A cryptocurrency is a digital asset that is created and transferred on a blockchain rather than issued by a central bank or recorded by a commercial bank. Bitcoin, launched in 2009, was the first; thousands of others now exist. Cryptocurrencies have attracted huge interest and investment — and large losses. Understanding how they work and what can go wrong is essential before going anywhere near them.
What you will learn
- Explain how cryptocurrencies are created, held and transferred
- Distinguish Bitcoin, other cryptoassets and stablecoins
- Understand why crypto prices are so volatile
- Recognise the main risks, scams and regulatory issues
Important: This article is educational and is not a recommendation to buy or sell any cryptoasset. In some countries, including Bangladesh, dealing in cryptocurrencies is restricted or not legally recognised — check your local rules before doing anything.
How cryptocurrencies work
- Issuance: new units are created according to the network’s rules — for Bitcoin, as rewards to miners who add blocks, with a maximum supply of 21 million coins written into the protocol (Nakamoto, 2008).
- Ownership: a holder controls coins through a private key. Whoever has the key can move the coins.
- Transfers: transactions are signed with the private key, broadcast to the network and confirmed when they are added to a block. Transfers can be sent across borders without a bank, but usually cannot be reversed.
- Fees: users pay transaction fees to the network, which vary with demand.
Main types of cryptoassets
| Type | Description | Examples of use |
|---|---|---|
| Bitcoin | The first cryptocurrency, with a fixed maximum supply | Promoted as a store of value or payment network |
| Platform tokens | Native tokens of smart contract platforms such as Ether | Paying fees for applications on the network |
| Stablecoins | Tokens designed to hold a stable value, usually against the US dollar | Trading, transfers, decentralised finance |
| Other tokens | Governance, utility or meme tokens | Highly speculative |
Stablecoins are only as stable as the assets and arrangements behind them. Those backed by reserves of cash and short-term government securities depend on the quality and transparency of those reserves; "algorithmic" stablecoins without adequate reserves have collapsed. The Financial Stability Board has recommended consistent regulation of stablecoin arrangements because of their potential links to the wider financial system.
Wallets and custody
- Custodial wallets — an exchange or provider holds the keys for you. Convenient, but you depend on the provider’s security and solvency; several exchanges have failed or been hacked and customers lost funds.
- Self-custody wallets — you hold the keys yourself, in software or a hardware device. You avoid provider risk but take full responsibility: lose the key or recovery phrase, and the coins are gone.
Why crypto prices are so volatile
Most cryptoassets do not generate cash flows such as interest or dividends, so there is no anchor for valuation of the kind used in stock valuation. Prices depend on supply, demand, sentiment, liquidity and regulation news. Large price falls of more than 50% have occurred several times.
Worked example: why large losses are hard to recover
An investment of 10,000 falls by 50% and then rises by 50% (illustrative figures).
- After the fall: 10,000 × 0.50 = 5,000.
- After the rise: 5,000 × 1.50 = 7,500.
A 50% fall needs a 100% gain just to break even. Volatile assets can therefore destroy wealth even when their average percentage moves look balanced — see risk and return.
Main risks
- Market risk: extreme price swings and the possibility of an asset becoming worthless.
- Custody and counterparty risk: exchange failures, hacks and frozen withdrawals.
- Key loss: forgotten passwords or lost recovery phrases cannot be reset.
- Fraud and scams: fake investment platforms, "pump and dump" schemes, impersonation of celebrities, romance scams and Ponzi schemes promising guaranteed returns.
- Legal and regulatory risk: bans, restrictions or new rules can change what is permitted.
- Liquidity risk: small tokens may be impossible to sell at a fair price.
- Tax: where crypto is legal, gains may be taxable.
Warning signs of a crypto scam: guaranteed or very high returns, pressure to act quickly, requests to send crypto to "unlock" withdrawals, unsolicited contact through social media or messaging apps, and platforms not registered with any regulator.
Managing exposure, where permitted
For investors in jurisdictions where it is allowed, common risk principles apply:
Worked example: limiting the impact of a crash
An investor with a 200,000 portfolio limits a speculative cryptoasset position to 5% (illustrative figures).
- Position size: 200,000 × 5% = 10,000.
- If the cryptoasset falls 70%, the loss is 10,000 × 70% = 7,000.
- The loss on the whole portfolio is 7,000 ÷ 200,000 = 3.5%.
Sizing a speculative position as money one can afford to lose keeps a severe fall from damaging the investor’s overall plans — see diversification and asset allocation.
Other principles: only use regulated providers where they exist, never invest borrowed money, and be sceptical of anything promising quick riches.
Central bank digital currencies
A central bank digital currency (CBDC) is a digital form of a country’s official currency issued by its central bank. Unlike cryptocurrencies, it is a liability of the central bank with a fixed value in the national currency. Many central banks are researching or piloting CBDCs; they should not be confused with privately issued cryptoassets.
Regulation
Approaches vary widely: some countries license crypto exchanges and set investor protection rules, some impose restrictions and some prohibit certain activities. Global bodies including the FSB and IOSCO have published recommendations on regulating cryptoasset activities and stablecoins. Anti-money laundering rules increasingly apply to crypto service providers.
Common mistakes
- Investing because of social media hype or fear of missing out.
- Keeping large amounts on an exchange without understanding custody risk.
- Sharing a recovery phrase with anyone, including "support staff".
- Assuming stablecoins carry no risk.
- Ignoring local laws on crypto ownership and trading.
Key terms
- Cryptocurrency — a digital asset transferred on a blockchain without a central issuer.
- Private key — the secret that controls a crypto holding.
- Stablecoin — a token designed to keep a stable value against a reference asset.
- Custodial wallet — a wallet where a provider holds the keys on the customer’s behalf.
- CBDC — digital money issued by a central bank.
Frequently asked questions
Is cryptocurrency legal in Bangladesh?
Bangladesh Bank has warned the public against dealing in virtual currencies, noting they are not legal tender and that transactions may breach foreign exchange and anti-money laundering rules. Check the latest official guidance.
Is Bitcoin anonymous?
Not fully. Transactions are publicly recorded, and addresses can often be linked to individuals, especially through exchanges that verify identity.
Can crypto be recovered if it is stolen?
Recovery is rare because transactions are irreversible. Prevention — secure keys and avoiding scams — is far more effective.
Key takeaways
- Cryptocurrencies are blockchain-based digital assets controlled by private keys.
- Stablecoins are only as stable as their backing; CBDCs are central bank money, not crypto.
- Prices are extremely volatile because most cryptoassets have no cash flows to anchor value.
- Custody failures, lost keys, scams and legal restrictions are major risks — check local rules first.