Cryptocurrency is a digital asset recorded using a blockchain or similar distributed ledger. Exchanges can help people trade it, but an exchange account, a blockchain wallet, and an exchange-traded product are different things—with different forms of control and risk.
What is cryptocurrency, in simple terms?
A crypto asset is an asset generated, issued, or transferred using blockchain or similar distributed-ledger technology, according to the SEC staff’s December 2025 investor bulletin. The assets and systems vary; “cryptocurrency” does not describe one uniform technology or risk profile.
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Bitcoin and Ether are two prominent examples, but they belong to different systems. Bitcoin uses proof of work; Ethereum uses proof of stake, and Ether is Ethereum’s native crypto asset, the Congressional Research Service (CRS) explained in January 2025.
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Some crypto assets called stablecoins are designed to maintain a value relative to a national currency or another asset. That design goal is not a guarantee: stablecoins have lost their intended stable value. Market figures also need a date. The CRS reported that Bitcoin and Ether together represented more than 65% of crypto market capitalization, and stablecoin capitalization exceeded $200 billion, as of January 2025. These are historical figures, not current market data.
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How does a blockchain transaction work?
A blockchain is a distributed ledger maintained by a network of computers, often called nodes. Nodes process on-chain transactions and maintain the system. In a simplified transfer, the sender uses a private key to authorize a transaction; the network processes it, and the blockchain records it. A recipient’s public key can be used to receive assets and verify transactions, but it cannot authorize a transfer.
Not every transaction associated with crypto is necessarily written to a blockchain. The CRS distinguishes on-chain transfers from off-chain transactions that online platforms, including exchanges, facilitate and record on their own systems. That distinction matters when an exchange account shows a balance: it may reflect the platform’s internal records rather than a separate on-chain transfer for every activity.
What does a crypto exchange do?
An exchange provides a venue for trading digital assets and may let customers convert between government-issued money (often called fiat) and crypto. Some exchanges also host wallets and hold assets on customers’ behalf. In that arrangement, the provider controls access to the private keys, while the customer uses an account with the service.
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An exchange account is therefore not the same as a wallet whose keys you control. The account can be convenient, but access depends on the custodian and its systems. If the provider is hacked, shuts down, or enters bankruptcy, assets held there may become inaccessible, the SEC staff bulletin warns.
| Arrangement | Who controls the keys? | Main practical trade-off |
|---|---|---|
| Hosted exchange account | The exchange or other custodian | The provider handles key access, but your access to assets depends on that provider. |
| Self-custody wallet | The user | You control transaction authorization, but you are responsible for protecting and recovering the keys. |
What are private keys, seed phrases, and wallets?
A wallet does not ordinarily contain crypto assets themselves. It manages the keys or credentials used to access and authorize transactions involving assets recorded on a blockchain. The SEC staff puts it plainly: “Crypto wallets do not store crypto assets themselves; instead, they store the ‘private keys’ or passcodes for your crypto assets.”
- Public key: Can be used to receive assets and verify transactions; it does not authorize spending.
- Private key: Authorizes transactions. Whoever controls it may be able to move the associated assets.
- Seed phrase: A set of words that may restore wallet access. Treat it as highly sensitive: someone who obtains it may be able to access the wallet.
With self-custody, losing a private key or seed phrase can mean losing access permanently. The SEC advises keeping recovery information secure and not sharing it. A device marketed as a hardware wallet can support self-custody, but it does not hold the blockchain assets or eliminate the need to protect keys and recovery information.
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What is the difference between hot and cold wallets?
“Hot” and “cold” describe a wallet’s connection to the internet; “self-custody” and “third-party custody” describe who controls the keys. They are separate distinctions. Either kind of custodian arrangement may use hot or cold storage.
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|---|---|---|
| Hot wallet | Connected to the internet | Can be convenient, but internet connectivity exposes it to cyber threats. |
| Cold wallet | Not connected to the internet | Reduces internet-connected exposure, but does not remove the need for secure key handling and recovery. |
Neither label alone tells you who controls the keys, what recovery options exist, or how an organization protects assets. Those details depend on the particular wallet or custodian.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.What makes cryptocurrency risky?
The CFTC’s virtual-currency trading advisory says much of the cash market operates through platforms that may be unregulated and unsupervised. Its general warnings include:
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- Sharp price moves: Crypto prices can be volatile, including flash crashes.
- Platform and market risks: Safeguards may be weak, manipulation may occur, and some platforms may trade from their own accounts.
- Cybercrime and fraud: Hacking and phishing can threaten accounts or keys. The CFTC’s token advisory also cautions about speculative digital coins or tokens and promises of returns.
- Leverage: Borrowed exposure magnifies losses. In futures trading, losses can exceed the initial amount invested.
These are general risks, not findings about every asset or platform. The CFTC advisory states: “There is no such thing as a guaranteed investment or trading strategy.”
What should you check before relying on a custodian?
The SEC staff recommends asking detailed questions about custody and account terms. Before using a provider, find out:
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- Whether assets may be lent or commingled with other customers’ assets.
- What insurance, if any, applies, and what it does and does not cover.
- How the provider handles privacy, transactions, transfers, and account fees.
Read the provider’s actual terms; do not assume that a hosted balance has the same protections or access arrangements as money in a bank account.
Is a crypto exchange-traded product the same as holding crypto?
No. A crypto-linked exchange-traded product provides market exposure through a securities account; it is not the same as controlling crypto in a personal wallet. In its September 2024 bulletin, the SEC described spot Bitcoin and Ether ETPs as exchange-traded commodity trusts that hold the crypto asset itself. Despite the “ETF” label sometimes used in product names, the bulletin says these trusts are not registered as investment companies under the Investment Company Act of 1940.
The SEC bulletin identifies risks including crypto price volatility, a product price that may diverge from the underlying asset’s price, sponsor fees, and risks in the underlying crypto market. That description is specific to the spot Bitcoin and Ether products discussed in the 2024 bulletin, not every product with crypto exposure.
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