as a lawyer and as someone who has watched this space develop. First, educate yourself thoroughly before investing any money. Understand that cryptocurrency is highly risky and you could lose everything you put in. Never invest more than you can afford to lose completely. Second, be extremely cautious of anyone promising guaranteed returns or pressuring you to invest quickly. These are classic signs of a scam. Third, keep meticulous records of all your cryptocurrency transactions for tax purposes. Fourth, use reputable exchanges and secure wallets, and consider cold storage for any significant holdings.

Cryptocurrency represents a genuinely new form of technology with both exciting possibilities and serious risks. Whether it will ultimately transform our financial system or fade into a historical footnote remains to be seen. What’s certain is that it’s no longer something you can simply ignore. As cryptocurrency becomes more mainstream, understanding the basics will become increasingly important for everyone, not just tech enthusiasts and financial professionals.

The key takeaway is this: cryptocurrency is real, it has real value (however volatile), it comes with real legal obligations and it involves real risks. Treat it with the same seriousness you would any other financial decision, do your homework and don’t be afraid to seek professional advice from accountants and lawyers who understand this emerging field. Court is adjourned until dessert.