The picture in three lines
- A cryptocurrency is a record in a shared ledger; your private key is what lets you move your entry in that ledger.
- Transactions are grouped into blocks and accepted through proof of work (Bitcoin) or proof of stake (Ethereum, Tron).
- Prices are volatile, and large falls need much larger rises to recover, so position size matters more than timing.
How crypto works is simpler than it sounds once the pieces are drawn in order. A cryptocurrency is an entry in a public ledger that many computers keep in sync. Nobody holds a physical coin; what you hold is a private key that proves you are allowed to move a particular balance. The rest of the system exists to decide, without a central bank or company, which movements are valid.
Keys, addresses and wallets
A wallet is software or a device that stores keys, not coins. Each private key produces a public address, which you can share so others can pay you. Signing a transaction with the private key proves you control the address without revealing the key itself.
Most wallets generate keys from a recovery phrase of 12 or 24 words. Anyone who sees those words can take everything the wallet holds, which is why no genuine service, support agent or website will ever ask for them.
Hot wallet
An app on a connected phone or computer. Quick to use, but exposed to malware and phishing.
Cold wallet
A hardware device or offline setup that signs transactions away from the internet. Slower, and much harder to attack remotely.
How crypto works when you send a coin
The life of one crypto transaction
- SignYour wallet signs a transfer with your private key.
- BroadcastThe signed transaction is shared with the network's nodes.
- QueueIt waits in a pool; a higher fee usually gets picked sooner.
- BlockA miner or validator includes it in a new block.
- ConfirmEach later block makes reversal harder still.
Every network charges a fee to process a transaction. On Bitcoin, fees are paid in BTC. On Ethereum, they are paid in ETH and called gas. On Tron, they are paid in TRX or covered by resources called bandwidth and energy. If your wallet holds a token but none of the network's native coin, you may be unable to move the token at all.
How the network agrees: proof of work and proof of stake
Thousands of computers must agree on one version of the ledger. Two main methods exist.
- Proof of work. Used by Bitcoin. Miners spend electricity racing to solve a puzzle; the winner adds the next block and receives newly issued coins plus fees. Rewriting history would require outspending the rest of the network.
- Proof of stake. Used by Ethereum since 2022 and by Tron in a delegated form. Validators lock up coins as collateral and are chosen to propose blocks; dishonest behaviour can cost them part of that stake.
Coins, tokens and stablecoins
A coin is native to its own blockchain: BTC on Bitcoin, ETH on Ethereum, TRX on Tron. A token is created by a smart contract running on someone else's blockchain; USDT, for example, exists as a token on Tron, Ethereum and other networks. A stablecoin is a token designed to track a reference such as the US dollar.
| Bitcoin (BTC) | Ether (ETH) | TRX | |
|---|---|---|---|
| Main purpose | Scarce digital money | Pays for computation and smart contracts on Ethereum | Pays for transactions and resources on Tron |
| Consensus | Proof of work | Proof of stake | Delegated proof of stake |
| Supply | Capped at 21 million | No fixed cap; issuance and fee burning both change supply | No fixed cap |
| Hosts tokens such as USDT? | Not in the usual sense | Yes (ERC20) | Yes (TRC20) |
The phrase digital coin is often used loosely for all three categories. The distinction matters in practice: a token's value and rules depend on the contract that created it and the organisation behind it, not only on the blockchain it lives on. Read more in our Bitcoin explainer and our USDT explainer.
Smart contracts: code that holds money
Bitcoin's scripting is deliberately limited. Ethereum and Tron allow smart contracts, programs stored on the blockchain that hold and move tokens according to their code. Tokens such as USDT are smart contracts; so are the lending pools and trading pools of decentralised finance.
Smart contracts remove some middlemen but add a new risk: the code itself. A bug, a badly designed incentive or an administrator key held by a small team can drain funds, and there may be nobody to reverse it. When an app asks your wallet to approve a contract, you are trusting that code with the tokens you approve.
Where crypto prices come from
There is no official price of a coin. Each platform has its own order book, a list of buy and sell orders at different prices, and the last trade on that book becomes its price. Decentralised exchanges use a different design: a pool of two tokens whose ratio sets the price, so every trade shifts the ratio and moves the price a little.
Price sites that quote "the" bitcoin price are usually averaging many venues. For small coins traded on only a few platforms, a single large order can move the quoted price sharply, which is one reason thinly traded tokens are so volatile.
Networks built on networks
Busy blockchains can become slow and expensive, so many projects move activity onto separate systems that settle back to a main chain. On Ethereum these are often called layer-2 networks. They can cut fees sharply, but they add their own rules, bridges and operators to trust. Moving tokens between networks usually requires a bridge, and bridges have been among the most frequently attacked pieces of crypto infrastructure. For a beginner, the practical lesson is the same as with USDT: know exactly which network your tokens are on, and move them only to addresses that support that network.
Records worth keeping
Many countries tax gains on crypto disposals, and a disposal can include swapping one coin for another, not just selling for cash. Rules differ widely, so check your own tax authority's guidance. Whatever the rules, a simple record of every purchase, sale, swap and transfer, with dates, amounts, prices and fees, makes later calculations far easier. Platform exports can disappear if a platform closes, so save them regularly.
The maths of volatility
Crypto prices can move far in a single day and fall by most of their value over months. A useful fact to keep in mind is that losses and recoveries are not symmetrical. The rise needed to get back to your starting point grows much faster than the fall itself.
Rise needed to recover from a fall
Formula: required rise = 1 ÷ (1 − fall) − 1. A 50% fall needs the price to double.
This is why the size of a position matters more than the timing of the purchase. Our homepage works through a sizing example, and the crypto profit calculator shows the effect of fees on your break-even price.
Buying, holding and moving crypto safely
- Check any platform's licence and custody arrangements first; see how to choose a broker or exchange.
- Turn on app-based two-factor authentication and use a unique password for every crypto service.
- When withdrawing, match the network exactly on both ends and send a small test amount first.
- Write your recovery phrase on paper, store it offline and never type it into a website.
- Ignore anyone who contacts you first about an investment, however friendly. The scam guide explains why.
Short answers
Is crypto real money?
It is a digital asset that some people accept as payment, but in most countries it is not legal tender and its value is set only by what buyers will pay.
Can a crypto transaction be reversed?
Generally no. Once a transaction is confirmed in a block, there is no bank to call. That is why checking the address and network before sending matters so much.
Do I need to buy a whole bitcoin?
No. Bitcoin divides into 100 million smaller units called satoshis, and most platforms let you buy a small fraction.
Sources
- Bitcoin whitepaper, Satoshi Nakamoto (2008)
- Ethereum.org documentation on proof of stake and gas
- Tron developer documentation on bandwidth and energy