What Is Cryptocurrency? A Beginner’s Guide to Digital Money

You might hear friends mention Bitcoin at dinner or see headlines about new digital coins. Yet when you ask how it actually works, the answers can be confusing. Words like "blockchain", "mining" and "private keys" are often thrown around without much explanation.

If that sounds familiar, you are in the right place. This guide explains what cryptocurrency is, how the technology behind it functions, and how people use it in a practical and safer way.

The Core Concept: What is Crypto?

Cryptocurrency is a type of digital money. You cannot hold it in your hand. There are no paper notes or metal coins. It exists only as records in computer systems.

Unlike euros or other traditional currencies, most cryptocurrencies are not issued by a central bank. They are usually created and managed by open networks of computers around the world. This structure is called decentralisation.

In a decentralised system, no single bank, government, or company can simply log in and change your balance. The rules are set in computer code and are typically visible to anyone who wants to review them.

It works like a shared spreadsheet

Blockchain is the technology that supports many cryptocurrencies.

You can think of a blockchain like a shared online spreadsheet that everyone can read, but no single person can quietly edit or erase. Every time someone sends cryptocurrency, the network adds a new entry that records:

• who sent it
• who received it
• how much was sent

These entries are grouped into blocks, and each block is linked to the one before it. Once a block is confirmed, changing it becomes extremely difficult. This creates a permanent record of transactions that anyone can check.

Understanding fungibility

Most well-known cryptocurrencies, such as Bitcoin (BTC) and Ether (ETH), are fungible tokens.

Fungible simply means that each unit is interchangeable with another unit of the same kind. If you lend someone a 10 euro note, you do not need the exact same piece of paper back. Any 10 euro note is acceptable, because they all have the same value.

Bitcoin works in a similar way. One bitcoin has the same type of value as any other bitcoin. This property helps cryptocurrencies function as a medium of exchange and a possible store of value, although their prices can change significantly over time.

How Transactions Are Processed: The Role of Mining

Since there is no central bank to process payments, many networks use a system called mining to validate transactions. Bitcoin is the best-known example of this type of system.

Mining is carried out by participants called miners. They use specialised computers to compete in solving complex mathematical problems. This process is part of a wider security model known as "proof of work".

Mining serves two main purposes:

1. Validation: Miners group new transactions into a block and check that the sender has enough funds and is not trying to spend the same coins twice.
2. Creation: The miner that successfully solves the problem first is allowed to add the next block to the blockchain. As a reward, they usually receive newly created coins plus transaction fees.

This reward system encourages miners to invest computing power and keep the network running.

How mining is changing

In the early days of Bitcoin, people could mine using home computers. As the network grew, mining became more competitive. Today, most mining is done in large facilities that use powerful equipment.

There is also greater focus on energy use. Many operators now seek renewable energy sources, such as hydro or solar power, or use spare capacity from existing infrastructure. Some data centres run both artificial intelligence (AI) workloads and mining machines to use resources more efficiently.

Not all cryptocurrencies use mining. Some use other systems, such as "proof of stake", where participants lock up coins as a type of security deposit instead of running energy-intensive hardware.

Ownership and Storage: Custody

One of the most common questions is: "Where is my crypto stored?"

The answer is slightly different from what most people expect. Your cryptocurrency does not live on your phone, your laptop, or a USB stick. It lives on the blockchain.

What you actually control are private keys. These are long strings of characters that act like high-security passwords. If you hold the private key for a certain blockchain address, you can authorise transactions from that address.

In other words, control of the keys equals control of the coins. This idea is often referred to as crypto custody.

There are two main approaches to custody.

1. Self-custody (non-custodial)

With self-custody, you hold your own keys. You might use:

• a hardware wallet (a small device that stores keys offline)
• a software wallet app on your phone or computer
• a combination of both

Pros:

• You have direct control over your assets.
• You are not relying on a third party to safeguard your keys.

Cons:

• If you lose your recovery phrase or forget your password, you may permanently lose access to your funds.
• You must protect your device and back-ups from theft, damage, or malware.

There is no central "reset" option. For many people, this level of responsibility is new and can feel risky.

2. Third-party custody (custodial)

With custodial services, a company such as an exchange or regulated custodian holds your keys for you. You access your funds using a normal login and password, similar to online banking.

Pros:

• It is easier for beginners, as the provider handles most of the technical details.
• Account recovery is usually possible if you lose your login details, subject to identity checks.

Cons:

• You are trusting the provider’s security, systems, and financial stability.
• If the provider is hacked, poorly managed, or becomes insolvent, your assets may be at risk, depending on the legal protections in place.

