Crypto basics

Short answers to basic questions about crypto

TLDR stands for Too Long, Didn't Read. This section is for anyone who just wants short, simple and straight forward answers to basic questions about how crypto works and why it has value.

15 Basic questions about crypto

What is cryptocurrency?

Cryptocurrency is a new kind of internet money. Anyone, anywhere can use it to buy things online, and you can send it instantly to other users anywhere in the world, quickly and at very low cost, needing nothing more than a smartphone and an internet connection.

What makes cryptocurrency different from regular (fiat) money is that there is no bank, company or government authority behind it. This is what is meant by the term ‘decentralised

That one word is a big deal, as it is the first time that money creation isn’t controlled by the government.

As well as functioning as a new type of internet money, cryptocurrency is also a very popular form of investment, with eye-popping long-term appreciation. Investors are speculating that cryptocurrencies will see wider adoption/use and have significant value in the future.

There are now thousands of cryptocurrencies in circulation, each trying to solve slightly different problems connected to moving value around.

What is Bitcoin?

Bitcoin was the first ever cryptocurrency. Its creator is anonymous, using an alias - Satoshi Nakomoto. In October 2008 he/she/they published an outline - called a whitepaper - of how Bitcoin can work as a form of digital money that one person can send to another without going through some central authority

In early 2009 Bitcoin went live. At first it was treated as an experiment, but over time more people have started to recognise that as well functioning as an alternative type of digital money, Bitcoin functions like a digital gold - what is known as a store of value.

This is because:

  1. it is scarce - there will only ever be 21 million
  2. you cannot copy, or create fake Bitcoin
  3.  it is almost impossible to fake Bitcoin transactions
  4. it follows rules not rulers as there is no one person/entity in charge to manipulate it


Who is using Bitcoin?

As of May 2021 there were on average over a million active Bitcoin addresses daily. You can think of an address like a bank account number. There was an average of $7bn worth of Bitcoin moved every day.

A large proportion of activity is speculative - people trading it for short term gain, or what is known as hodling, in the hope of long term appreciation. This is because of Bitcoin’s properties as a store of value, a kind of digital gold.

Big financial institutions are also now investing in Bitcoin.

Bitcoin is also being actively used as a genuine alternative for the majority of the world’s population who don’t have access to banking or :

  • By charities and those suffering financial censorship
  • By the 1.2 billion people living under inflation of double digits or higher
  • By the 4.3 billion people living under authoritarian governments

Those people are desperate to an alternative to the money manipulated and abused by untrustworthy governments.

Why does a cryptocurrency like Bitcoin have value?

The key to answering this question is understanding what value money has full stop. We use money to transport the energy we put into creating things of value through time and space.This is a hard concept to wrap your head around.

When early civilisations stopped being nomadic and had surpluses of useful items they used credit systems to exchange them. "Have this pair of sandals, I’ll take a credit of five chickens." This worked until the amount of things being exchanged grew too large to keep track of and people from outside of communities - who weren’t trusted - wanted to trade too.

The solution was money - it acts as an agreed medium of exchange and a store of value, storing the value of the energy we put into making or doing things. If you have ever inherited something of value, that is essentially transporting and storing the energy of your ancestors through space and time.

All early civilizations started experimenting with forms of money which have evolved over time, from jewellery or shells to gold. The soundest (most useful) forms of money have these qualities:

  • Scarce
  • Durable
  • fungible
  • Divisible
  • Portable
  • Recognisable

Bitcoin has all these qualities, and is the first digitally scarce money. There will only ever be 21 million Bitcoin, and they can only be created through a process called mining. Mining requires a huge amount of electricity (energy) which keeps the system secure, and stops manipulation, in return miners get rewards of new Bitcoin.

In this way Bitcoin is a new hybrid money, providing a superior medium of exchange and store of value to existing forms.

Why are cryptocurrency prices so volatile?

