7 Chapter 7 of 10 · 10 min read · Updated September 22, 2026
Crypto and Blockchain
What a blockchain is, how Bitcoin and Ethereum work, how you buy and hold coins, the specific ways beginners lose money, and where crypto might fit.
Core facts
- A cryptocurrency is a digital token whose ownership is recorded on a blockchain: a shared ledger copied across thousands of computers, with no bank or company in charge.
- Bitcoin (2009) is the first and largest. Its supply is capped at 21 million coins. Ethereum (2015) runs programs called smart contracts; most other tokens are built on it or chains like it.
- Transactions are confirmed by miners (Bitcoin, proof of work) or validators (Ethereum, proof of stake since 2022), who are paid in new coins and fees.
- Prices are extremely volatile. Bitcoin has fallen more than 70% from a high at least four times: 2011, 2014, 2018, and 2022.
- Crypto has no earnings, dividends, or interest. Its price is what the next buyer will pay. It is speculation, and common guidance is to hold only what you could lose, often 5% of a portfolio or less.
- Whoever holds the private key controls the coins. Lose the key and the coins are gone forever. Keep coins on an exchange and you are trusting that exchange; when FTX failed in 2022, about $8 billion of customer money was missing and withdrawals were frozen for over two years.
- Most beginner losses come from scams, hacks, and tokens that go to zero, not from Bitcoin's price. Thousands of tokens have already gone to zero.
- Since January 2024, spot Bitcoin ETFs let you hold Bitcoin exposure in a normal brokerage or retirement account with no keys to manage. Ether ETFs followed in mid-2024.
- The IRS treats crypto as property. Every sale, and every swap of one coin for another, is a taxable event.
What a blockchain is
A bank keeps one ledger of who owns what, and you trust the bank. A blockchain keeps the same ledger on thousands of independent computers at once, and the computers agree on each new entry by following fixed rules. No single party can change history or freeze an account.
- Transactions are grouped into blocks. Each block contains a fingerprint (hash) of the previous one, forming a chain. Changing an old block would change every fingerprint after it, which the network would reject.
- The ledger is public. Anyone can see every transaction ever made, tied to addresses rather than names.
- Sending coins means signing a transaction with your private key, a long secret number. Your address is derived from it and is safe to share.
The technology solves one problem: moving value between strangers without a trusted middleman. Whether that is worth what the coins currently cost is the entire investment question.
Bitcoin
| Fact | Detail |
|---|---|
| Launched | January 2009, by the pseudonymous Satoshi Nakamoto. |
| Supply | Capped at 21 million. About 19.9 million exist; the last will be mined around 2140. |
| New blocks | Roughly every 10 minutes. Miners compete to solve a puzzle (proof of work); the winner adds the block and earns new bitcoin. |
| Halving | Every 210,000 blocks (about four years) the reward per block halves. Last: April 2024, to 3.125 BTC. Next: around 2028. |
| Purpose | Designed as digital cash; used mostly as a speculative store of value, "digital gold." |
| Energy | Proof of work uses electricity comparable to a mid-sized country. This is a real cost and a real criticism. |
Bitcoin's scarcity is its pitch: no government can print more. Its problem is that scarcity alone does not create value; demand does, and demand has swung violently.
Ethereum, tokens, and stablecoins
- Ethereum is a blockchain that runs code. A smart contract is a program that moves coins automatically when conditions are met. Its coin is ether (ETH). Since September 2022 it uses proof of stake: validators lock up ETH as collateral instead of burning electricity, cutting energy use by over 99%.
- Tokens are coins created by smart contracts on Ethereum or similar chains (Solana, others). Anyone can create one in minutes. Most have no purpose and no value.
- Stablecoins (USDC, USDT) are tokens pegged to $1, backed by dollars and Treasuries held by the issuer. They are how money moves inside crypto. They pay nothing by themselves and depend entirely on the issuer's reserves being real.
- Altcoins is the name for everything that is not Bitcoin. A few (Ethereum, Solana) have real networks. Thousands are dead or scams.
- NFTs are tokens that point to a unique item, usually an image. The 2021 boom collapsed; most are worth nothing.
How you buy and hold
| Method | How it works | Who holds the keys | Trade-off |
|---|---|---|---|
| Spot Bitcoin or Ether ETF | Buy in any brokerage or IRA like a stock. Fees about 0.20% to 0.25% a year. | The fund's custodian | Simplest and taxable like a stock. Bitcoin and Ether only. You cannot spend or move the coins. |
| Exchange (Coinbase, Kraken, others) | Open an account, link a bank, buy coins. The exchange holds them for you. | The exchange | Easy. If the exchange fails or is hacked, your coins may be gone. No FDIC or SIPC protection. |
| Self-custody wallet | Move coins from an exchange to a wallet whose keys only you hold. | You | Nobody can freeze or lose them but you. Lose the seed phrase and they are gone with no recourse. |
Wallets, seed phrases, and hardware devices are covered in the Library page on crypto wallets. The one-line version: a seed phrase of 12 or 24 words is the master key to everything; write it down, store it offline, never type it into a website.
