The short version
- A cryptocurrency is an entry on a shared ledger, a blockchain, that no single company controls; ownership is proved with a private key.
- There is no official crypto price: each platform has its own, and aggregator sites average them.
- Crypto produces no earnings or dividends, can fall very sharply, and has weaker protections than regulated share accounts.
To understand how crypto works, forget coins for a moment and think of a ledger: a list of who owns what. In ordinary finance a bank or broker keeps that list. In crypto, thousands of computers keep identical copies of it and follow shared rules to agree on every change. The coins are simply balances on that list.
How crypto works: the blockchain in plain terms
A blockchain groups new transactions into blocks and links each block to the one before it using cryptography. Changing an old entry would mean redoing every block after it and persuading most of the network to accept the new version, which is designed to be impractical. That is what makes the record hard to tamper with.
Networks agree on new blocks in different ways. Bitcoin uses proof of work: computers compete to solve a mathematical puzzle, and the winner adds the block and earns newly created coins. Ethereum and many newer networks use proof of stake, where participants lock up coins as a deposit and are chosen to validate blocks, losing part of that deposit if they cheat.
Platforms often offer "staking" to their customers, paying a share of these validation rewards. The reward is not interest in the banking sense. Your coins may be locked for a period, the platform takes a cut, the reward is paid in the same volatile coin, and if the platform fails, staked coins are exposed like any other balance held there. An advertised staking rate says nothing about what the coin itself will be worth when you want to sell.
Keys, wallets and transactions
Ownership in crypto is proved with a private key, a long secret number. A matching public address is what you share to receive funds. A wallet is software or a device that stores keys and signs transactions; it does not hold the coins themselves, which always live on the blockchain.
When you send crypto, your wallet signs an instruction with your key and broadcasts it. The network checks the signature and balance, a validator includes it in a block, and after a number of further blocks it is considered final. You pay a network fee, which rises when the network is busy. There is no customer service desk: a payment sent to the wrong address is usually gone for good.
Many wallets let you back up keys as a seed phrase of 12 or 24 words. Anyone who sees those words can take everything. No genuine exchange, support agent or website will ever ask for them.
Coins, tokens and stablecoins
- Coins are native to their own blockchain, such as bitcoin on Bitcoin or ether on Ethereum. They are used to pay fees on that network.
- Tokens are created by programs running on an existing blockchain. They can represent almost anything, from a project's governance vote to a game item.
- Stablecoins are tokens that aim to hold a fixed value, usually one US dollar, backed by reserves held by the issuer. USDT is the most widely used.
For a deeper look at the original cryptocurrency, see our guide to what Bitcoin is.
Where crypto prices come from
A listed share has an official price on its home exchange. Crypto does not. Each trading platform runs its own order book, so the same coin can trade at slightly different prices in different places at the same moment. Traders who buy where it is cheaper and sell where it is dearer keep those prices close together, but gaps widen when markets move fast or when a platform is in trouble.
When you look up crypto prices today on a data or aggregator site, you are usually seeing an average across several platforms, weighted by volume. That is useful for a general picture but it is not the price you will get: your own platform's order book, spread and fees decide that. Three habits help:
- Compare the figure on your own platform with an aggregate before placing an order, and question large differences.
- Look at the spread and order book depth, not just the last traded price.
- Type addresses of price sites yourself. Fake copies of popular crypto sites are used to steal logins and funds.
Crypto trades 24 hours a day, every day, so there is no closing price in the stock-market sense. Many sources use a price at midnight UTC as the "daily close", but that is a convention, not a rule.
The costs of using crypto
Crypto costs arrive in several layers. Platforms charge a trading fee on each purchase and sale, and the spread between buying and selling prices adds a further cost that is not always shown. Moving coins off a platform means paying the blockchain's network fee, often plus a withdrawal charge set by the platform. Card purchases and instant-buy buttons are usually the most expensive route. Our trading fees guide explains how costs of this kind compound.
Custody: who holds the keys
If you buy crypto on an exchange and leave it there, the exchange usually holds the keys and you hold a claim on the exchange. That is convenient, but if the exchange fails, freezes withdrawals or is hacked, your coins may be lost or stuck in insolvency proceedings for years. Moving coins to a wallet you control removes that dependence but makes you fully responsible for your keys. Neither choice is risk-free; they are different risks.
What gives a network value?
Supporters point to different sources of value for different networks. For Bitcoin, the argument centres on a fixed supply and a neutral, hard-to-censor payment system. For programmable networks such as Ethereum, it centres on demand for block space to run applications, with fees paid in the native coin. Critics note that most tokens have no revenue, weak or unclear rights for holders, and prices driven largely by speculation. Neither side's argument can be settled with a cash-flow valuation of the kind used for shares, which is one reason prices swing so widely.
Crypto in a long-term portfolio
Crypto assets generate no profits, dividends or interest by themselves, so there is no cash flow to value. Their price depends on demand, adoption and sentiment, and falls of more than half have happened repeatedly. Investors who choose to hold some often size it so a severe fall would be painful but not damaging.
Common mistakes are easy to list: buying after a sharp rise because of fear of missing out, keeping large balances on a platform for convenience, storing a seed phrase as a phone screenshot, and following anonymous tips in group chats. Each one has caused serious losses to otherwise careful people.
An illustrative example: an investor with a $20,000 portfolio puts 5% into crypto, which is $1,000. If crypto then falls 70%, the loss is $700, or 3.5% of the whole portfolio. If the same investor had put half the portfolio into crypto, the same fall would cost $7,000, or 35%. Position size, not conviction, decides how much a bad year hurts. You can check a trade's result after fees with our crypto profit calculator.
Rules and protection
Crypto regulation is developing unevenly. The EU's Markets in Crypto-Assets Regulation (MiCA) now requires crypto service providers there to be authorised. The UK Financial Conduct Authority has banned the sale of crypto derivatives to retail consumers since 2021, and UK and EU retail CFD clients face a 2:1 leverage cap on crypto. In many countries, crypto held on a platform is not covered by the compensation schemes that protect bank deposits or share accounts.
Reader questions
Why is the price of a coin different on different sites?
Each crypto platform has its own buyers and sellers, so prices can differ slightly between them. Aggregator sites publish an average, but the price you actually pay depends on your platform's order book, spread and fees.
Can a crypto transaction be reversed?
Generally no. Once a transaction is confirmed on the blockchain there is no central authority to reverse it. That is why checking the address and network before sending is so important.
Is crypto covered by deposit or investor compensation schemes?
Usually not. Schemes that protect bank deposits or share accounts generally do not cover crypto-assets held on a platform. Check the rules in your own country and the platform's regulatory status.
Sources
- UK Financial Conduct Authority, ban on the sale of crypto-derivatives to retail consumers (2021)
- European Union, Markets in Crypto-Assets Regulation (MiCA)
- European Securities and Markets Authority, product intervention measures on CFDs