At a glance
- A cryptocurrency is a record on a shared ledger; whoever controls the private key controls the coins.
- Exchanges hold coins for customers, so leaving funds on one means trusting that company.
- Prices differ between venues; closing those gaps is harder and riskier than it looks once fees and transfer time are counted.
Understanding how crypto works starts with one idea: a cryptocurrency is an entry in a shared ledger, not a file on your phone. The ledger, called a blockchain, is copied across thousands of computers that follow the same rules for adding new entries. Ownership is proved with cryptographic keys. Everything else, from exchanges to stablecoins, is built on top of that.
How crypto works, from transaction to confirmed block
- SignYour wallet signs a transaction with your private key
- BroadcastIt is sent to the network and waits in a queue
- IncludeA block producer adds it to a new block
- ConfirmFurther blocks build on top, making it final
On Bitcoin, a new block is added roughly every ten minutes; other networks are faster. Once a transaction is buried under several further blocks, reversing it becomes impractical. That permanence is a feature for settlement and a problem for mistakes: a payment sent to the wrong address cannot be recalled by anyone.
Who adds the blocks: proof of work and proof of stake
A blockchain needs a way to decide who writes the next block without a central authority. Bitcoin uses proof of work: miners spend electricity running computations, and the first to find a valid answer proposes the block. Ethereum and many newer networks use proof of stake: validators lock up the network's own coins as a deposit and are chosen to propose and confirm blocks, losing part of that deposit if they break the rules. Both systems make cheating expensive; they differ in energy use, hardware needs and who ends up with influence over the network.
Keys, wallets and who is in control
A wallet does not store coins. It stores the private key that authorises spending from an address on the blockchain. Most wallets back up that key as a seed phrase of 12 or 24 words. Anyone who sees those words can take the coins, which is why no genuine service will ever ask for them.
| Custodial (exchange account) | Self-custody wallet | |
|---|---|---|
| Who holds the key | The exchange | You |
| If you forget your password | Account recovery through the company | Only the seed phrase can restore access |
| If the company fails | You may be an unsecured creditor | Not affected |
| Main risk | Company failure, freezes, hacks | Losing the phrase or being tricked into revealing it |
Coins, tokens and stablecoins
A coin is the native asset of its own blockchain, such as bitcoin or ether. A token is issued by a smart contract running on someone else's blockchain. A stablecoin is a token designed to hold a steady value, usually one US dollar, backed by reserves held by the issuer. USDT is the largest example; our USDT guide explains how it works and what can go wrong, and the Bitcoin guide covers the original network.
What happens when you buy on an exchange
- VerifyIdentity checks on a regulated platform
- DepositBank transfer or card, converted to a balance
- OrderMarket or limit order against the order book
- Hold or withdrawKeep on the exchange or send to your own wallet
Regulated platforms verify your identity before you can deposit, a process usually called KYC (know your customer). Once your order fills, the coins appear as a balance in your account, which is a record in the exchange's own database rather than an entry on the blockchain in your name. Only when you withdraw to a wallet address does an on-chain transfer take place, with a network fee and often a platform withdrawal fee. Our trading fees guide shows how those charges combine.
How exchanges set prices
A centralised exchange runs an order book much like a stock exchange, but each exchange has its own book. That is why BTC/USDT can be $60,000 on one venue and $60,240 on another at the same moment. Decentralised exchanges replace the book with a pool of tokens and a formula, so the price moves as people trade against the pool.
Smart contracts and token approvals
Networks such as Ethereum run smart contracts: programs stored on the blockchain that hold and move tokens according to fixed code. Decentralised exchanges, lending apps and most tokens are built this way. To trade on one, you usually sign an approval that lets the contract move a certain token from your wallet. Approvals are normal, but a malicious site can ask for an unlimited approval and later drain every unit of that token. Read what your wallet asks you to sign, prefer limited amounts, and revoke approvals you no longer use. A smart contract can also contain bugs; audits reduce that risk but do not remove it.
Arbitrage between venues, with the fees counted
A price gap looks like free money. Here is a simple arbitrage crypto trade on paper, using illustrative numbers: buy 0.5 BTC at $60,000 on venue A and sell it at $60,240 on venue B.
The $120 gap shrinks to about $47.83 once a 0.1% trading fee on each side ($30.00 + $30.12) and a withdrawal fee of 0.0002 BTC (about $12.05) are paid. And that is the best case. While the coins travel between venues, the price can move by more than the remaining margin, and the gap often closes before you finish. Professional firms keep balances on both venues to avoid the transfer, which a beginner usually cannot do. Run your own figures in the crypto profit calculator.
Risks you should weigh first
- Volatility: double-digit percentage moves in a week are common.
- Platform risk: exchange failures and freezes have left customers waiting years for partial repayment.
- Irreversible errors: wrong network, wrong address, or a signed malicious approval.
- Leverage: crypto derivatives are banned for UK retail consumers and limited to 2:1 for EU retail CFD clients; offshore platforms offering far more remove those safeguards.
- Scams use crypto because payments are hard to reverse. See how to spot trading scams.
Questions to ask before your first purchase
- Is the platform registered or licensed for crypto services where I live?
- Will I leave coins on the exchange or move them to my own wallet, and do I know how to back up a seed phrase?
- What is the total fee for buying, holding and withdrawing the amount I plan to spend?
- How much of my savings could I lose entirely without it changing my plans?
It also helps to write down, before buying, what would make you sell: a price, a change in the project, or simply needing the money. Decisions made in advance are easier to follow than decisions made while a chart is moving quickly.
If any answer is unclear, the purchase can wait. Crypto markets run every day of the year; there is no closing bell that forces a decision.
Where to go from here
If you are wondering which coin to look at first, read why there is no single best coin to buy before anything else. It sets out a way to evaluate projects that does not depend on anyone's tip.
Reader questions
Is crypto legal?
Owning crypto is legal in many countries, but rules on exchanges, advertising and derivatives vary widely and some countries restrict it. Check the position where you live, and whether a platform is registered or licensed there.
Can a crypto transaction be reversed?
Not by the network. Once confirmed, a transfer is final. Only the recipient can choose to send the coins back, which is why scammers prefer crypto payments.
Why do crypto prices differ between exchanges?
Each exchange has its own order book and customers. Fees, withdrawal limits and transfer times stop traders from closing every gap, so small differences persist.
Sources
- UK Financial Conduct Authority, ban on crypto-derivatives for retail consumers
- European Securities and Markets Authority, CFD leverage limits