What is cryptocurrency? Blockchains, keys, exchanges and why prices swing so hard

A cryptocurrency is a digital token whose ownership is recorded on a public ledger called a blockchain, which is copied and maintained by thousands of independent computers rather than by a bank or government. You prove that you own a token, and authorise its transfer, with a private cryptographic key. There is no central party that can freeze the ledger, reverse a mistaken payment or stand behind the token's value, which is both the point of the design and the source of most of its risks.

This guide explains the moving parts in plain language: what a blockchain is, how the network agrees on a single version of the truth, what keys and wallets do, how buying on an exchange differs from trading a CFD with a broker, and why crypto prices move the way they do. It is the starting point for the rest of our crypto guides.

Risk first. Crypto-assets are highly volatile and you can lose all of the money you put in. Many crypto firms and tokens fall outside the investor protections that apply to regulated financial products. If you trade crypto through leveraged CFDs, losses are magnified, and most retail CFD accounts lose money.

The problem cryptocurrency tries to solve

Digital information is easy to copy. If money were simply a file, you could send the same file to two people. Traditional payment systems prevent this "double spending" with a trusted record-keeper: your bank keeps the ledger, and when you pay someone, the bank debits your account and credits theirs.

Cryptocurrency replaces that single record-keeper with a shared ledger and a set of rules that every participant runs. Nobody needs to trust a particular bank; instead they trust that the rules, the cryptography and the economic incentives built into the network make it very expensive to cheat. Whether that trade-off is worth it is a matter of debate. What matters for a trader is understanding what has been replaced, and what has not.

What a blockchain is

A blockchain is a list of transactions grouped into blocks. Each block contains:

• a batch of transactions (for example, "address A sends 0.5 coins to address B");
• a timestamp;
• a cryptographic fingerprint, called a hash, of the previous block.

Because every block includes the fingerprint of the one before it, the blocks form a chain. Change a single transaction in an old block and its fingerprint changes, which breaks the link to every block after it. Anyone running the software can check the whole chain from the first block onwards and spot the tampering.

Copies of the ledger are held by many computers, called nodes, around the world. When a new block is added, nodes check that every transaction in it follows the rules: that the sender actually had the coins, that the signatures are valid, and that no coin is being spent twice. Blocks that break the rules are rejected.

Most major blockchains are public: anyone can download the ledger and read every transaction ever made. Addresses are long strings of characters rather than names, so activity is pseudonymous rather than anonymous. Once an address is linked to a person, for example through an exchange's identity checks, its whole history can often be traced.

How the network agrees: consensus

A shared ledger needs a way to decide who gets to add the next block, and which version of the chain is the real one if two appear at once. This is the consensus mechanism. The two you will hear about most are proof of work and proof of stake.

Proof of work

Used by Bitcoin. Computers called miners compete to solve a mathematical puzzle that can only be cracked by trying enormous numbers of guesses. The winner adds the next block and receives newly created coins plus transaction fees. The puzzle makes adding blocks costly in electricity and hardware, so rewriting history would require outspending the rest of the network. The cost is high energy use, which has drawn criticism from governments and environmental groups. Our guide to Bitcoin covers mining in more detail.

Proof of stake

Used by Ethereum since September 2022 and by many newer blockchains. Instead of burning electricity, participants called validators lock up, or stake, the network's own coins as collateral. Validators are chosen to propose and confirm blocks, earn rewards for doing so honestly and can lose part of their stake if they break the rules. The security comes from having money at risk rather than computing power. See Ethereum and altcoins for how this works in practice.

Both systems share one important property for users: once a transaction is buried under enough later blocks, it is, in practice, final. There is no chargeback and no customer service desk that can undo it.

Keys, addresses and wallets

This is the part beginners most often get wrong, and the mistakes are expensive.

• A private key is a very large secret number. Whoever knows it can sign transactions that move the coins associated with it.
• A public key, and the address derived from it, is what you share so others can send you coins. Knowing an address does not let anyone spend from it.
• A wallet is software or a device that stores your private keys and uses them to sign transactions. The coins themselves never sit "inside" the wallet; they exist as entries on the blockchain. The wallet holds the keys that control those entries.
• A seed phrase (usually 12 or 24 words) is a human-readable backup from which a wallet can regenerate all of its keys. Anyone who sees your seed phrase can take everything.

