A Brief Introduction Into Cryptocurrencies

Dec 21, 2020

You may have been reading a lot about cryptocurrencies and decentralised finance (DeFi) recently, perhaps recalling it from 2017/18 when anyone and everyone wanted to know what it was?

If you’re unfamiliar or just beginning to explore this world, this is meant as a basic introduction and explanation of what a cryptocurrency is, some of the key ones to know about, and why it could be beneficial to understand them sooner rather than later.

The simplest and most obvious definition is that they are a currency, a virtual one – you won’t find a physical crypto coin or note like you would with fiat currency. Similar to conventional money though, you do need some form of account or a wallet to store your crypto. This is not some fancy Italian leather wallet which smells like a freshly peeled cow, this is a physical and highly secure storage device, likely USB. The other option is an account via a custodian – but let’s first explain how you’d initially get your hands on some crypto.

Fortunately, today it’s very easy to acquire. A common way is to head to an exchange such as Coinbase. Here you can view all the currencies on the market; buy and sell as you desire; and have the money sent to your secure wallet via cryptographic methods. Just like having one single Pound coin, if you have 1 whole Bitcoin, that number will never change, but its value ( and value compared to other currencies) can – and will.

An increasingly popular option is to use a custodian. This is the simplest way to access crypto. Signing up is identical to modern banks like Starling and Monzo, once you’ve passed the digital ID checks, your account will be live in a matter of minutes. Chuck some GBP in your account and you’re all set! The key thing to understand here is that you never technically own it, you own the value.

As of writing, if via a custodian, on a simple mobile app, I buy £100 worth of Bitcoin (BTC), I’d acquire 0.006 BTC. Whichever way the market fluctuates, the exchange rate back to GBP may differ, but I’ll always have 0.006 worth of one Bitcoin.

I’m just using Bitcoin as the example here, in a moment we’ll go into slightly more detail on the top 3 cryptocurrencies, but first we should look at why people are choosing to use and invest this way.

Crucially, these are decentralised currencies, they’re not controlled by any government or bald man who resides inside a remarkably stable but definitely active volcano (as far as we know…). They’re borderless, with no global restrictions, and as such have incredibly low fees, which makes them an extremely cost-effective way to send money around the world. Equally, in an age of growing privacy concerns, no one is scraping your data here and learning whatever they can about you for some kind of post-apocalyptic social engineering. Still filling out those ‘which Twilight character am I’ quizzes on Facebook are you?

They can also simply be a good place to store your money, as people do with gold. It’s safe from changes in taxes and local economics, and it’s highly likely people are doing this at the moment as we deal with the fallout from Covid-19 – with quantitative easing being rife in many countries, the financial implications on everyone will be obvious.

Potentially you’ve seen the markets and percentage increases recently and want a slice of the digital pie, to treat it as a long-term investment. Whilst this blog is in NO way investment advice, that could pay off…

This may help

There is already a large and growing community worldwide of people who’re aiming for what we call ‘mass adoption’ of crypto and their core platforms, blockchains. There are companies building upon these services to revolutionise personal banking, insurance, trade and shipping etc., you name it. They are stable, secure, and the data is immutable.

The scope for services is vast, which ultimately drives people to the platforms. The currencies act as a type of ‘fuel’ for each transaction. This is what we can buy; the more the platforms and services are used, the more value the currency has.

So, which ones should we watch out for at the moment?

Let’s look at Bitcoin (BTC), Ether (ETH), and Ripple (XRP).

I’d put money (virtual or otherwise) on you having heard of Bitcoin. It hit national news at the end of 2017 when it hit a peak of $19,783 per coin – it was once $121.34 – that’s not bad return over 3/4 years! Its peak was most likely driven by the media hype, everyone wanted to know what it was, and a lot of people worked out how to buy some (which wasn’t always so easy). This pushed the price up, but for a lot of people they would have bought in at the worst possible time, and only last month may have recouped their losses. BTC in this sense is just a currency, a volatile one.

ETH is the fuel of the Ethereum platform, where smart contracts are by built. What’s a smart contract? We mentioned insurance before – take your car insurance for instance, you and the insurer are engaged in a contract, but imagine all of your vehicle and driver history data being stored on one immutable record. No more comparison sites, no more arguing over accidents that did or didn’t happen. Insurers could simply view everything in one record.

Ripple is a real time gross settlement system; transfer times are immediate which makes it favourable by banks and institutions as they avoid fees and waiting times on transfers. XRP can be transferred for nearly any currency.

All three of these boomed recently. BTC was naturally increasing, reaching and eventually breaking its 2017 peak. ETH was likely riding that wave slightly, but also the entire platform was being upgraded, and XRP was following suit as a cheap option at first, only 19p per coin, which rose by 200%.

Crypto isn’t going anywhere – but it’s important to remember it’s still young, not even 10 years old yet, and far less than that as a viable form of currency. With the communities pushing it forward though, it’s only going to become more prevalent in everyday life. We’ve seen house sales in London through crypto, Pizza Hut will accept in Venezuela, and impressively, PayPal will allow it across their entire network. That 0.006 BTC you acquired earlier could come in handy on eBay if someone accepts BTC over PayPal. Treat yourself to a fancy new magnetic wallet from Apple for those soon-to-be ancient rectangles of plastic called ‘credit cards’.

We’ve set out here to give you a basic introduction of cryptocurrencies – the best thing to do if this is totally brand new to you is to research before making any decisions; websites like coindesk.com and coinbase.com will be of huge help.

If you're considering investing in Bitcoin in particular, you may benefit from joining CoinShares' January webinars on how the Bitcoin community will approach a true valuation of the currency.