The crypto industry is still very immature - just over 12 years old, but with most innovation in the last 5 years. Most cryptocurrencies are being bought based on potential future value, rather than for the specific utility they offer right now.

Though fundamental metrics of adoption are important and do impact price, future value is largely driven by subjective factors.

  • Perceptions of key analysts
  • Perceptions of influential entrepreneurs/celebrities
  • Government adoption and regulation
  • The impact of what happens in the broader economy

For example, Bitcoin is considered by many as a potential hedge against inflation, so higher inflation might see its price go higher; but higher inflation might also lead to less government stimulus -  which is linked to spending in all speculative assets, including bitcoin - so could also have an opposite effect. As you can see, it gets complicated. Here are headlines that have had a huge impact, you can read more in this blog article - Bitcoin's most dramatic moments

  1. China bans crypto - price goes down
  2. Elon Musk tweets support of Bitcoin - price goes up
  3. Elon Musk changes his mind - price goes down
  4. US releases record inflation numbers - price could go up or down
  5. El Salvador recognises Bitcoin as legal tender - price goes up
  6. Financial markets react to Covid impact - price plummets by 50%
Why are there so many cryptocurrencies?

There are a huge number of cryptocurrencies in circulation because the cost and effort required is quite small.

The technology to create cryptocurrencies is open source; that literally means anyone can copy the code (instructions) and adapt them, applying a different use case. 

Cryptocurrencies generally work as services on a platform. Similar to the way developers can easily create Apps for Android and the Playstore, the Ethereum blockchain is designed to support applications that follow its standards, acting as the engine for different cryptocurrencies to run on.

This means that the cost of producing a new cryptocurrency is relatively low, the real challenge is generating a user base and meaningful value.

Each new cryptocurrency is trying to either improve the solutions to a known problem, or proposing a completely new solution to problems we face in everyday life. Most will fail, but the prize for those that see real adoption is enormous, so innovation is happening at a furious pace, especially in these areas:

DEFI - financial services - lending/borrowing, trading, derivatives - open to anyone with a smartphone and internet connection.

NFTs - Unique receipts that prove ownership and provenance of physical or digital assets, replacing things like title deeds, contracts or proof of ownership, but most popular for new forms of digital art and collectibles in gaming.

How does Bitcoin work?

Bitcoin is a new monetary system without a central authority or workforce running things. To function, a monetary system needs to settle transactions and control the supply of money. It needs to do that in a secure way so that transactions happen only once - avoiding what is known as double spend.

Bitcoin settles transactions and issues new Bitcoin at a strictly controlled rate via a network of what are called Miners. This is all described by the rules running Bitcoin - its software - which all Miners run a version of on specially designed computers dedicated to the mining process.

They compete against each other to process new transactions, bundle them into blocks (to be added to the Bitcoin blockchain) and receive a reward of new Bitcoin (growing the supply at a fixed rate until it reaches 21 million). 

To win that competition and earn the reward, they have to simply prove they have done a required amount of work to ensure the system is regulated at 10 minutes per block. 

The work consists of solving an arbitrary maths puzzle, which gets harder as more miners join the competition, and makes the system stronger as it requires more potential energy to try and disrupt it.

It isn’t intuitive, but could you explain what happens behind the scenes when you tap your debit card for a coffee? And that doesn’t stop you doing it, or trusting it.

What matters most is that there is a greater economic incentive for participants of the Bitcoin system to help run and protect it, then to attack it. So over time it gets stronger, more decentralised and independent, and impossible to stop.

What is Bitcoin Mining?

Mining is the name given to the process for confirming valid bitcoin transactions and creating new bitcoin, which are given as a reward to the Miners who perform the function.

They are called Miners, because just as gold miners have to expend energy in proportion to the difficulty of reaching new deposits, Bitcoin Miners have to expend energy - in the form of electricity - in order to mine new bitcoin. There is no actual digging involved, Bitcoin Miners instead earn bitcoin, rather than finding it, by entering a virtual race to find the solution to an arbitrary maths puzzle.