The practical consequences are stark. If you lose your keys and your seed phrase, the coins are effectively gone for good. If someone tricks you into revealing them, or into signing a malicious transaction, the transfer is usually irreversible. If you send coins to the wrong address, or on the wrong network, there is often nothing anyone can do.

Custodial and self-custody

When you buy crypto on an exchange and leave it there, the exchange usually holds the keys and owes you the coins, much as a bank owes you your deposit but without the deposit protection. This is called custodial holding. When you move coins to a wallet where you alone hold the keys, that is self-custody. Each has its own risks: exchanges can be hacked, freeze withdrawals or collapse, while self-custody puts the whole burden of security on you. The collapse of the FTX exchange in November 2022, which left customers unable to withdraw, is the best-known recent example of custodial risk. Our guide to crypto wallets and custody goes through both in detail.

What a "coin" or "token" actually is

The words get used loosely, but there is a useful distinction:

• Coins are the native asset of their own blockchain, such as bitcoin on the Bitcoin network or ether on Ethereum. They are used to pay transaction fees and reward the miners or validators who secure the chain.
• Tokens are created by programs, called smart contracts, running on an existing blockchain. Thousands of tokens run on Ethereum and similar networks. They can represent almost anything: a claim on a project, a voting right, a game item, or a digital dollar.
• Stablecoins are tokens designed to track a reference such as the US dollar. They are widely used for moving money between exchanges and as the "cash" side of crypto trades. See stablecoins explained for how they keep, and sometimes lose, their peg.

Most tokens do not give you any legal claim on a company's profits or assets. A token is not a share, even when it is marketed with language that sounds like one.

Exchanges versus brokers: two very different ways in

Retail traders usually reach crypto in one of two ways, and they are different products.

Buying on a crypto exchange or platform

You open an account, pass identity checks, deposit money and buy coins. You own the asset (or a claim on it if the platform holds it for you), you can usually withdraw it to your own wallet, and you can hold it indefinitely without financing charges. You can lose everything you paid, but not more than that, unless you use borrowing or derivatives offered by the platform. In the EU, firms providing these services now need authorisation under the Markets in Crypto-Assets Regulation (MiCA), covered in our guide to crypto scams and regulation.

Trading a crypto CFD with a broker

A contract for difference tracks the price of a coin, but you never own it. You can go long or short, you trade on margin, and you pay a spread and overnight financing while the position is open. Under ESMA's product intervention rules, retail leverage on crypto CFDs in the EU is capped at 2:1, meaning you must put up at least 50% of the position's value as margin. In the UK, the FCA has banned the sale of crypto derivatives, including CFDs, to retail clients since January 2021.

Our general guide to what a CFD is explains the mechanism, and crypto CFDs vs buying crypto compares the two routes side by side, including costs and custody.

Worked example: the same move, two ways

An illustrative example, with round numbers. Suppose a coin trades at 20,000 dollars and falls 15% to 17,000 dollars over a few days.

• Bought outright: you spend 2,000 dollars on 0.1 coin. After the fall it is worth 1,700 dollars, a loss of 300 dollars, or 15% of what you put in.
• CFD at 2:1: you put up 2,000 dollars as margin and open a position worth 4,000 dollars (0.2 coin). The same 15% fall costs 0.2 times 3,000, or 600 dollars: 30% of your margin, before spread and financing.

Leverage doubles the percentage loss on the money committed. With higher leverage, available outside the EU and UK or to professional clients, the effect is larger still. Use a position size calculator to see how a stop distance translates into money at risk before you place any trade.

Why crypto prices are so volatile

Crypto-assets regularly move by amounts that would be extraordinary in major currencies. There are several reasons, and they compound each other.

No anchor of cash flows

A share is a claim on a company's future earnings, and a bond pays interest. Most crypto-assets pay nothing and have no earnings to value. Their price rests on what other people are willing to pay, which depends on adoption, sentiment, regulation and liquidity. Without an earnings anchor, prices can travel a long way in either direction before anything pulls them back.

Trading never stops

Crypto markets trade around the clock, every day of the year. Big moves can happen at 3 a.m. on a Sunday, when liquidity is thin and you may be asleep. If you trade crypto CFDs, check your broker's hours: some quote crypto at weekends, others pause pricing, which can produce gaps when quoting resumes. Our guide to gap risk and weekend risk explains why stops do not always fill where you set them.

