What is blockchain? A beginner’s guide

Blockchain technology has emerged as a revolutionary force in the digital age, transforming industries and redefining the way we think about transparency and trust. While many different blockchains exist – with applications ranging from cryptocurrency, to health care and supply chain management – they all operate on a similar basis, recording transactions in a way that helps ensure that data is secure, transparent, and immutable.

For cryptocurrency investors, it’s important to understand blockchain technology, as it underpins the very existence and functionality of these digital assets. So, here’s a quick breakdown of what to know.

Just as a traditional ledger keeps track of business transactions and helps ensure that there are funds to cover costs, a blockchain is a digital, distributed ledger that, in cryptocurrency and other applications, records and validates all of the transactions that have occurred.

In the world of cryptocurrency specifically, a blockchain is like a shared database that tracks each coin or digital asset as it is created, sent, divided, aggregated, and sent again. Once a transaction is verified, that “block” of information is added to the blockchain. Like instructions listed in an assembly manual, the blocks must remain in a specific order relative to one another. When all of these blocks are stacked in chronological order, they show a chain of custody for every cryptocurrency ever created.

For example, the networks operating Bitcoin and Ethereum – currently the largest and second-largest cryptocurrencies by market capitalization, respectively – use their blockchains to record their existence and every transaction up to the present.  

Cryptocurrency uses blockchain to operate on a peer-to-peer basis without central authority. Unlike in traditional finance, which relies on a trusted third party like a bank or credit card company to verify and complete a transaction, cryptocurrencies depend on a network of computers around the world to validate transactions on the blockchain.

With common cryptocurrencies like Bitcoin, when a transaction is started, it is shared on the network and put into a group called a “block” with other unconfirmed transactions. Computers on the network, often known as “miners,” then compete to solve a difficult computer-code problem to get the chance to verify and add the block to the blockchain. The whole network checks each transaction in the block against the rules before accepting it as official, ensuring the transaction’s legitimacy and allowing the block to be added to the blockchain.

Bitcoin and Ethereum are both popular cryptocurrencies, but there are key differences when it comes to transferring value on their blockchains.

Bitcoin is primarily designed as a digital currency, focusing on secure and decentralized transactions, with new blocks typically added approximately every 10 minutes. This, combined with a limited block size, means transactions can take a bit longer to process.

On the other hand, the Ethereum blockchain not only allows for the transfer of its currency, ether, but also supports “smart contracts,” which are like self-executing agreements that can handle more complex tasks. Ethereum’s blockchain processes transactions faster, with new blocks created roughly every 12 seconds, and it uses a different method called “proof-of-stake” to validate transactions, which is more energy-efficient than Bitcoin’s “proof-of-work” system. These differences make Ethereum more versatile for various applications beyond just currency transfers.

• Digital scarcity: Blockchain technology enables the creation of digital assets with a defined supply. Some of these digital assets have a limited supply, similar to precious metals like gold. This scarcity may enhance the value of digital assets over time, providing potential investment opportunities for crypto investors. Other digital assets may use different supply formulas the designers use to create different incentives.  

• Decentralization: Blockchain operates on a network of computers, meaning no single entity controls the entire system. This reduces the risk of manipulation and provides a more democratic structure.

• Transparency: Every transaction is recorded on a public ledger, making it easy for investors to verify and track the history of their assets, ensuring authenticity and helping reduce the risk of fraud.

• Security: The decentralized nature of blockchain technology makes it difficult for hackers to alter data, as they would need to change records across multiple locations simultaneously.

• Speed and efficiency: Transactions on the blockchain can be processed quickly relative to traditional financial transactions, often within minutes, without the need for intermediaries, making it a more efficient system for transferring assets.

• Immutability: Once a transaction is recorded on the blockchain, it cannot be changed or deleted, providing a permanent and unalterable record.

• Accessibility: Blockchain technology allows digital assets to be stored on any device with computing power, making it easy for investors to access and manage their investments from anywhere in the world.

Cryptocurrencies rely on encryption to make changes to the blockchain, connect blocks, and ensure blocks stay in the correct order. If there are any cryptographic vulnerabilities, digital assets could be stolen, or the network may become unusable. If the cryptography in the code changes, it could increase the chance of software bugs.

For investors, a software bug could lead to unexpected behavior in the blockchain, potentially resulting in loss of funds or assets becoming inaccessible. This is a significant risk because it could directly impact the value of your investment.

In addition to software bugs and higher valuations, other risks include regulatory changes that could affect the use of cryptocurrencies or introduce changes in the blockchain’s operation. These factors could influence the stability and value of cryptocurrency investments.

Blockchain technology is just one part of the broader cryptocurrency landscape. Before diving into digital assets, it's important for investors to evaluate how cryptocurrency fits into their overall investment strategy. This includes considering their risk tolerance and financial objectives. Understanding these factors can help determine if cryptocurrency is a suitable addition to their portfolio.

The source of this article, Investing in Cryptocurrency, was originally published on August 5, 2025, by Denny Galindo of Morgan Stanley’s Global Investment Office.

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