The competition itself is meaningless, but the function it serves is vital to ensure new bitcoin are created at a fixed rate - currently 6.25 roughly every 10 minutes - toward a total supply of 21 million. 

Whichever miner finds the solution adds a block of new transactions to an existing chain thereby extending the blockchain.and providing the dual service of issuing new coins and settling transactions.

The mining process is what makes Bitcoin truly digitally scarce, because there is no other way bitcoin can be created. It also designed to prevent false transactions because there is no financial incentive for trying to game the system.

Read a detailed explanation from our Knowledge Base

Who is Satoshi Nakamoto? Why are they important?

Satoshi Nakamoto is the creator of Bitcoin, and the founder of the crypto movement that followed, but no one knows who he/she/they are. They purposely protected their identity, and were last active online in 2011.

This is very important for these reasons:

Satoshi controls 1.1 million bitcoin (of the 21 million total) none of which have never moved; were those to be sold it could have a massive impact on price and confidence.

Most people believe that Satoshi disappeared so that Bitcoin was free of individual influence or point of weakness, and instead driven by a decentralised network of nodes that support its function. 

Many people claim to be Satoshi Nakamoto, but all have failed the simple test of moving any of the Bitcoin he/she/they mined, or signing a transaction from one of those addresses:.

One of the biggest criticisms of modern money is ease with which it can be manipulated and abused by policy makers and politicians, benefiting the few at the expense of the many, who's purchasing power is destroyed by inflation.

If Satoshi's identity were known, they could be the target of all kinds of threats and coercion, while their every word could influence price and perception. Their decision to disappear is therefore considered an act of altruism, as society in general might benefit from a new form of money free from influence, following a fixed set of rules defined in code.

Read a more detailed explanation in our Knowledge Base:

Why do we need crypto? What is wrong with existing money

You may rightfully feel that there is nothing wrong with the money you use right now. That is largely because for many living in stable economies the problems with modern money are hard to detect on a day-to-day basis. 

This is often described as the boiling frog problem, because a frog in a cooking pot is unaware of the danger it faces given the slow and incremental rise in temperature. The same is true of inflation.

There are however, 1.2 billion people living under double or triple digit inflation. Ask them what it feels like to see the purchasing power of money - the fruit of your labour - melt like ice cream in your hand.

Even the USA has seen the purchasing power of the dollar decline by 95% since 1913. The problem is that the controls on money supply - the Gold Standard - have been removed. That required that every pound, dollar, euro or yen put into circulation was backed by an equivalent amount of gold. It ensured that money was scarce, which is essentially what gives it value.

Without that constraint governments can print as much as they want, finance wars, or futile projects, and run up massive debts. The US debt is currently $23 trillion, with another $130 trillion in medical insurance liability. It will soon amount to 100% of GDP.

All that keeps the mountain of debt from collapsing and crushing the dollar is trust. Hyperinflation is what happens when that trust disappears, you end up with starving billionaires.

Read more a detailed explanation in our Knowledge Base:

What is fiat money?

Fiat money has nothing to do with an Italian car manufacturer. The term is used to describe the regular money we are used to, which is issued and controlled by governments or central authorities (like the European Central Bank (ECB) and the Euro).

The word fiat is Latin, and it literally means a decree or an authorisation. So fiat money is money that the government authorises.

Within the crypto community fiat is a dirty word because that authority is the only thing that gives money value. Money was historically backed by gold - the Gold Standard - but that system was abandoned in 1971 by US President, Richard Nixon. 

Since then governments have been free to print as much money as they want without anything backing it, which has led to mountains of debt which many feel is unmanageable in the long run. Cryptocurrencies offer an alternative outside of that fiat model.

Read more a detailed explanation in our Knowledge Base:

Can bitcoin be used for regular shopping/spending?

