Intro Guide to Cryptocurrencies
What is cryptocurrency?
The most comparable technological innovation is the internet.
Before the internet we transferred information by use of pigeons, then electronic telegrams using morse code, then we started using the ‘internet protocol’ which allowed us to transfer information with the click of an email – great!
But did that mean we could transfer value as efficiently as sending an email?
To transfer money internationally using the traditional finance system it is quicker to put the money in a briefcase on a plane and fly it over there.
Cryptocurrencies aim to solve this issue, due to the advanced technology they use – the blockchain.
The chart above from GMI (Global Macro Investor) compares the growth of internet users to the growth of crypto users after both innovations reached 5 million users. You can see that crypto has been growing at almost double the rate at which the internet grew over the first 5 years. If crypto growth slows to match the internet’s growth rate from year 6 – year 10, then the crypto industry will increase from 295 million users to 1.2 billion by 2026. (Crypto.com – World Bank – Global Macro Investor, March 2022)
What is a Blockchain?
Blockchains are the underlying technology which cryptocurrencies use.
In essence, a blockchain is a fancy database. Rather than data being stored on a single computer or institutions like a bank, data in the blockchain is shared amongst many computers (called nodes). All of these nodes have a copy of the database. Data is recorded in blocks.
When new transactions take place, the new data is stored in new blocks, and each new block is added to the blockchain
There are three core aspects of blockchain technology to allow for efficient transfer of value:
Blockchain records transactions and other data on a shared ledger (database) that allows participants to see all the information and agree on its accuracy: https://www.blockchain.com/explorer
A person’s identity is hidden, transactions are represented by a public address rather than a name.
Blockchain does not store any of its information in a central location. Instead, the blockchain is copied and spread across a network of computers. Whenever a new block is added to the blockchain, every computer on the network updates its blockchain to reflect the change.
No middlemen needed - transactions are easier, faster and require less or no additional transaction fees. International exchange easier and faster.
Underprivileged people who don’t have access to banks can use cryptocurrencies. All you need is access to the internet.
Secure – Hackers can’t shut the network down by taking over just one or two computers since the other computers will still maintain the network and resist any changes.
Means once something enters the blockchain, it can’t be tampered with.
Valuable for financial institutions as you can identify theft and simplify auditing.
What is Bitcoin?
Bitcoin is a peer-to-peer online currency.
This means that all transactions occur directly between participants of the network without an intermediary like a bank.
This is the first invention of a digital money supply outside the control of any government or bank.
Bitcoin’s blockchain is verified across a network of thousands of computers, as opposed to a bank’s ledger which is centralised (control is under a single entity).
Who created Bitcoin?
In January 2009, a person or group named Satoshi Nakamoto created Bitcoin.
Satoshi’s identity has never been revealed.
How are new Bitcoins mined?
Bitcoin’s source code governs the issuance of new Bitcoins (instead of a central bank or government).
People use energy-intensive computers to mine new Bitcoins. The protocol allows new blocks to be mined every 10 minutes with Bitcoins rewarded to the miners.
To add new blocks to the chain, node operators need to validate a certain number of transactions. They need to verify things like who is sending the funds and if the right amount of funds are available in the account.
Only one miner has the right to add a new block to the blockchain.
Miners compete to add new blocks by correctly solving a random puzzle using their mining power
The miner who correctly solves the puzzle and ads a new block is rewarded with Bitcoins.
There are currently about 19 million Bitcoins in existence, and the max quantity is capped to 21 million, so there will be only 2 million left to mine.
The mining reward is halved every 4 years (known as the halving).
The Bitcoin mined every 10 minutes was reduced from 25 in 2012 to 12.5 in 2016 to 6.25 in May 2020.
Why does Bitcoin have value?
Bitcoin has characteristics which align with those that give traditional government money value: Scarcity, durability, portability, divisibility, fungibility and acceptability.
Bitcoin has an advantage against government money with some of these characteristics, in particular scarcity, portability, and divisibility.