In the European Union, MiCA introduces specific requirements for crypto-asset service providers, including custodial services. When choosing a custodial platform, it is sensible to check whether it is regulated in your country and what safeguards apply to client assets.

How to Read the Market: Candlestick Charts

If you visit a crypto exchange or price website, you will often see candlestick charts instead of simple line graphs.

These charts came from 18th-century Japanese rice trading and are now widely used in financial markets, including cryptocurrencies.

Each candlestick shows what happened to the price over a chosen period, such as one minute, one hour, or one day. Every candle contains four data points:

• Open: The price at the start of the period.
• Close: The price at the end of the period.
• High: The highest price reached during that time.
• Low: The lowest price reached during that time.

Reading the body and wicks

A candlestick has two main parts.

• The body: The thick section shows the range between the open and close prices.

  • If the candle is green (or sometimes white), it usually means the closing price was higher than the opening price.
  • If the candle is red (or sometimes black), it usually means the closing price was lower than the opening price.

• The wicks (or shadows): The thin lines above and below the body show the highest and lowest prices during that period. Longer wicks can indicate that the price moved around a lot within that timeframe.

Candlestick charts do not predict the future. They simply provide a visual summary of past price movements. Traders use them as one of several tools when deciding when to buy or sell, but prices remain uncertain and can change quickly.

Real-life Examples of Crypto Assets

Not all crypto-assets work in the same way or have the same purpose. Here are some common categories.

• Native cryptocurrencies:
  These are assets like Bitcoin that run on their own blockchains. People may use them as a payment method or treat them as a form of "digital gold". Prices can be highly volatile, and there is no guarantee that they will hold their value.

• Utility tokens:
  These tokens give access to services in a specific network. For example, Ether (ETH) is used to pay transaction fees on the Ethereum blockchain. You can think of it a bit like tokens at an arcade that let you use the machines.

• Stablecoins:
  Stablecoins are designed to maintain a more stable price, often by linking (or "pegging") their value to an external asset such as a fiat currency.
  For instance, 1 unit of a US dollar stablecoin is typically intended to equal 1 US dollar.
  In the EU, certain stablecoins may be treated as "asset-referenced tokens" or "e-money tokens" under MiCA, with specific rules for issuers and service providers.

• Governance tokens:
  Tokens such as Uniswap (UNI) allow holders to vote on proposed changes to a protocol. In some projects, token holders can influence fee structures, product upgrades, or how certain funds are used.

These categories can overlap, and each token can have its own risks, technical design, and legal treatment. Always check how a particular crypto-asset works before using or buying it.

Safety and Risks

Cryptocurrencies offer new ways to send, receive, and store value. At the same time, they come with specific risks that are different from traditional bank accounts or payment cards.

Here are some key points to keep in mind.

• Price volatility:
  Crypto prices can rise or fall quickly, sometimes by large percentages in a single day. You could lose part or all of the money you put in. There is no guarantee that you will be able to sell a crypto-asset at a higher price, or at all.

• Irreversible transactions:
  Once a transaction is confirmed on most blockchains, it cannot be reversed. If you send funds to the wrong address or to a scammer, it is usually not possible to get them back. Always double-check the recipient address and the network before sending.

• Phishing and fraud:
  Criminals may try to trick you into giving away your private keys or recovery phrase. They can use fake websites, emails, or support chats.
  Genuine support teams do not need your private keys or full recovery phrase. If someone asks for them, it is almost certainly a scam.

• Custodial risk:
  If you use a third-party custodian or exchange, you are exposed to their operational, security, and legal risks. Past failures in the industry have shown that customers can face delays or losses if a platform is hacked or collapses.

• Regulatory risk:
  Rules around crypto-assets are evolving. In the European Union, MiCA aims to create clearer standards for issuers and service providers. However, not all assets or providers are covered in the same way. Changes in regulation or tax treatment might affect your ability to use or trade certain crypto-assets.

Good basic practices include using strong passwords, enabling two-factor authentication, keeping your software up to date, and storing larger amounts of crypto in more secure wallets rather than on exchanges.

Summary

Cryptocurrency is digital money that operates on shared networks instead of a single central authority. Blockchains record who owns what, and systems like mining or proof of stake help secure the data and reduce fraud.

Ownership is based on control of cryptographic keys, not on physical coins. You can choose to manage your own keys or use a regulated third party, each with its own advantages and risks.

Some people use crypto to make payments, some treat it as a speculative investment, and others are mainly interested in the underlying technology. Whatever your reason, it is important to understand both the potential benefits and the significant risks, especially around price volatility, security, and regulation.