Digital assets
Cryptocurrency
A digital asset recorded on a distributed ledger rather than by a bank or government.
How it works
Ownership is proven by control of a private key, and transactions are validated by a network rather than an institution. There is no issuer standing behind the value.
Because there are no cash flows, valuation methods used for shares and bonds do not apply. Price is set entirely by what others will pay.
Where it misleads people
Volatility is several times that of equities and drawdowns exceeding 70% have occurred repeatedly. Position sizing should reflect that rather than the strength of the argument for it.
Related terms
- BlockchainA shared record of transactions maintained by many computers rather than one authority.
- BitcoinThe first and largest cryptocurrency, with a supply capped at 21 million units.
- Private keyThe secret that proves ownership of a crypto holding, and the only thing that does.
- VolatilityHow much an investment’s returns bounce around their average — the standard measure of risk.
- StablecoinA crypto token designed to hold a fixed value, usually one US dollar.
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Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.