Bitcoin Explained: Your No-Nonsense Guide to How Cryptocurrency Works

Bitcoin surged past US$123,000 in July 2025. This milestone demonstrates how cryptocurrency works on the ground as digital markets continue to expand. The total cryptocurrency market now stands at approximately US$3.86 trillion, making these digital assets impossible to ignore.

Cryptocurrency’s foundation lies in its nature as digital assets created through blockchain technology. These assets typically work without any central authority’s control. Bitcoin has made the most important effect on the financial world since its birth in 2009. Many experts now call it “digital gold” or “gold 2.0”. Bitcoin’s fixed supply cap of 21 million coins creates a lack that adds to its value proposition.

This piece breaks down everything you need to know about cryptocurrencies. You might be curious about blockchain technology, thinking over your first investment, or just wanting to understand this financial revolution. We’ll explain the mechanics behind cryptocurrencies, get into the different types available, and show how you can join this fast-changing market.

What is cryptocurrency and how does it work?

Cryptocurrencies have changed our perspective on money fundamentally. These digital currencies exist without government backing and rely on advanced cryptographic techniques for security.

Definition of cryptocurrency

A cryptocurrency works as a digital or virtual currency that uses cryptography to stay secure, which makes counterfeiting or double-spending nearly impossible. People can pay each other directly through an online system without banks or other middlemen.

The value of cryptocurrencies comes purely from market demand—they’re worth whatever people will pay for them. This makes them different from national currencies, which get their value partly from being official legal tender.

How blockchain powers crypto

Blockchain technology serves as the foundation for all cryptocurrencies. A blockchain functions as a distributed and secure database or ledger that network computers share. Cryptocurrency transactions follow these steps:

1. The sender broadcasts transaction instructions to the entire network
2. The transaction joins others in a waiting area
3. These transactions are grouped into a “block”
4. Miners solve complex cryptographic puzzles to verify the block
5. The verified block joins the chain
6. The transaction completes

Each block contains data from previous blocks, which creates an unbreakable chain. Large and fast networks make blockchains very secure. Anyone trying to change information in previous blocks would affect all later blocks, which makes tampering practically impossible.

Why decentralisation matters

Cryptocurrencies stand out because they don’t need central control. The system spreads authority and control across many participants instead of relying on banks or governments.

This approach offers significant benefits. The system stays more secure because hackers can’t target a single weak point. Users control their assets, identities, and data completely. The public can see all transactions on an available ledger, which creates remarkable transparency.

Bitcoin’s price moved from US$45,869 to US$107,029 before settling at US$53,514 in early 2022. Despite such market swings, the core technology continues to grow and improve.

How cryptocurrency works step by step

Getting started with cryptocurrencies takes just a few practical steps. Let’s explore how to use cryptocurrency in your daily life now that you understand what it is.

1. Creating a wallet

You’ll need a crypto wallet to begin. This digital tool stores your private keys and lets you manage your cryptocurrencies. Crypto wallets don’t store actual coins – they hold the keys that prove you own these digital assets.

The wallet setup process includes:

1. Pick between hot wallets (internet-connected) or cold wallets (offline storage)
2. Get the software or buy a hardware device
3. Set up a secure password and save your recovery phrase

Your recovery phrase contains 12-24 random words that represent your wallet’s master private key. Keep this phrase safe offline because anyone who has it can access your crypto.

2. Buying your first crypto

Your wallet is ready, and now you can buy cryptocurrency through:

• Cryptocurrency exchanges that need you to create an account and verify your identity through Know Your Customer (KYC) procedures
• Broker platforms with user-friendly interfaces but higher fees
• Peer-to-peer marketplaces to buy directly from other users

You can buy parts of cryptocurrencies on most platforms – no need to purchase a whole Bitcoin or Ethereum coin.

3. Sending and receiving coins

You need the recipient’s wallet address to send cryptocurrency. This long string of characters works like a bank account number. Many wallets show this as a QR code to make scanning easier.

Remember these points when sending crypto:

• Send to the right address type (Bitcoin to Bitcoin addresses, Ethereum to Ethereum addresses)
• Network congestion might affect transaction fees
• Double-check all details before you send because transactions can’t be reversed

4. Storing your crypto safely

The way you store your cryptocurrency plays a big role in its security. Your options include:

• Exchange wallets: Easy to use but might be vulnerable to hacks
• Hardware wallets: Physical devices that keep keys offline, the safest option available
• Software wallets: Apps on your computer or phone
• Paper wallets: Physical documents with printed keys

Experts recommend cold storage methods for large amounts, especially hardware wallets that cost between AUD 152.90 to AUD 305.80. A smart approach combines small amounts in hot wallets for transactions with larger holdings secured offline.

Types of cryptocurrencies and their uses

The cryptocurrency market now reaches way beyond Bitcoin. Thousands of digital assets serve different purposes in the broader ecosystem.