How beginners lose money
| Loss | How it happens | Defense |
|---|---|---|
| Volatility | Buying at a peak, panicking at −60%. | Small position, long horizon, no borrowed money. |
| Pump and dump | A group hypes a tiny coin online, sells into the buying, price collapses. | Never buy a coin because it is trending. |
| Rug pull | Developers launch a token, collect money, disappear. | Only large, established coins; ignore anything under a year old. |
| Phishing | A fake site or "support agent" asks for your seed phrase. | No legitimate party ever needs your seed phrase. Ever. |
| "Guaranteed yield" | A platform promises 8% to 20% a year on deposits, far above Treasury rates. The yield comes from risky lending or from new deposits. When the loans fail, withdrawals are frozen (Celsius, BlockFi, Voyager, all in 2022). | Yield well above Treasury rates with no visible source is a warning sign. You are an unsecured lender, not a depositor. |
| Exchange failure | FTX used customer deposits for its own bets; about $8 billion was missing. Customers waited over two years and were repaid at 2022 coin prices, missing the rebound. | Do not keep more on an exchange than you are actively trading. |
| Lost keys | Seed phrase lost, phone wiped, wallet password forgotten. | Two offline copies of the seed phrase in two places. |
| Taxes | Swapping coins all year, then a bill for gains on each swap. | Trade rarely; keep records; use software that tracks cost basis. |
Where crypto might fit
In Chapter 1's terms, a coin is a thing, not a loan or a business. A stock is a claim on profits. A bond is a claim on payments. A coin is a claim on nothing except the belief that others will want it. That does not make it worthless; it makes it impossible to value with the tools used elsewhere in this course. Price is set entirely by demand.
If you hold any:
- Size it as speculation. A common ceiling is 5% of a portfolio. An amount whose total loss would not change your life.
- Stick to Bitcoin and possibly Ether. They have the longest history, the most liquidity, and ETF access. Everything else carries a far higher chance of going to zero.
- Prefer the ETF unless you have a reason to hold keys. Same price exposure, no custody risk, normal tax reporting.
- Buy on a schedule, not on headlines. Crypto rewards the patient and punishes the reactive more than any other asset here.
Regulation is unsettled and changes by country and by year. Exchanges have been shut down, tokens declared securities, and accounts frozen. Assume the rules you buy under will not be the rules you sell under.
Common mistakes
- Buying a coin because it is trending on social media. That is the pump; you are the dump.
- Leaving a large balance on an exchange for years. It is not a bank account and has no insurance.
- Typing a seed phrase into a website, app, or message because "support" asked.
- Depositing coins with a platform promising fixed high yield.
- Swapping between coins frequently and discovering each swap was a taxable sale.
- Sizing crypto like an index fund. It is a speculative slice, not a core holding.
Remember
- A blockchain is a shared ledger nobody controls. Coins are entries on it; keys control the entries.
- Bitcoin is scarce by design. Scarcity is not the same as value.
- Volatility, scams, exchange failures, and lost keys are the four ways people lose. All four are avoidable.
- A spot ETF gives price exposure without custody risk. Self-custody gives control with total responsibility.
- Keep it small, keep it to the largest coins, and expect the rules to change.
Common questions
What is cryptocurrency in simple terms?
Digital money whose ownership record is kept on a shared public ledger instead of at a bank. Sending it means signing a transaction with a secret key; the network checks the signature and updates the ledger.
How does blockchain technology work?
Transactions are bundled into blocks, each block carries a fingerprint of the one before it, and thousands of computers keep identical copies. To change history you would have to rewrite every later block on most of the copies at once, which is impractical.
Can I invest in crypto through a normal brokerage?
Yes. Since 2024, spot Bitcoin and Ether ETFs trade on U.S. exchanges and can be held in regular and retirement accounts. They track the coin's price, charge a small yearly fee, and involve no keys or wallets.
What are the risks of investing in cryptocurrency?
Price drops of 50% to 80% are historically normal; exchanges can fail without insurance; scams are everywhere; keys can be lost with no recovery; regulations change; and most tokens go to zero. The defense is small size, large coins, and careful custody.
How do I store crypto safely?
For small amounts you trade, a reputable exchange. For anything meaningful, a hardware wallet with the seed phrase written on paper or metal and stored in two places. Or an ETF, which removes storage entirely. See the wallets page in the Library.