Cryptocurrency definition. A cryptocurrency is a form of digital or virtual currency that leverages cryptography for security.

Cryptocurrency, also known by its abbreviation, crypto, operates in a decentralized control structure as opposed to traditional currencies, which are centrally controlled by financial institutions or governments.

Cryptocurrencies operate on technology called blockchain, a type of distributed ledger enforced by a network of computers, also known as nodes. These nodes validate transactions, which are then added to the ledger, ensuring the transactions' security and immutability.

The advent of cryptocurrency was marked by Bitcoin, introduced in 2009 by an unknown individual or group under the pseudonym Satoshi Nakamoto. Nakamoto's goal was to create an electronic payment system based on mathematical proof that would enable any two willing parties to transact directly without the need for a trusted third party, such as a bank or government.

Transactions made with cryptocurrencies are processed through a peer-to-peer network, allowing users to send or receive payments from anywhere globally without intermediaries. Each transaction is validated and recorded on the blockchain by the network nodes, providing transparency and traceability.

The defining feature of a cryptocurrency, and arguably its most compelling allure, is its organic nature. The rules by which cryptocurrencies operate, such as Bitcoin, are established ahead of time through algorithms and mathematical proofs. They don't rely on a central authority for issuance or regulation, making them theoretically immune to government interference or manipulation.

Cryptocurrencies come in many forms and serve various purposes. Bitcoin, for example, was designed primarily as a digital alternative to traditional currencies, while others, like Ethereum, offer more sophisticated functionalities, including smart contracts and decentralized applications (dApps).

While cryptocurrencies have been hailed for their potential to revolutionize financial and economic systems, they also face criticism and regulatory scrutiny due to their association with illegal activities, volatility, and potential for facilitating tax evasion or money laundering.

In conclusion, a cryptocurrency is a digital asset designed to work as a medium of exchange wherein individual coin ownership records are stored in a ledger existing in the form of a computerized database using strong cryptography to secure transaction records, control the creation of additional coins, and verify the transfer of coin ownership.

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Michelle Legge
By Michelle LeggeHead of Crypto Tax Education
Updated Nov 9, 2023
This article has been fact checked and reviewed as per our editorial policy.