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

You might have heard friends talking about Bitcoin at the pub, or seen headlines about prices shooting up or crashing down. When you ask how it actually works, you often get a string of jargon like “blockchain”, “mining” and “private keys”.

Feeling confused is normal. This guide explains what cryptocurrency is in plain English, how it works in practice, and what you should think about if you decide to use or invest in it. It is information, not a recommendation to buy or sell.

The Core Concept: What is Crypto?

At its simplest, cryptocurrency is a form of digital money. It does not exist as physical coins or notes. It exists as records on a database that lives on the internet.

The key feature of most cryptocurrencies is that they are decentralised. Pounds are issued and controlled by the Bank of England. Euros by the European Central Bank. In contrast, cryptocurrencies such as Bitcoin are maintained by a global network of computers that follow shared rules.

This design reduces reliance on a single central party, but it also means there is usually no central authority to turn to if something goes wrong, and limited consumer protections. You are largely responsible for your own security and decisions.

It works like a shared spreadsheet

A blockchain, the technology behind many cryptocurrencies, is often compared to a shared spreadsheet that anyone can view and add to, but no one can easily change.

Each time someone sends cryptocurrency, the network records that transaction in a block. Once a block is confirmed and added to the chain, its contents are designed to be extremely difficult to alter. This creates a public, time-ordered record of who controls which coins.

In practice, this transparency can help reduce some types of fraud or double-spending. It does not prevent price manipulation, scams, or user mistakes, and it does not guarantee that a particular project or token has real-world value.

Understanding “fungibility”

Most major cryptocurrencies, such as Bitcoin (BTC) or Ethereum (ETH), are fungible tokens. That simply means that each unit is intended to be interchangeable with any other unit.

If you lend someone £10, you usually do not mind which £10 note you get back, as long as you get £10. Bitcoin is similar in that one BTC is meant to be treated the same as any other BTC.

This interchangeability makes it easier to use cryptocurrencies as a medium of exchange or a way to store value. However, the value of that BTC or ETH in pounds can change very quickly and sometimes very sharply, which is why using crypto as a savings vehicle carries significant risk.

How Transactions Are Processed: The Role of Mining

Because there is no bank checking balances, many cryptocurrencies rely on a process known as mining to validate transactions and keep the network running.

You can think of mining as a type of competition carried out by specialised computers. These machines race to solve difficult mathematical problems. The process supports the network in two main ways:

1. Validation: It helps confirm that transactions follow the rules, for example that someone is not trying to spend the same coins twice.
2. Creation: The first miner to solve the problem for a block usually earns new coins and any transaction fees included in that block.

This reward system encourages miners to use their computing power to support the network, but it also consumes large amounts of electricity. Mining is a business activity, not a guaranteed income stream, and profitability depends on factors like energy costs and the market price of the cryptocurrency.

Modern mining trends

In the early years, individuals could sometimes mine Bitcoin on a home computer. That is generally no longer realistic. Mining has become highly specialised and is now concentrated in large facilities using powerful, purpose-built hardware.

Some operators say they use renewable energy or repurpose existing infrastructure, and some also run Artificial Intelligence (AI) workloads alongside mining. This may improve efficiency in some cases, but concerns remain about overall energy use and environmental impact. As a retail user, you are more likely to buy, sell or hold coins than to mine them yourself.

Ownership and Storage: Custody

One of the most important ideas in crypto is understanding what you actually own.

You do not own a file containing your coins. The coins exist as entries on the blockchain. What you control are private keys. These are long, unique codes that let you authorise transactions. In simple terms, if you control the private keys, you control the coins linked to them.

This is often called crypto custody, and how you manage it has serious implications for convenience, security and risk.

There are two broad approaches.

1. Self-custody (non-custodial)

With self-custody, you look after your own keys. You might use a hardware wallet (a small offline device) or a software wallet on your phone or computer.

• Pros:
  You have direct control over your assets. You are not relying on a third party to hold your coins, so there is no platform insolvency risk in the same way there is with a custodian.

• Cons:
  You are responsible for keeping your keys safe. If you lose your recovery phrase, your device, or your password, you may permanently lose access to your funds. There is no reset button and in most cases no one can restore them for you. Self-custody can be complex and may not suit everyone.

2. Third-party custody (custodial)

With third-party custody, a company such as an exchange or specialist custodian holds your keys for you and provides an interface, like an app or website, so you can view and manage your holdings.

• Pros:
  It can feel more familiar and convenient, especially for beginners. If you lose your login details, the provider may be able to help you recover access, subject to their security checks.

