How does cryptocurrency work?

A cryptocurrency works by keeping a shared record of who owns what, and updating it only when the owner of some coins signs an instruction to move them. Thousands of computers check each instruction and agree on the order, so no bank is needed. Following one payment from start to finish shows how the parts fit.

What do you need to make a payment?

The sender needs a crypto wallet, an app or device that stores a private key. The private key is a long secret number that proves ownership. From it, the wallet produces an address, a string of letters and numbers that works like an account number.

The receiver needs only an address of their own to share. The coins themselves never sit in either wallet. They are entries on the network's ledger.

What happens when you press send?

Suppose Alice sends Bob a small amount of bitcoin.

1. Alice's wallet writes a transaction, a short message saying "move this amount from Alice's address to Bob's."
2. The wallet signs the message with her private key. The signature proves the instruction came from the key's holder without revealing the key.
3. The wallet broadcasts the transaction to the network. Computers called nodes check that the signature is valid and that Alice has not already spent those coins.
4. Valid transactions wait in a queue. Miners or validators, the operators who build the ledger, select transactions and bundle them into a block.
5. The network accepts the block under its consensus mechanism, the rule for agreeing on one version of the record. The payment now has one confirmation.
6. Each later block adds another confirmation and makes the payment harder to undo. Bob's wallet shows the coins.

How long does it take, and what does it cost?

It depends on the network. Bitcoin adds a block about every 10 minutes, while some newer networks add one every few seconds. Many recipients wait for several confirmations before treating a large payment as final.

The sender pays a network fee to the operators who process the transaction. The fee rises when the network is busy, because space in each block is limited. Exchanges and apps may add fees of their own.

What can go wrong?

The network checks that a payment is valid. It does not check that it is wise. A payment to a mistyped address or to a fraudster is final, and there is no one to call for a refund.

Anyone who obtains a private key can sign as its owner. That makes the storage of keys the weakest point of the system. Some people keep their own keys, and others leave them with an exchange, a choice explained in the guide to custodial and non-custodial wallets.