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Cryptocurrency is a digital asset whose ownership and transfers are recorded using a blockchain or similar shared ledger. A blockchain network processes transactions; an exchange can help people trade crypto or convert it to and from traditional money. A wallet manages the keys used to access assets recorded on the blockchain—it does not hold the coins like a physical wallet holds cash. Understanding who controls those keys, and what protections a service does or does not provide, is central to understanding crypto’s risks.
What is cryptocurrency?
A crypto asset is an asset generated, issued, or transferred using blockchain or similar distributed-ledger technology, according to the SEC staff’s December 12, 2025 investor bulletin. The term covers assets with different designs and purposes; it does not describe one uniform product or guarantee that an asset will hold value.
Bitcoin and Ether are two well-known examples, but they are not interchangeable. Bitcoin is the native asset of the Bitcoin network. Ether is the native asset of Ethereum. The Congressional Research Service (CRS) describes Bitcoin as using proof of work and Ethereum as using proof of stake—different approaches to how their networks agree on valid activity.
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Repair common Windows errors and clear accumulated junk for a smoother, more stable PC - no reinstall needed.Free scan · no reinstallSome crypto assets are called stablecoins because they are designed to maintain a stable value relative to a national currency or another asset. “Designed to” is not a guarantee: stablecoins have lost their intended stable value. In a report dated January 14, 2025, the CRS said Bitcoin and Ether together accounted for more than 65% of crypto market capitalization and stablecoin capitalization exceeded $200 billion, both as of January 2025. Those are historical figures, not current market data. See the CRS introduction to cryptocurrency.
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How does a blockchain transaction work?
A blockchain is a ledger maintained across a network of computers, often called nodes. When someone initiates an on-chain transfer, the network processes the transaction under that blockchain’s rules and records valid activity on the shared ledger. The precise validation and record-keeping process varies by network; Bitcoin and Ethereum, for example, use different consensus approaches.
- A transaction is authorized. The sender uses a private key to produce the authorization required by the network. A public key can help others verify transactions or receive assets, but it does not authorize a transfer.
- The network processes it. Nodes check the transaction against the network’s rules and participate in reaching agreement about valid activity.
- The ledger is updated. Once accepted and recorded, the transaction changes the blockchain’s record of which addresses can access the assets. A transfer may be difficult or impossible to reverse, depending on the network and circumstances.
Not every crypto-related transaction is recorded directly on a blockchain. The CRS distinguishes on-chain transfers from off-chain transactions facilitated and recorded by online platforms such as exchanges. In the latter case, a platform may update its own records without processing a separate blockchain transaction for every customer activity.
What does a crypto exchange do?
A crypto exchange provides a venue for trading digital assets and may let customers convert traditional money—often called fiat currency—to crypto and back. Some exchanges also provide hosted accounts and wallets, holding assets and managing access to the keys on a customer’s behalf.
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An exchange account balance is not the same thing as a wallet for which you control the keys. With a hosted account, you rely on the service to safeguard access and to let you withdraw or transfer assets. This can be more convenient, but it also means that access depends on the provider’s systems, policies, and continued operation. A provider’s displayed balance is a record of what it says it holds for you; it is not itself a blockchain address that you control.
Whether a platform supports a particular asset, permits withdrawals, or offers particular customer protections depends on the provider and jurisdiction. The CFTC warns that much of the virtual-currency cash market operates through platforms that may be unregulated and unsupervised. Its customer advisory on virtual-currency trading risks describes general concerns, not a finding about every platform.
What are crypto wallets, private keys, and seed phrases?
A wallet is software or a device that manages the credentials used to access and authorize transactions involving crypto assets recorded on a blockchain. As the SEC staff puts it, “Crypto wallets do not store crypto assets themselves; instead, they store the ‘private keys’ or passcodes for your crypto assets.” The distinction matters: losing access to the keys can mean losing access to the assets.
- Public key or address: Information used to receive assets or verify transactions. Sharing a receiving address is not the same as sharing the credential that authorizes spending.
- Private key: A secret credential that authorizes transactions. Anyone who gains control of it may be able to move the associated assets.
- Seed phrase: A set of words that can restore access to a wallet. Someone who obtains it may be able to take control of the wallet, so the SEC advises keeping it secure and not sharing it.