Bitcoin: digital gold

Bitcoin earned its “digital gold” nickname because of its design focused on limited supply. A maximum supply cap of 21 million coins makes Bitcoin similar to gold’s finite nature. The system reduces mining rewards through “halving events” every four years. The next halving in April 2024 will cut the reward from 6.25 to 3.125 Bitcoin per block. This built-in limited supply makes Bitcoin a potential shield against inflation and currency devaluation.

Ethereum and smart contracts

Ethereum changed blockchain technology by introducing smart contracts – agreements that execute themselves with terms written directly in code. While Bitcoin focuses on transactions, Ethereum supports a global network of decentralised applications (dApps). Its native cryptocurrency (ETH) powers these applications in finance, gaming, and digital ownership systems.

Utility tokens vs. security tokens

Utility tokens let users access services within specific blockchain ecosystems without giving them ownership rights. These tokens work as tools rather than investment vehicles. Security tokens, however, represent ownership in real-life assets like equity or property. The main difference shows up in regulation. Security tokens must follow securities laws and often give dividend rights. Utility tokens face lighter regulations.

Stablecoins and their role

Stablecoins solve cryptocurrency volatility by keeping their value steady through various backing methods. The stablecoin market grew to about USD 282.86 billion in April 2022. Popular options include:

• Fiat-backed: Tether (USDT) and USD Coin (USDC), tied to currencies like the US dollar
• Commodity-backed: Tether Gold (XAUt), connected to physical gold reserves
• Crypto-collateralized: DAI, supported by other cryptocurrencies worth about 155% of circulating value

Can I invest in cryptocurrency?

The cryptocurrency market creates both opportunities and risks for investors who want to explore this dynamic market. The market has grown to about US$3.86 trillion as of July 2025, making it a major player in the financial world.

Ways to invest: exchanges, ETFs, apps

Australian investors can choose several ways to invest in cryptocurrency. Centralised exchanges like Kraken give you access to advanced trading tools and a wide range of cryptocurrencies. Crypto ETFs let you invest in the market without owning digital assets directly. You’ll find nine ETFs on the ASX and Cboe Australia that track Bitcoin or Ethereum.

Investment apps give you another way to get started. eToro helps beginners learn with its educational tools, while Coinbase supports its customers around the clock. Robinhood makes crypto trading even more attractive with zero fees.

Risks and volatility explained

Your crypto investments come with big risks. Prices can swing wildly without warning, and you could lose all your money. Scammers are everywhere in the crypto world, running Ponzi schemes, pump-and-dump operations, and “pig butchering” scams.

Security threats pose another big risk, as hackers keep targeting crypto platforms. The biggest issue is that many crypto companies operate without oversight, leaving you unprotected if something goes wrong.

How to build a crypto portfolio

A strong portfolio needs different types of cryptocurrencies, sectors, and strategies. Smart investors often use the 80/20 rule – putting 80% in established coins like Bitcoin and 20% in smaller cryptocurrencies.

You should rebalance your portfolio regularly as prices change. It also helps to keep some stablecoins handy, which can protect you during market drops while keeping your money accessible.

Tax and legal considerations

Australia’s tax system treats cryptocurrencies as property. You’ll pay capital gains tax when you sell or trade digital assets, but you might get a 50% CGT discount if you hold them for more than 12 months.

You might not pay tax on transactions under AUD 15,289.90 if you use them to buy goods or services. But this rule doesn’t work for investment assets. That’s why you need to keep detailed records of all your transactions for tax purposes.

Conclusion

Bitcoin’s journey since 2009 has been remarkable. The price surge to US$123,000 per Bitcoin shows how digital currencies have gained mainstream acceptance. Learning the basics becomes vital before jumping into this complex market.

Blockchain technology serves as the foundation for all cryptocurrencies. The system provides better security than traditional financial systems through decentralisation. Users get true ownership of their digital assets because this distributed system removes single points of failure.

Starting your crypto journey needs some practical steps. You’ll need to pick the right wallet and keep your private keys safe. Most people store large amounts in hardware wallets for maximum security. Software wallets work better for smaller amounts and daily transactions.

Bitcoin is just the beginning of the crypto world. Smart contracts came from Ethereum, while stablecoins help solve price swings. The digital economy uses utility and security tokens that serve different purposes.

Australian investors can now buy crypto through exchanges, ETFs, and mobile apps. These options are a great way to get started, but they come with risks. Prices can change drastically without warning, and scams still plague the industry.

A balanced crypto portfolio usually follows a simple rule. Put 80% in 13-year-old cryptocurrencies and 20% in new projects. The market changes fast, so regular portfolio adjustments help manage risk levels.

Tax rules need careful attention. Australia’s government sees crypto as property and applies capital gains tax rules. Long-term holdings might get tax discounts. Good record-keeping becomes vital for tax compliance.

Cryptocurrency brings state-of-the-art technology and financial possibilities together. Your financial goals, risk comfort, and faith in the technology’s future will shape your decision to invest. This fascinating innovation reshapes our financial scene daily, whether you choose to invest or just learn more about it.