• Cons:
  You are exposed to the custodian’s risks. If the provider is hacked, mismanages funds, or becomes insolvent, you may lose some or all of your assets. Protection schemes such as FSCS usually do not apply to cryptoassets, even if the firm is regulated for some of its activities.

If you choose a custodian, look for a reputable company that is transparent about how it secures client assets. In some markets there is a shift towards qualified custodians that are subject to specific rules about safeguarding assets, although this does not remove investment risk.

How to Read the Market: Candlestick Charts

If you view a cryptocurrency price on an exchange or market app, you may see a candlestick chart. These charts give more detail than a simple price line, but they can still be misread.

Each candlestick shows price movements over a set period, for example 1 minute, 1 hour or 1 day. It usually displays four key prices:

• 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

Each candle has two main parts.

• The body:
  The solid section between the open and close. If the close is higher than the open, many charts colour the candle green to show a rise. If the close is lower, it is often coloured red to show a fall.

• The wicks (or shadows):
  The thin lines above and below the body show the full range between the high and the low during that period. Long wicks can indicate that the price moved around a lot, which may signal volatility or uncertainty.

Candlestick charts can help you see how prices move over time, but they do not predict the future. Trying to trade frequently based only on short-term chart patterns can be highly risky and is often unsuitable for inexperienced investors.

Real-life examples of cryptoassets

Not all cryptoassets work in the same way. Below are some common categories. A single project can sometimes have more than one function.

• Native cryptocurrencies:
  Assets such as Bitcoin are designed primarily as digital money or a store of value. People may use them for payments or as a speculative investment. Their prices in pounds can be extremely volatile and they are not backed by any central bank.

• Utility tokens:
  Tokens such as Ether (ETH) on the Ethereum network are used to pay fees for using that network, for example when you interact with a decentralised application. Their value depends on factors such as demand for the network and market sentiment, and they can also be highly volatile.

• Stablecoins:
  Tokens such as USDC are meant to track the value of a reference asset, often a fiat currency such as the US dollar. For example, 1 USDC is usually designed to be worth around US$1.00.
  Stablecoins aim to reduce price swings, but they carry specific risks, such as the quality and transparency of the reserves backing them, and the legal and regulatory status of the issuer.

• Governance tokens:
  Tokens such as Uniswap (UNI) can give holders voting rights over protocol changes, for example how fees are set or how a treasury is used. Holding a governance token does not usually grant ownership of a company in the same way as a share, and its value is not guaranteed.

The fact that a token belongs to one of these categories does not mean it is safe or suitable for you. Many tokens have failed, and some may be linked to scams or poorly designed projects.

Safety and Risks

Cryptocurrency can offer more direct control and flexibility than traditional finance, but that comes with significant responsibilities and risks. It is important to understand these before you put in any money you cannot afford to lose.

Some key risks include:

• Price volatility:
  Crypto prices can rise quickly, but they can also fall suddenly and by large amounts. You could lose your entire investment, and there may be no recourse if that happens.

• Irreversible transactions:
  Once a transaction is confirmed on most blockchains, it cannot be reversed. If you send coins to the wrong address, or pay a scammer, it is usually impossible to get them back. Always check the address carefully and consider sending a small test amount first.

• Phishing and scams:
  Fraudsters often create fake websites, emails or social media accounts that look like genuine services. They might ask you to share your seed phrase or private keys. A legitimate provider will never ask you to reveal your full seed phrase or private key. If you share it, the other party can usually take your funds.

• Custodial and platform risk:
  If you hold assets on an exchange or with a third-party custodian, you are exposed to their operational, security and financial risks. Some platforms have failed or been hacked, leading to large customer losses. Check where a firm is based, what regulation (if any) applies, and how they store customer assets.

• Regulatory risk:
  Crypto rules are still developing in many countries. Changes in regulation, tax treatment or enforcement action can affect the value or usability of a cryptoasset, or restrict access to certain services.

Before buying or using crypto, consider your financial situation, your tolerance for loss and your understanding of the product. Crypto is unlikely to be suitable for most people as a short-term investment or as a way to meet essential financial goals.

Summary

Cryptocurrency is a form of digital money that uses blockchain technology and cryptography to record and verify transfers without relying on a single central institution. It allows value to move across borders relatively quickly and without traditional intermediaries, but this comes with high levels of volatility, technical complexity and personal responsibility.

Some people see crypto as a long-term investment, others as a payment method, and some as an experimental technology. None of these perspectives changes the underlying risk that you could lose all the money you put in.

If you decide to explore cryptocurrency, take time to learn how it works, start small, and treat any money you put in as at risk.