If you control a wallet’s keys yourself, a lost or stolen private key or seed phrase can leave the assets inaccessible or exposed to theft. A physical hardware wallet is one possible tool for self-custody, not a container for coins: it does not remove the owner’s responsibility to protect keys and recovery information.
What is the difference between hot and cold wallets?
“Hot” and “cold” describe a wallet’s connection to the internet, not who controls its keys. A hot wallet is internet-connected, which can make it convenient to use but can expose it to online threats. A cold wallet is not connected to the internet. Either arrangement can be self-custody or involve a third-party custodian.
In self-custody, you manage the keys and are responsible for securing them and maintaining a recovery method. With third-party custody, a provider controls access to the keys. The SEC staff warns that a custodian’s hack, shutdown, or bankruptcy could make assets inaccessible. The balance between convenience and control therefore depends on more than whether a wallet is hot or cold.
What should you understand before relying on a custodian?
Custody arrangements differ, so a provider’s description of an account or wallet is not enough to establish what happens to the assets or how you can recover them. The SEC staff suggests considering questions such as:
- Who controls the private keys, and what happens if you lose account access?
- What assets and networks are supported, and what security and recovery practices are available?
- Can the provider lend, use, or commingle customer assets? What does the agreement say about those practices?
- What privacy practices apply, and what transaction, transfer, or account fees may be charged?
- What protections, if any, apply if the provider is hacked, shuts down, or enters bankruptcy? Do not assume that an account or crypto asset is insured; check the provider’s terms and the applicable protections.
These are due-diligence questions, not a claim that any one custody model or provider is safe. The SEC custody bulletin is investor education reflecting SEC staff views; it has no legal force or effect and is not legal advice.
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Crypto prices can move sharply, and a loss is possible. The CFTC identifies volatility, flash crashes, manipulation, cyber risks, weak platform safeguards, and platforms trading from their own accounts among possible concerns in virtual-currency markets. These are general risks, not predictions about a specific asset or platform.
- Market risk: An asset’s price may fall quickly, and there is no guaranteed trading strategy. The CFTC advisory states, “There is no such thing as a guaranteed investment or trading strategy.”
- Platform and custody risk: A service may experience a security incident, stop operating, or restrict access. If it controls the keys, you depend on it to provide access to the assets.
- Key and fraud risk: A stolen private key or seed phrase can enable unauthorized transfers. Be wary of claims of guaranteed returns or pressure to hand over credentials; the CFTC’s advisory on digital coins and tokens cautions consumers about speculation and fraud.
- Leverage risk: Borrowing or using leverage magnifies gains and losses. The CFTC warns that futures trading can result in losses greater than the initial amount invested.
The cash market and derivatives are not the same. A person buying or selling an asset in a cash market faces different mechanics from someone trading futures, where leverage can create losses beyond the initial investment. An explanation of crypto is not a recommendation to trade either one.
Is a crypto exchange-traded product the same as holding crypto?
No. Exposure through an exchange-traded product (ETP) is different from holding crypto in a personal wallet: an ETP is a security traded through a brokerage account, while wallet-held crypto involves control of credentials for assets recorded on a blockchain.
In a September 9, 2024 bulletin, SEC staff described spot Bitcoin and Ether ETPs as exchange-traded commodity trusts that hold the crypto asset itself. Despite sometimes being called ETFs, the products described in that bulletin are not registered as investment companies under the Investment Company Act of 1940. The bulletin highlights volatility, possible divergence between the ETP’s price and the underlying asset’s price, sponsor fees, and risks in the underlying crypto market. This description is specific to the products covered by that bulletin, not every crypto-linked investment. Read the SEC staff bulletin on Bitcoin and Ether ETPs for its scope and qualifications.
Quick Recap
A simple way to keep the concepts straight
- Blockchain: The network’s shared record of transactions.
- Crypto asset: An asset whose generation, issuance, or transfer uses blockchain or similar technology.
- Exchange: A service or venue that can facilitate trading and may provide hosted custody.
- Wallet: Software or a device that manages the keys or credentials used to access and authorize transactions.
- Custody: Who controls access to those keys, and who bears responsibility for safeguarding them.
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