July 17, 2025
Understanding Cryptography: The Backbone of Cryptocurrency and Blockchain Technology
The Important Bits
Cryptography is the foundation of cryptocurrency security, ensuring transactions are protected and can’t be double-spent.
Techniques like hashing, symmetric encryption, and asymmetric key pairs enable secure storage, identity, and transfers in blockchain systems.
Bitcoin and other cryptocurrencies use algorithms like SHA-256 and elliptic curve cryptography to make keys practically impossible to reverse-engineer.
Introduction to cryptography
Since the advent of cryptocurrency, two main problems have plagued computer scientists: how to make the transactions secure, and how to prevent the same funds from being sent more than once. Failing to address both would effectively nullify the entire point of digital money. If a currency can’t be sent securely, it’s not safe for anyone to use. And if an asset can be spent over and over again, it doesn’t have any value.
Bitcoin was the first form of digital currency to fix these problems. The first, making virtual transactions secure, was solved using cryptography. While the second addressed what’s known as the double-spend problem, as a Bitcoin transaction can only be sent once and is permanent and irreversible.
The term “crypto” in cryptocurrency comes from the root word “cryptography.” And cryptography is at the core of what makes cryptocurrencies secure.
What is cryptography?
Cryptography involves encoding a message in a way that can’t be deciphered by anyone other than the sender and the intended recipient. A message is first encrypted into an unreadable format, which can’t be decrypted without a special key to break the code. This allows for the secure transfer of information in a way that prevents outside parties from gaining access.
Various forms of cryptography have been used throughout the ages. The earliest record of encryption dates back to the 7th century BC in Ancient Greece. Another early use for encrypted messages was during times of war. Militaries would, for obvious reasons, sometimes seek to encode their secretive communications. If one side could decrypt the reports of the other, they could gain a tremendous tactical advantage.
Today, computer networks are constantly encrypting and decrypting all kinds of information. Email clients, web browsers, VPNs, password managers, and many other online tools all utilize some form of encryption.
Types of cryptographic techniques
One type of cryptography central to encryption is called a hash function, or hashing. Hashing involves converting data of any type into illegible text. This is an efficient way to encode information, as there’s no way to return the data to its original state without the hash itself.
For example, a bank may store customer passwords as hashes. Instead of saving the password itself, it gets encoded into a hash function, which is then used in place of the actual text. This way, if a hacker manages to access the bank’s records, any information discovered will be unusable. Many modern hacking methods, like social engineering, involve bypassing login credentials precisely for this reason.
Symmetric cryptography, or private-key cryptography, uses a single key for both the encryption and decryption of data. This type of encryption is preferred in cases like the example above.
Asymmetric cryptography uses pairs of keys – a public key and a private key -- to allow for the secure sending and receiving of data.
Public and private key cryptography
Bitcoin and other cryptocurrencies assign a private key to all users who create a digital wallet. This key acts like a highly secure password which is needed to sign transactions or spend assets from the wallet. Public keys are derived from the private key but are safe to share, for instance, when someone wants to send assets to your wallet.
Hashing is used to derive a public key from the private key. An algorithm encodes a variation of the private key into a lengthy string of alphanumeric characters. This makes public keys shareable because it’s virtually impossible to reverse the hash and figure out the private key, thanks to cryptography.
Private keys give the holder access to the assets in a crypto wallet, which contrary to their name, don’t actually store cryptocurrencies. The assets exist as entries on the blockchain ledger, and the keys signify who their rightful owners are. Multiple public keys can be derived from a single private key, allowing users to receive assets from multiple addresses to a single wallet.
Cryptographic algorithms in blockchain
It’s important that public keys are generated securely so they can’t be reverse engineered to reveal the private key they derive from. To ensure this, Bitcoin uses the SHA-256 algorithm, or the Secure Hash Algorithm, along with elliptic curve cryptography (ECC). Some cryptocurrencies use different encryption algorithms for the same purpose. Litecoin (LTC) and Dogecoin (DOGE) both use the Scrypt algorithm, for example.
The exact process by which these algorithms function can be a complex subject matter. Put simply, ECC enables a public key to be created using a private key in a mathematically random way. The private key itself is also a randomly generated 256-bit number.
These keys are as secure as it gets. Guessing a private key from a public key would require a quantum computer with 13,000,000 qubits. By comparison, the most powerful quantum computers known to exist today have less than 130 qubits, or about 0.001% of the computing power required to crack a private key.
Applications and real-world examples of cryptography in cryptocurrency
Applications of cryptography in cryptocurrency
Creating digital wallets
Mining and consensus mechanisms
Real-world examples
Cryptographic methods in Ethereum
Challenges and the future of cryptography in blockchain
The potential security threat posed by quantum computers is a common criticism of cryptocurrencies. In theory, a quantum computer with the necessary power could find any private key, enabling someone to steal the assets from any crypto wallet.
As mentioned, the quantum computers of today possess a tiny fraction of the computing power needed to discover a private key. One day, quantum computers could potentially be powerful enough to crack today’s encryption methods. But until then, blockchain cryptography can be updated to better defend against quantum computers through the use of post-quantum algorithms, or quantum encryption.
For in-depth information on how this would work, this 2013 article by Bitcoin Magazine offers an explanation.
Besides quantum computers, the main threats to cryptocurrencies are user error and the risk of a third-party holding your coins. By keeping digital assets in a self-custody wallet, and the bulk of them offline in cold storage, the tokens are designed to be extremely secure.
Wrap up on cryptography
Cryptography in blockchain is an in-depth, highly technical subject. Any of the concepts outlined above can be researched to an almost endless extent. There’s much more to the story, and there’s always more to learn as crypto continues to evolve. As time goes on and new technologies emerge, encryption will have to keep pace.
The basic idea is that encryption involves encoding data into a secret form and providing a way for only the intended recipient to decode it. In cryptocurrency, methods like hashing and asymmetric encryption enable users to send secure transactions.
Note: All information herein is for educational purposes only, and shouldn't be interpreted as legal, tax, financial, investment or other advice. BitPay does not guarantee the accuracy, completeness, or usefulness of any information in this publication and we neither endorse, nor are we responsible for, the accuracy or reliability of any information submitted or published by third parties. Nothing contained herein shall constitute a solicitation, recommendation, endorsement or offer to invest, buy, or sell any coins, tokens or other crypto assets. BitPay is not liable for any errors, omissions or inaccuracies. For legal, tax, investment or financial guidance, a professional should be consulted.
