What is cryptocurrency and where do coins come from
How cryptocurrency works - how it resembles money and how it differs, where coins come from, what a coin and a token are, and why prices swing so much.
In this article
The word "cryptocurrency" sounds mysterious, but the idea is simple: these are records in a shared ledger (a blockchain) that can be passed to another person without a bank. The record "address A holds 3 coins" is protected by mathematics, not by a bank's stamp. Let us see what stands behind it.
What money has to do
Economists name three functions of money:
- A medium of exchange - you can pay for goods or services with it.
- A unit of account - prices are expressed in it: "costs 50 dollars".
- A store of value - you can set it aside and spend it later.
Cryptocurrencies cope with these differently. As a medium of exchange they work well: a transfer takes minutes and needs no middleman. As a unit of account, worse: prices in "ordinary" coins jump, so deals more often use stablecoins tied to the dollar. As a store of value - at your own risk, because of volatility.
How a cryptocurrency is built
Three components:
- The ledger. A shared book recording who owns what. Thousands of independent computers keep it, and nobody can rewrite it alone.
- The rules. What counts as a valid transfer, how new coins are created, how the network agrees on the order of records (consensus).
- The keys. Only whoever holds the secret key can dispose of the coins. How this works is explained in the article on public-key cryptography, and how to store keys in the article on the wallet and seed phrase.
An important detail: there are no physical "coins" in a wallet. The ledger holds a record "such-and-such address owns such-and-such amount", and the wallet stores the key that can change that record.
Where coins come from
With ordinary money, a central bank creates new banknotes and account entries. In cryptocurrencies the issuance rules are written into the protocol, and they differ.
Bitcoin. New coins go to participants who spend computational work protecting the network (mining). The reward halves roughly every four years, and the total number of coins is capped at 21 million. More in the article on Bitcoin and Ethereum.
Ethereum. New coins are paid to validators - those who put up a deposit and check blocks. Part of the fees is burned, and under high load more coins are burned than issued. There is no hard cap on the total.
Tokens on existing networks. Anyone can issue their own token with a smart contract in a few minutes, and such a token "is worth nothing" until someone is ready to accept it. This is the key reason our service uses a token whitelist.
Coin and token: what is the difference
- A coin is the network's main currency: ETH on Ethereum and Base, POL on Polygon, BNB on BNB Chain. It is built into the protocol and is needed to pay transaction fees (gas).
- A token is a record in a table inside a smart contract: USDT, USDC, DAI and thousands of others. Tokens live "on top of" a network and obey their own contract's rules. More in the article on tokens and NFTs.
A practical consequence: to send a token you also need a little of the main coin for the fee. This is one of the most common beginner problems.
What determines the price
A cryptocurrency has no "fair" price set by one party. The price is formed by supply and demand on exchanges and in swap pools. It is affected by expectations, news, regulation, overall market mood and the number of coins available for sale.
Example. Say you agreed on Monday to buy goods for 1 ETH, and plan to pay on Friday. If the rate moved 15% over the week, either the seller will be short or you will overpay. That is exactly why deals fix the amount in a stablecoin rather than a "volatile" coin: 1,000 USDT stays 1,000 USDT on Monday and on Friday.
What cryptocurrency is not
- Not anonymous. Addresses contain no names, but all transfers are public forever. If an address is tied to a person, their whole history is visible. This is "pseudonymity".
- Not insured. No service will return a transfer sent to the wrong place. Transactions are irreversible.
- Not always profitable. The price can go down as well as up, and that is no guarantee of profit.
- Not equal to "Bitcoin". Bitcoin is the first and best-known cryptocurrency, but there are thousands, built in different ways.
What to read next
To see the differences on concrete examples, read about Bitcoin and Ethereum. And if you want to learn the terms quickly, see the glossary.
Keep reading
- 1 · Basics
Bitcoin vs Ethereum - the difference and why deals are built on Ethereum
Bitcoin and Ethereum compared - goals, accounting model, smart contracts, consensus and fees. Why guarantor deals run on Ethereum and its L2 networks.
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Crypto wallet, address and seed phrase: how not to lose your money
How a crypto wallet works - private and public key, address, seed phrase, wallet types and the main security rules for a beginner.
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Mentioned in
- What is a blockchain, in plain words
- Stablecoins: USDT, USDC, DAI - how they differ and what the risks are
- Glossary - blockchain, wallets, smart contracts and escrow from A to Z
- EIP-1559 - how the Ethereum fee market works (base fee, tips and burning)
- Proof of Stake and finality - how Ethereum agrees on blocks
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