Three things to take away
- A cryptocurrency is an entry on a shared ledger, the blockchain, and whoever holds the matching private key can move it.
- Coins run their own blockchains, tokens live on someone else's, and stablecoins try to hold a fixed value such as one US dollar.
- Most people buy through an exchange that holds the keys for them, which is convenient but means trusting that company.
How crypto works is easier to grasp if you forget about prices for a moment and think about record-keeping. A bank keeps a private list of who owns what money. A cryptocurrency keeps a similar list, but copies of it are held by thousands of independent computers, anyone can read it, and changes are only accepted if they follow strict rules. That shared list is the blockchain, and everything else in crypto is built on top of it.
The blockchain: a ledger nobody owns
A blockchain is a record of transactions grouped into blocks. Each new block refers back to the one before it, forming a chain. Because every block contains a fingerprint of the previous one, changing an old transaction would break every link that follows, and the other computers on the network would reject the altered copy.
The computers that store and check the ledger are called nodes. They agree on which new block is valid through a set of rules called a consensus mechanism:
- Proof of work, used by Bitcoin, asks miners to spend computing power solving a puzzle. The first to solve it adds the next block and earns newly created coins plus fees.
- Proof of stake, used by Ethereum and many newer chains, asks validators to lock up coins as a deposit. Validators who break the rules can lose part of that deposit.
The upshot is that no single company can quietly edit the record. The flip side is that nobody can reverse a transaction for you either.
Keys, addresses and wallets
Ownership in crypto comes down to a pair of keys. The private key is a secret number that authorises spending. The public address, derived from it, is what you share so that others can send you funds. Anyone with the private key can move the coins; anyone without it cannot, including you if you lose it.
A wallet is software or a device that stores keys and signs transactions. It does not really hold coins; the coins stay on the blockchain. Wallets come in a few forms:
- Custodial wallets, such as an exchange account, where the company controls the keys and you log in with a password.
- Software wallets on a phone or computer, where you hold the keys and back them up with a recovery phrase of 12 or 24 words.
- Hardware wallets, small devices that keep keys offline and sign transactions without exposing them to the internet.
The recovery phrase is the master key. No genuine company, support agent or website will ever ask for it. Anyone who does is attempting theft, a pattern covered in our scam lesson.
Coins, tokens and stablecoins
These words are often used loosely, but the distinction is useful.
- A coin is the native asset of its own blockchain, used to pay transaction fees there. Bitcoin and Ether are examples.
- A token is created by a program, called a smart contract, running on an existing blockchain. Tokens can represent almost anything: a stake in a project, a voting right, an item in a game.
- A stablecoin is a token designed to hold a steady value, most often one US dollar. USDT, issued by Tether, is the most widely traded; our USDT lesson explains how it is backed and where it can go wrong.
Bitcoin deserves its own lesson because its design, including a fixed maximum supply of 21 million coins, shapes how people think about the whole market.
Metaverse crypto and other themes
New tokens are often grouped into themes that rise and fall in popularity. Metaverse crypto is one of them: tokens tied to virtual worlds, where they may be used to buy digital land, avatars or in-game items, often recorded as NFTs (non-fungible tokens, each one unique). Other themes have included gaming, artificial intelligence, decentralised finance and "meme" coins with no purpose beyond attention.
A theme is a story, not a guarantee. A token's value depends on whether people keep wanting it, and many themed tokens have lost almost all of their value once interest moved on. Before paying attention to any theme, ask what the token actually does, who created it, how many exist and who holds most of them. We never recommend specific coins or tokens.
How a transaction travels
When you send crypto from a wallet you control, the wallet signs a message with your private key saying, in effect, "move this amount from my address to that address". The message is broadcast to the network, waits in a queue with other pending transactions, and is picked up by a miner or validator who includes it in the next block. You pay a network fee for this, and the fee rises when the network is busy.
Once enough further blocks have been added on top, the transaction is treated as final. There is no chargeback and no helpline. If you send to the wrong address, or on the wrong network, the funds are usually gone.
Exchanges: where most people start
Most beginners buy crypto through a centralised exchange. You pay in money from a bank account or card, the exchange matches your order with a seller, and your balance appears in your account. Behind the scenes the exchange holds the coins in its own wallets.
That is convenient but it adds a layer of trust. Exchanges have been hacked, have frozen withdrawals and, in some well-known cases, have collapsed while holding customer funds. The home page's method for comparing crypto exchanges and our ten-point platform checklist focus on who supervises the firm and how it keeps customer assets.
A worked example, with illustrative numbers: you buy $200 worth of a coin priced at $2,500 through a service that charges 0.5%. The fee is $200 × 0.005 = $1, leaving $199 to buy with, which gets you $199 ÷ $2,500 = 0.0796 coins. Sell straight back and you pay a fee again, so the price has to rise just to get your $200 back. The crypto profit calculator shows the effect on any trade.
Centralised and decentralised exchanges
Alongside company-run exchanges, there are decentralised exchanges: programs on a blockchain that let people swap tokens directly from their own wallets. There is no account to open and no company holding your funds during the trade. Instead, you connect a wallet and approve each transaction yourself.
That removes one kind of risk and adds others. Anyone can create a token and list it, so fake copies of popular tokens are common. Smart contracts can contain bugs that are exploited. Approving a malicious contract can let it drain your wallet. And there is nobody to call if something goes wrong. For a beginner, decentralised exchanges are best understood before they are used.
What makes crypto risky
- Volatility. Large coins have fallen by more than half in past downturns; smaller tokens can lose nearly everything.
- Platform risk. An exchange can fail or freeze withdrawals, and compensation schemes rarely cover crypto.
- Irreversibility. Mistakes and thefts cannot be undone.
- Fraud. Fake apps, fake advisers and "guaranteed" schemes target newcomers.
- Regulation. Rules differ widely between countries and are still changing. The UK, for example, has banned the sale of crypto derivatives to retail consumers since 2021.
A sensible learning order
- Understand keys and wallets well enough to explain them to someone else.
- Read the USDT and Bitcoin lessons.
- Learn every fee you will pay between your bank and a wallet.
- Check any platform with the ten-point checklist.
- Read the scam lesson before you send anything to anyone.
Quick answers
Do I need to buy a whole coin?
No. Most coins can be divided into very small units. Bitcoin, for example, divides into 100 million satoshis, so you can buy a small fraction.
Is crypto anonymous?
Mostly not. Blockchain transactions are public and linked to addresses, and regulated exchanges verify their customers' identities. Addresses can often be connected to people through that data.
What happens if I lose my recovery phrase?
If you hold your own keys and lose both the device and the phrase, the funds are normally unrecoverable. Store the phrase offline, somewhere safe, and never type it into a website or share it.
Sources
- UK Financial Conduct Authority, ban on crypto-derivatives for retail consumers (2021)
- Bitcoin and Ethereum protocol documentation