Leverage and forced liquidations

Many offshore crypto platforms offer leverage far above the EU and UK caps. When prices fall sharply, leveraged long positions hit their liquidation levels and are closed automatically, which means more selling, which pushes prices lower and triggers further liquidations. The same cascade can happen upwards when short positions are squeezed. This feedback loop is a major reason why crypto moves often look like cliffs rather than slopes.

Fragmented, concentrated liquidity

The same coin trades on hundreds of venues, each with its own order book. Outside the largest coins, liquidity can be shallow and holdings concentrated among a small number of wallets, so a single large order can move the price a long way. Smaller tokens can lose most of their value in hours.

Sentiment, news and regulation

Crypto prices react strongly to regulatory announcements, exchange failures, hacks, approvals of new products and changes in interest-rate expectations. Social media amplifies all of it. Our guide to crypto volatility and risk looks at how to size positions for markets that move like this.

Common claims, and the evidence

You will hear crypto described as "digital gold", "a hedge against inflation" or "the future of money". These are opinions held by some investors, not established facts.

• Store of value: some investors argue that a fixed supply, as in Bitcoin, makes a coin a long-term store of value. Critics point out that a store of value should hold its purchasing power, and crypto prices have repeatedly fallen by more than half in a matter of months.
• Inflation hedge: when inflation rose sharply in 2022, crypto prices fell heavily alongside other risky assets, which does not fit the hedge story well.
• Decentralisation: many projects are in practice controlled by small teams, a foundation or a few large holders.

Treat these claims as arguments to examine, not reasons to buy.

Common mistakes beginners make

• Confusing owning crypto with trading a CFD. They are different products with different costs, risks and protections. Know which one you have.
• Leaving everything on one platform without checking its authorisation. Look the firm up on the relevant regulator's register; our regulator registers page lists where.
• Sharing a seed phrase. No genuine exchange, wallet provider or support agent will ever ask for it.
• Sizing positions as if crypto were a major currency pair. A 10% daily move is not unusual in crypto. A position size that feels normal in EUR/USD can be reckless here.
• Chasing a coin after a big rise. Sharp rallies are often followed by sharp falls, and the people promoting a coin may be the ones selling it. See crypto scams and regulation for pump-and-dump schemes.
• Ignoring tax. In many countries, swapping one crypto-asset for another, or spending it, can be a taxable event. Rules depend on where you live.

Our glossary defines terms such as volatility, leverage and liquidity, and our risk warning sets out the risks of leveraged trading.

Frequently asked questions

Is cryptocurrency real money?

It is used to make payments in some places, but most crypto-assets are not legal tender and are not issued or backed by a central bank. Their value depends on what other people will pay for them, which can change quickly. Stablecoins aim to track a currency such as the dollar, but they depend on the issuer and its reserves.

Who controls a cryptocurrency?

No single company runs a large public blockchain; the ledger is maintained by a network of nodes following shared software rules. In practice, influence is often concentrated among developers, large miners or validators, foundations and big holders, and many smaller tokens are effectively controlled by the team that created them.

Can a crypto transaction be reversed?

Generally no. Once a transaction is confirmed on the blockchain it cannot be undone by anyone, which is why scams and mistaken transfers are so costly. Some centralised platforms can freeze funds still on their books, and some stablecoin issuers can freeze tokens, but that is the exception.

Is crypto regulated in the EU?

Partly. Since MiCA, firms offering crypto services in the EU need authorisation, and issuers of stablecoins face specific rules. Many tokens themselves are not regulated as financial instruments, and protections such as deposit protection or investor compensation schemes generally do not apply to crypto held with an exchange.

Is trading crypto CFDs the same as buying bitcoin?

No. A CFD is a leveraged contract with a broker on the price; you never own the coin, you pay financing to hold the position, and leverage magnifies losses. Buying bitcoin gives you the asset or a claim on it. Retail crypto CFDs are capped at 2:1 leverage in the EU and are not available to retail clients in the UK.

Why do people say most crypto traders lose money?

There is no single official statistic for all crypto trading. For CFDs, EU and UK brokers must disclose the share of retail accounts that lose money, and published figures commonly sit between about 60% and 90%. Crypto's volatility, leverage on many platforms and round-the-clock trading make losses easier, not harder. See why most retail CFD traders lose.