You can theoretically use bitcoin for any form of purchase, so long as the merchant is willing to accept it, and there are plenty that do. The reality is that Bitcoin’s design sacrifices speed for security and decentralisation - which means it stays controlled by the many not the few - making it impractical for most everyday low-value purchases where speed is key.

The story doesn’t end there, however. There is a system that bolts on to the Bitcoin blockchain, but isn’t constrained by the slow speed of confirmations. It's called the Lightning Network. It offers almost instant bitcoin transactions at a fraction of the current transaction fee.

There are a growing number of Lightning supported wallets and services, which are improving their usability all the time. You just scan a QR code to make a purchase, or request a payment. Lightning can make Bitcoin both a medium of exchange and a store of value.

Read more detailed explanations in our Knowledge Base:

What is Ethereum & what does it do?

Ethereum is two things in one. Firstly, it is a blockchain that acts as an engine for anyone that wants to create a piece of software like an App and benefit from all the features of a blockchain - censorship resistant, fraud resistant, reliable - without the hassle of creating a blockchain themselves.

By following its standards, any service built on Ethereum can create its own currency and utilise a settlement system for transactions. Users of the service pay a fee for transactions, charged in something called GAS.

Ethereum also refers to a specific cryptocurrency, called Ether, which functions as a form of money in its own right and represents the value of the Ethereum blockchain.

Given its design, Ethereum is known as the world’s computer. It supports a huge and growing number of crypto applications, especially within Decentralised Finance (DEFI) and NFTs - Digital Collectibles.

Read a more detailed explanation in our Knowledge Base:

What is a Stablecoin & what does it do?

A Stablecoin is a type of cryptocurrency specifically designed to maintain a stable value relative to an existing currency such as the US Dollar. USDT (aka Tether) is a Stablecoin that attempts to maintain 1:1 parity with the real US Dollar. There are many Stablecoin variants, the difference being how they maintain that parity. 

Why, you might reasonably ask, do we need a crypto version of the US Dollar? Why not just use dollars? Government issued money comes with strings attached. It isn’t easy to move it between countries, or exchange it, and there are a few hurdles to buying cryptocurrencies with USD.

Stablecoins are therefore, a bridge between the money we are used to, and the new forms of money that cryptocurrency offers. 

One of the main characteristics of crypto is price volatility. This is because they are immature and their value depends on perceptions of potential future use. Some see this as a great investment opportunity, but they lack stability, for which Stablecoins were created. 

  • They allow crypto traders to avoid volatility without having to pull funds back to fiat
  • They are good for settling international payments
  • They provide a simple and intuitive way to enter the crypto market
  • They are an integral part of DEFI & leveraged crypto trading

Read a more detailed explanation in our Knowledge Base:

What is a Blockchain & what does it do?

Every piece of digital information, from your photos on social media to the components of the web page you are reading right now, are stored in a database somewhere. Whoever has access to that database, controls those items and if they wish, can alter them, replace them or delete them. Databases are centralised stores of information.

A blockchain is a system of storing information without a central controlling authority. A blockchain storing your photos would mean that they exist across a network of servers that maintain an agreement on how many photos exist and the correct version. This is called decentralisation.

Blockchains are designed to make it very hard for anyone intent on removing or editing those photos. That quality is called censorship resistance.

The first ever blockchain was the Bitcoin blockchain. It was designed to enable a new form of money that wasn’t controlled by a central authority (a bank) but instead managed by a network of different participants processing new transactions and creating new bitcoin (Miners) and validating transaction accuracy (Nodes).

So Bitcoin is controlled by the many, not the few.

Your bank balance is just a record on a database maintained by your bank. You trust the bank to keep an accurate record. The wider monetary system is maintained by the central bank. They can grow/shrink the money supply however they want, which has consequences for all of us.

Blockchains are a way to remove the dangers of centralised  control, which in the case of money can have disastrous consequences.

Read a more detailed explanation in our Knowledge Base:

This is not investment advice.