Crypto basics for beginners
What blockchains, Bitcoin, wallets and exchanges actually are, and how to stay safe while you learn.
What is a blockchain?
A blockchain is a shared record of transactions that is copied across thousands of computers around the world. New transactions are grouped into "blocks", and each block is linked to the one before it, forming a chain. Because so many independent computers hold a copy and check the rules, it is extremely difficult for any single person, company or government to quietly change past entries.
Think of it as a public ledger that nobody owns, everyone can read, and no one can secretly rewrite.
What is Bitcoin?
Bitcoin, launched in 2009 by the pseudonymous Satoshi Nakamoto, was the first cryptocurrency. It lets people send value directly to each other over the internet without a bank in the middle. A few key points:
- Fixed supply: there will only ever be 21 million bitcoin. New coins are released on a schedule that halves roughly every four years (the "halving").
- Mining: computers called miners compete to add the next block and are rewarded with newly created bitcoin plus transaction fees. This process, called proof of work, is what secures the network.
- Divisible: one bitcoin is divisible into 100 million units called satoshis ("sats"), so you never need to buy a whole coin.
Ethereum and other coins
Ethereum is the second-largest network. As well as moving its coin, ether (ETH), it runs "smart contracts": small programs that execute automatically on the blockchain. These power things such as stablecoins, decentralised exchanges and NFTs. Since 2022 Ethereum has been secured by proof of stake, where participants lock up ETH rather than using mining hardware.
Thousands of other coins and tokens exist ("altcoins"). Many are experimental, some are scams, and most of the older ones have lost almost all of their value. A coin being listed on a website or exchange does not make it legitimate.
Stablecoins such as USDT and USDC aim to stay worth one US dollar, usually by holding cash and government bonds in reserve. They are useful for moving money between exchanges, but they are only as good as the company and reserves behind them.
What is a wallet?
A crypto wallet does not actually "hold" coins; your coins live on the blockchain. A wallet holds the keys that prove you own them and let you move them.
- Private key / seed phrase: usually 12 or 24 words generated when you create a wallet. Anyone who has these words can take everything in the wallet. Write them down on paper (or metal), keep them offline, and never type them into a website, photograph them, or share them with anyone, including "support staff".
- Public address: a long string you can share so people can send you crypto, a bit like an account number.
- Hot wallets are apps on your phone or browser. They are convenient but connected to the internet.
- Hardware wallets (cold wallets) are small physical devices that keep your keys offline. Buy them only directly from the manufacturer, never second-hand or from marketplaces, as tampered devices are a known scam.
What is an exchange?
An exchange is a company that lets you buy and sell crypto for pounds or other currencies, much like a broker. When you leave coins on an exchange, the exchange holds the keys on your behalf; this is called custodial storage.
- In the UK, firms offering crypto services must be registered with the Financial Conduct Authority (FCA) for anti-money-laundering purposes. You can check a firm on the FCA Financial Services Register. Registration is not the same as full protection: it does not mean your money is covered if the firm fails.
- Exchanges have collapsed before, most famously FTX in 2022, leaving customers unable to withdraw.
Self-custody: "not your keys, not your coins"
Self-custody means holding your own keys in your own wallet rather than leaving coins on an exchange. It removes the risk of an exchange failing or freezing withdrawals, but it makes you entirely responsible: if you lose your seed phrase or send coins to the wrong address, there is no bank to call and no way to reverse it.
A sensible approach for many people is to learn with a small amount first, practise sending a tiny test transaction, and only then consider moving larger sums to a hardware wallet.
Staying safe from scams
Crypto scams are extremely common. Warning signs include:
- Guaranteed or very high returns. Nobody can guarantee crypto profits.
- Unsolicited contact on WhatsApp, Telegram, Instagram, dating apps or by phone, especially from someone who wants to "teach" you to trade.
- Celebrity endorsements in adverts or videos. These are very often fake or AI-generated.
- Pressure to act fast, or to keep it secret from family and your bank.
- Requests for your seed phrase, or for you to install remote-access software. Legitimate companies never ask for these.
- "Recovery" services offering to get back money you have already lost. These are usually a second scam.
- Fake websites and apps with names very similar to real ones. Type addresses yourself or use bookmarks.
If you think you have been scammed in the UK, contact your bank immediately and report it to Action Fraud (or Police Scotland on 101 if you are in Scotland).
Before you buy anything
- Only use money you could afford to lose entirely.
- Understand that prices can fall by 50% or more in a short time, and have done so many times.
- Profits on crypto may be subject to Capital Gains Tax in the UK; HMRC publishes guidance on cryptoassets and tax.
- Be wary of borrowing money, using credit cards or using leverage to buy crypto.
FCA risk warning
Don't invest unless you're prepared to lose all the money you invest. This is a high-risk investment and you are unlikely to be protected if something goes wrong. Most cryptoasset activity is currently largely unregulated in the UK (a fuller FCA regime is due to start in October 2027), and crypto investments are generally not covered by the Financial Ombudsman Service or the Financial Services Compensation Scheme. Read the FCA's guidance on cryptoassets before you invest.