The very basics of cryptocurrency.

Feb 18, 2021 | Community Guides

The whole reason behind blocmates is to knock down the barrier to entry for newbies getting into cryptocurrency. So we have taken it upon ourselves to go back to basics and think from the mind of a complete stranger to all things crypto.

A lot of this article will be addressing common themes we hear when doing our 1-2-1 sessions (which you can book through our website) or through our social media channels, Telegram in particular.

On a side note, everyone who is helping make the Telegram a really cool and inclusive place to everyone who joins, thank you so much it means a lot. You can join here if you haven’t already.

I can’t really see how the structure of this article is going to work but stick with me, you may learn something and that aha moment might be just a few words away. I am a lateral thinker and find it hard to concentrate and get to the point, so I apologies in advance for the waffle.

So what are cryptocurrencies exactly?

A cryptocurrency is a broad term, I will admit. The same way a company offers stocks and shares of their business, meaning that multiple people and the public own a portion of that particular business.

Stock and shares can be used interchangeably, for reference. They are very similar terminology.

Stocks and shares unless you are a very early adopt or you are on the board, have no real influence over the company they represent. Effectively, you buy several shares and these go up and down in value according to how everyone else values the company.

If people assume the future of the business will be a good one then people will part with their money which only really goes down in value because of inflation. In return, they are given stock in a company which can increase.

Let’s take Telsa for example. 10 years ago if you foresaw external influences like climate change and non-renewable energies becoming an issue, you might have thought, electric vehicles will be the future.

So, being the clever clogs you are in this hypothetical situation, you took some money out of your savings account which is decreasing year on year anyway (inflation again) and bought some TSLA.

The world slowly comes around to your way of thinking and because you invested in a super genius, Tesla, is taking the world by storm. So what does this mean for your shares? Well, a lot more people have now realised the potential of Tesla and they also want some of those gains.

This is basic economics. Demand goes up, supply goes down and consequently, you can charge more for those TSLA shares as they are now the golden ticket to financial freedom.

So what if Elon Musk and his big brain decide to issue more shares to the public because they are having issues with meeting manufacturing deadlines and extra funds from the public would help?

What happens to the supply? Well, it goes up… So what happens to demand? It is met and goes down… So does the price.

This happens and it did happen to Tesla shareholders not too long ago. Now, I will admit if a company is thriving as much as Tesla this isn’t an issue… The issue is, not all companies are Tesla.

As I mentioned earlier, the shares don’t have any other purpose than to give value to the company and for the designated person holding them to be able to sell them if they desire.

So getting back to cryptocurrency… 

Cryptocurrencies on the other hand are defined by their code. Code is law. And that code is open-source meaning everyone can access it and use it. This is brilliant and a curse.

The brilliance is that it is very trustworthy. If the code says no more will be printed, then no more will be printed or mined. You are safe.

The curse – There are a lot of what I call ‘copy & paste jobs’. Effectively taking the code from an existing project and changing a very minor aspect or variable. Sometimes these take off and it is very frustrating seeing people lose their money.

You can think of cryptocurrency as shares and the project releasing them as the company (they are effectively a company in the regular sense).

Cryptocurrency projects release their own cryptocurrencies which can serve multiple functions.

Utility – Utility tokens are tokens like ETH, LINK, OCEAN etc. They have utility… They have a use and are required by their users to operate.

Using ETH as an example, ETH is the utility token on the Ethereum blockchain. It is used to verify all interactions between people-to-people and if a person is to use one of the services or decentralised apps that are built on Ethereum, they pay in ETH. So you can see why the term currency is used. It is a medium of exchange.

Please read our ‘What is Ethereum’ article to understand ETH more.

The take-home here is that cryptocurrencies that have an actual purpose and use, are called utility tokens. The more people who use the product the project have released, the more people will need the token… Supply. And. Demand.

Actual cryptocurrencies – like Bitcoin and Litecoin etc. are primarily digital currencies. It doesn’t get much easier than that. But they have properties that prevent them from decreasing due to inflation. This is called the hard cap.