Companies can issue as many stock shares as they want. Governments can issue as much currency and bonds as they want. Therefore, these assets are not scarce.
Bitcoin is scarce and it is the world’s hardest asset - a hard asset is difficult to produce relative to its existing supply.
If Bitcoin rises in price, that can’t incentivise new production like it can with gold, silver and other commodities, which are also hard assets.
There are three things certain in life: death, taxes and that there will only ever be 21 million Bitcoin!
All you need is access to the internet to be able to trade/transfer Bitcoin.
Bitcoin can be subdivided up to the eighth decimal place, whereas U.S dollars are divisible to pennies.
The smallest unit of currency is called a Satoshi. (1 Bitcoin = 100,000,000 Satoshis).
The chart above from Off the Chain Capital shows Bitcoin’s progress in terms of the ownership percentage of U.S. households. Off the Chain Capital founder Brian Estes says, "Between 0 and 10% adoption, its an 'if.' Once a new technology hits 10% adoption, its a 'when.' It's the same amount of time, and I can give you plenty of examples — from personal computers, to internet, to fax machines in the 1970s, to washing machines in the 1940s, to automobiles in the 1930s, railroads in the 1800s, shipping in the 1600s — it's all the same adoption curve."
What is Ethereum?
Ethereum is a software platform that aims to act as a decentralised Internet as well as a decentralised app store (like a smart phone where apps can be built on)
What does decentralised mean? - This means it can’t be controlled by a single governing entity. Every single interaction only happens between the users taking part in it, with no controlling authority being involved.
Ethereum’s platform enables users to create decentralised apps – the apps can either be entirely new ideas or decentralized reworks of already existing concepts.
Ethereum allows you to trade nonfungible tokens (NFTs), trade cryptocurrencies, play games, use social media and much more.
Many consider Ethereum to be the next step of the internet.
If Apple’s App Store represent Web 2.0, then Ethereum is like Web 3.0.
This “next-generation web” supports decentralised applications (DApps), decentralised finance (DeFi) and decentralised exchanges (DEXs).
Web 1.0 allows you to read data on the internet, Web 2.0 allows you to read as well as write your own data (which social media networks like Twitter allow for) and Web 3.0 allows you to read, write and own data, which is provided by Ethereum’s platform.
Who created Ethereum?
Buterin came up with the idea of Ethereum in 2013 at 19 years old. He was then 21 when he launched Ethereum in 2015.
There were seven other founders that helped Vitalik build Ethereum.
How are new Ethereum tokens created?
New Ethereum tokens are created in the same way as Bitcoin – this is referred to as mining through ‘Proof-of-Work’.
The Ethereum miners are computers that run the software and process transactions to create blocks – they are then rewarded for this with new Ethereum.
This method of creating blocks is very energy intensive and leads to high fees on the Ethereum network.
Therefore, Ethereum is moving to ‘Proof-of-stake’ with Ethereum 2.0 to help reduce fees and attain a more environmentally friendly approach.
Why does Ethereum have value?
Ethereum’s platform allows you to run ‘smart contracts’ – making it a 2nd generation crypto (Bitcoin is 1st generation).
This means instead of just tracking transactions it programmes them; designed to automatically perform transactions and other specific actions within the network with parties that you don’t necessarily trust.
This let’s you exchange money property, money, stock without having to go through a lawyer/service provider, hence cutting out the middleman.
Smart contracts allow users to participate in DeFi (decentralised finance).
DeFi allows users to trade assets and borrow and lend directly to one another without involving banks, and also acts as a means to creatively unlock value – for payments, loans, insurance and more.
You can use Ethereum to earn yield in a similar way to your savings account but without an intermediary. This means you can earn lucrative rewards which can offset inflation.
With today’s inflation rates you are losing purchasing power every year with bank savings accounts.
Ethereum’s DeFi value has reached over $100 billion in 6 years.
