CD81 plays a role in a variety of physiological and pathological processes. Recent structural analysis of CD81 indicates that it contains an intramembrane cholesterol-binding pocket and that interaction with cholesterol may regulate a conformational switch in the extracellular domain of CD81. Therefore, CD81 possesses a potential cholesterol sensing mechanism; however, its relevance for protein function is thus far unknown. In this study we investigate CD81 cholesterol sensing in the context of its activity as a receptor for hepatitis C virus. Structure-led mutagenesis of the cholesterol-binding pocket reduced CD81-cholesterol association, but had disparate effects on HCV, both reducing and enhancing CD81 receptor activity. We reasoned that this could be explained by alterations in the consequences of cholesterol binding. To investigate this further we performed molecular dynamic simulations of CD81 with and without cholesterol; this identified an allosteric mechanism by which cholesterol binding regulates the conformation of CD81. To test this, we designed further mutations to force CD81 into either the open (cholesterol unbound) or closed (cholesterol bound) conformation. The open mutant of CD81 exhibited reduced receptor activity whereas the closed mutant was enhanced. These data are consistent with cholesterol switching CD81 between a receptor active and inactive state. CD81 interactome analysis also suggests that conformational switching may modulate the assembly of CD81-partner networks. This work furthers our understanding of the molecular mechanism of CD81 cholesterol sensing, how this relates to HCV entry and CD81's function as a molecular scaffold; these insights are relevant to CD81's varied roles in health and disease.