The hard cap of Bitcoin is 21,000,000. This means there will only ever be 21 million BTC ever in existence. So what happens when everyone in the world wants a Bitcoin because they realise the power and value of it?

Well between the 7.8 billion people on the planet, there isn’t enough to go around. Demand goes up as supply is fixed and consequently people are happy to pay more for Bitcoin.

Even if you don’t have enough to purchase 1 whole Bitcoin that is cool. You can buy as little as $10 worth.

This fraction of a Bitcoin is called a Satoshi, named after the anonymous Bitcoin creator Satoshi Nakamoto. To hear more about this read our ‘What is Bitcoin’ article HERE

Stablecoins – These are, as you might imagine, stable… In a volatile crypto world where things like to go up and down more than a dodgy elevator, stability is a much-needed safe-haven to be able to jump to if things get too much.

A lot of stable coins will be pegged to the price of $1 and will always reflect this price.

You can spot these as they will usually have USD in their ticker. USDT, BUSD, USDC are all stablecoins.

USDT is Tether. Questionable money printer other at Tether but its the most used stable coin and is built on Ethereum.

USDC is Coinbase’s answer to a stable coin. This is backed equally 1:1 with an equal amount of USD and other underlying assets.

BUSD is Binance’s answer to a stable coin and it is increasingly popular as the Binance Smart Chain uses it frequently.

They all have ‘USD’ in their name and then there is DAI…

DAI is another stable coin which also reflects $1. Just to confuse things…

Governance tokens – These are my favourite. Going back to the Tesla analogy. If TSLA was a governance token and Elon decided he wanted to increase the amount of TSLA to the general public, this would be put to a vote. The holders of TSLA would then be able to vote on the direction of this outcome and they would, naturally, be incentivised to vote in favour of the value of the TSLA price.

This democratic way of shaping the vision of a company or crypto project is a really big green tick for me. It stops corporate bias and greed from sneaking in and shaping the project in a way which may only benefit a select few.

Governance tokens are in high demand and it (in my opinion) is crypto done right.

Moving swiftly on… 

There have been a few friends and family who had thought they cracked the system and found a coin that was under $0.10 so that meant it was cheap. We had to quickly stop them from remortgaging their house to buy more of this obviously undervalued gem.

Just because a coin is cheap, doesn’t mean it is undervalued and will have a greater potential to reach $50,000 like Bitcoin.

Usually, it just means that the supply of that coin is huge. 

Let’s have a look at coin market cap, this is your new best friend (well this or coin gecko).

BTC+example.jpg

Working from left to right – 

  1. Rank – Bitcoin is king. This is because it has the highest market cap (see point 4)

  2. Name and ticker – Bitcoin and BTC is its trading ticker name

  3. Current price – everyone uses dollars it’s easier to trade against as everyone else is trading against it.

  4. Market cap – Price multiplied by supply gives you a market cap. This is what you judge a cryptocurrency on and note the price. The price is useless if it has a huge supply.

  5. Volume – How much of that coin was traded in the last 24 hours

  6. Circulating supply – If the circulating supply is nearly the full supply this is a good sign. You don’t want investors who hold large amounts of the coin to then introduce larger amounts into the supply and dilute your value.

Another point about supply is that in a projects white paper (the document that outlines how the cryptocurrency works), they may state the proportion of the coins and how they are distributed.

A portion of the supply may be kept for the team, for additional investors or even to slowly increase the supply over time. You should check out the tokenomics of a project before diving headfirst in. We look to cover tokenomics in each of our ‘What is X?’ articles.

So if you look at Bitcoin in the example above there is currently 18,631,381 BTC available in circulation. Multiply this by the price of BTC and you get the market cap.

18,631,381 x £52,000 = $968 billion’ish… Yeah, that’s not a mistake Bitcoin is nearly worth a combined total of 1 trillion dollars. And your dad still thinks it is a scam? Yes, you are early.

Now if we look at Cardano (ADA) as another example below we can see why the price is not the best indicator and why using market cap is the best way.

