Crypto for Beginners: What You Need to Know

Before you buy any crypto, you need a clear picture of what you would be holding. This lesson explains what a blockchain is, what bitcoin, ether and stablecoins are for, why most other coins are far riskier and how crypto differs from money in a bank. The only maths involved is percentages, and the percentages in the risk section matter more than anything else here.

What a blockchain is

A blockchain is a shared record of who owns what. Instead of one bank keeping the ledger, many computers around the world each keep a copy and agree on every change. New transactions are grouped into blocks, and each block is linked to the one before it, so an old entry cannot be quietly altered without the rest of the network noticing.

Owning crypto means that record shows an address holding some coins, and you hold the key that can move them. No bank sits in the middle. That gives you control, and it takes away the safety net: when something goes wrong, there is nobody to ring. Crypto Wallets and Self-Custody Explained covers keys properly.

Bitcoin

Bitcoin was the first cryptocurrency and is still the largest. Its rules cap the supply at 21 million coins, and roughly every four years the number of new bitcoin created with each block halves, an event known as the halving. No government or central bank can create more. That fixed supply is the main reason people hold it: they see it as a scarce asset that sits outside the banking system, which is why you will hear it called digital gold. Others use it to move money across borders without a bank.

You do not need to buy a whole coin. Bitcoin divides into very small units, so £20 buys £20 of it, and the price of one coin tells you nothing about whether it is cheap.

A fixed supply does not mean a steady price. Bitcoin has fallen more than 75% from a peak more than once. Anyone who holds it should be ready for that to happen again.

Ether and Ethereum

Ethereum is a blockchain that runs programs, called smart contracts. Those programs can hold coins, swap one token for another or create new tokens, and anyone can use them without asking permission. Ether (ETH) is the coin that pays the network's fees, so every transfer and every program run on Ethereum costs a little ether.

Many other tokens and most stablecoins run on Ethereum and similar networks. People who hold ether are betting that demand for using the network keeps growing. In past sell-offs ether has fallen further than bitcoin, which is the usual pattern for anything beyond bitcoin.

Stablecoins

A stablecoin is a token that aims to hold a fixed value, almost always 1 US dollar. USDT and USDC are the two best known. Traders use them as cash inside crypto: sell a coin for a stablecoin, wait, and buy back later without sending money to and from a bank. Because they track the dollar, their value in pounds moves with the exchange rate.

Aiming for 1 dollar is not a promise to hold it. TerraUSD (UST), an algorithmic stablecoin, collapsed in May 2022. USDC briefly traded below 1 dollar in March 2023 when its issuer had reserves at Silicon Valley Bank, which failed. A stablecoin is only as sound as whatever stands behind it.

Everything else

Beyond bitcoin, ether and the large stablecoins sit thousands of other coins, usually called altcoins. Some run their own blockchains and some are tokens for a single app. Memecoins exist mainly as jokes or online communities, with nothing behind them at all. New ones appear every day.

Almost all of them carry far more risk than bitcoin. Most smaller coins tend to move with bitcoin, and in sharp sell-offs they usually fall together, often harder. Many coins from earlier cycles never returned to their old highs, and some went to zero. A small coin can also be thinly traded, so one large seller can move its price a long way.

How crypto differs from money in a bank

• No compensation scheme. In the UK, the Financial Services Compensation Scheme (FSCS) does not cover crypto. Mt. Gox in 2014 and FTX in November 2022 froze customer withdrawals, and their customers waited years for partial recovery.
• No way to reverse a payment. Crypto transactions on a blockchain are generally irreversible. Send coins to the wrong address or to a scammer and no bank can pull them back.
• A market that never closes. Crypto trades around the clock, weekends included, so a large move can happen while you sleep.
• Balances that can halve. A savings account does not drop in value overnight. A crypto holding can, and it can stay down for a long time.

The maths of a fall is harsher than it looks. Say you put £1,000 into a coin and it drops 75%. You now hold £250. To get back to £1,000, that £250 has to grow by £750, which is a 300% gain. A 50% fall needs a 100% gain to recover, and a 90% fall needs 900%. Even a round trip costs you: if £1,000 rises 50% to £1,500 and then falls 50%, you are left with £750, down 25%. Compounding and Drawdowns in Crypto goes further into why this matters.

Scams are the other big risk. Because payments cannot be reversed, crypto attracts fraud aimed squarely at beginners, from fake support staff to giveaways that promise to double your coins. Read Crypto Scams and How to Spot Them before you need it.

A sensible first step

Decide how much you could lose entirely without it changing your life, and treat that as a hard limit. Start with bitcoin, and ether if you want a second coin, before you touch anything smaller. Buy a small amount first, then withdraw some of it, so you learn how the exchange works while the stakes are low. Keep leverage out of it while you learn.

You will see a lot of crypto content about short-term trading. The Degen Desk is one example: each morning the daily issue reads derivatives positioning and makes one call or passes, and degencoder trades every call with real money. Holding coins for years is a different game, and you need none of that to start. The next lesson, How to Start Investing in Crypto, sets out the order to do things in.

Key takeaways

• Bitcoin has a fixed supply of 21 million coins; ether pays the fees on Ethereum; stablecoins aim to hold 1 dollar and have failed before.
• Most smaller coins fall with bitcoin and usually harder, and many never recover their old highs.
• The FSCS does not cover crypto and blockchain transfers are generally irreversible.
• A 75% fall needs a 300% gain to get back to even, so size what you hold for the fall.