ADA example.png

Cardano is ranked 5th highest cryptocurrency on market cap but only costs $0.8781 per coin. So why is this, have you struck gold and if Cardano goes to the same price as Bitcoin you will be a trillionaire if you buy now? No.

It is because the supply is huge. There are over 31 billion ADA in circulation. If Cardano had the same price as Bitcoin then the market cap would be 31 billion x $52,000 and that is a number so large I can’t see it on my calculator…

Be realistic and look at how the coin you like fits in the rankings. Is it as valuable as Bitcoin? Probably not, could it be worth  $1 billion market cap? Well, there are currently 63 coins that have become unicorns, so why not?

This game is just getting started. There will be huge pullbacks along the way, but those are the time to be buying.

Again, for the people at the back “Be greedy when others are fearful and fearful when others are greedy”.

Let’s have a little look at the very basics of exchanges.

So first, what is an exchange? 

As the name suggests, it is a place where you can exchange things. In this case, cryptocurrencies.

So when you click markets on an exchange you will see you have a few options.

For spot buying, this means buying or selling at the current market price with no extra funds lent. This is the most common form of trading.

We have selected FIAT here as shown in the image. Fiat currency is a government back currency like the USD.

When you select the Fiat markets you will see all the stablecoin pairs.

So what is a pair? Well, it basically means you can trade that specific coin for the other.

In the example highlighted above, BTC/USDT means if you click on this market you can trade Bitcoin for USDT or USDT for Bitcoin depending on if you want to sell or buy BTC.

Remember from above USDT is a stable coin and reflects the $1.

People like to trade lots of coins against USDT/USDC/BUSD to get an indication of how much they are making (or losing). This is great over the short term as an indicator of your trades.

Now you will notice we have all the BTC markets. This means all the other coins you can trade directly with BTC.

This is what a lot of people in the industry strive for. They seek to be net-positive against BTC as opposed to USDT as the USDT is constantly depreciating, in value, whilst BTC is increasing in value.

This is the “Stacking Sats” you will see people refer to. What’s the point in making more USD or GBP if the currency is constantly decreasing in value?

Wouldn’t it be better to be making more BTC which is increasing value?

Some coins don’t have direct pairs. So any Binance Smart Chain (BSC) coin like CAKE, for example, will not have a direct pair with USDT. This is because USDT is a stablecoin built on Ethereum and not BSC.

So if you have USDT and want to buy CAKE, you would first have to find a pair that CAKE has i.e. BUSD. Once you trade your USDT for BUSD, you can then buy CAKE with BUSD.

If this still doesn’t make sense read our how to buy crypto article HERE.

Where do you store your coins?

Each exchange has a wallet for each specific coin. On Binance/Coinbase/AAX you will have a Bitcoin wallet, an ETH wallet and a BNB wallet etc. These are where you store each specific coin.

It is basically like having different bank accounts for each specific cryptocurrency. You wouldn’t store euros in your UK bank account for example.

These wallets have a specific address which is a sequence of cryptographic letters and numbers.

0x86c58fA1C975a55990784c1618b2c65B6cCfF7dE

If someone wants to send me BNB using the Binance Smart Chain, then this is the address I would give them. It is basically a sort code and account number rolled into one. Or it can be displayed as a QR code which you can scan to send that specific currency to.

You can/will have multiple wallets. You may have one on the exchanges you use, a DApp like MetaMask or Trust Wallet and most importantly a hardware wallet.

Read our article on the best cryptocurrency wallets in 2021 for our recommendations HERE.

What is the blockchain then?

The blockchain is the underlying technology that allows all these wonderful cryptocurrencies to work. We have written an in-depth, yet easy to read, explainer article on the blockchain you can read HERE.

There are different blockchains. Bitcoin runs on its own blockchain, Ethereum and all the coins built on Ethereum (ERC-20 tokens) run on the Ethereum blockchain whilst all Binance Smart Chain issued coins (BEP20 tokens) run on the Binance Smart Chain.

So to elaborate, you wouldn’t send BTC to an Ethereum wallet/address because they operate on different blockchains. But you can trade these coins for one another on an exchange.

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