Together, with the accessibility of DeFi and the draw of better interest rates, more and more retail consumers will likely turn to the DeFi space. Even now, there are more than $65 billion worth of assets locked up in DeFi.
To summarise why Ethereum has value, it is due to its utility as a platform.
Differing to Bitcoin’s value stemming from acting as ‘digital gold’, as it is a store of value, Ethereum’s value stems from acting as ‘digital oil’
This is because the world runs on oil as it is needed to operate so many physical applications, whilst Ethereum is needed to operate applications in the digital world.
What are NFTs?
NFTs are non-fungible tokens
Non-fungible means that each token is unique and therefore cannot be replaced with another token. US Dollars are fungible because if you swap one US Dollar for another you get exactly the same thing. This is the same for Bitcoin.
However, if you traded an NFT for a different one, you would have a completely different one.
NFTs are made on blockchains like Ethereum, and you can buy them with cryptocurrency.
NFTs can be a digital version of anything (such as art, land, music).
A lot of the current excitement is around using NFTs to sell digital art, as you may have heard some art NFTs selling for millions of dollars.
However, NFTs are much more than just art. Some say it is inevitable that all our homes will be sold as NFTs, as NFTs represent ownership rights digitally. Having data of items that you own on the blockchain provides significant benefits, including the ability to trace the data and the efficiency of transacting.
Frequently Asked Questions
What is the difference between using a crypto broker vs an exchange?
Check out our 'what is Bitcoin' page to read a brief overview of the most popular cryptocurrency.
Both provide a trading platform for you to buy, sell and store cryptocurrencies. The difference is that a Cryptocurrency broker typically provides a one-to-one service to clients. GlobalBlock clients are allocated a personal account manager to hold your hand through every step of your investment journey.
Why use a broker?
1. Register here
2. Confirm your email address
3. Log in here
4. That's it! You can now open your first orders
If you would like a personalised service when investing in cryptocurrencies, then using a broker for crypto portfolio management is ideal.
Brokers can also provide tight dealing spreads. As GlobalBlock are a cryptocurrency broker, not an exchange, they offer some of the best available prices in the market and a wide range of digital assets.
Lastly, brokers are generally more transparent than exchanges. At GlobalBlock, we believe in price transparency, and we don’t hide our charges. We make it clear what you pay before we execute a trade - no funding, withdrawal or deposit fees.
What are the risks involved with investing in crypto?
Contradicting orders are a combination of orders that result in an automatic loss. For example:
You place a limit order to sell 100 BTC at the price of 650€. You don’t currently own any BTC, so the order has a "paused" status.
Afterwards, you place a market order to buy 100 BTC at the current market price of 700€.
As soon as the market order executes, you would instantly sell your BTC for 650€, resulting in a loss of 50€ per BTC.
Because these contradicting orders will result in a guaranteed loss for you, we stop you from placing them. If you attempt to place a contradicting order, you will get an error message preventing you from doing so.
Volatility – cryptocurrencies experience extreme fluctuations in price.
GlobalBlock promote an investing framework in order to deal with the volatility, that involves diversification and dollar-cost averaging.
Security – exchange hacks have happened multiple times in crypto where clients funds are stolen.
GlobalBlock have partnered with industry leader Qredo who provide a Layer 2 digital asset tracking and settlement infrastructure, which removes the security risks. The vast majority of digital assets stored with us are insured against theft and criminal intent.
How can I open an account at GlobalBlock?
For every executed order (both buy and sell) you must pay trade fees. The current trade fee is 0.5% for each buy and sell order.
For example, if you sell 10 BTC at 500 EUR/BTC, you’ll receive 5,000.00€ minus the trade fees. A 0.5% trade fee on that sale equates to 25€. So you’ll receive 4,975.00€.
Register for an account here and one of our traders will be in touch to help you through the next steps and assisting with your crypto portfolio management.
How can I learn more about the crypto markets?
You can place a new order directly from the Trade page. You can specify the type of the order, the amount of BTC you want to trade, and set a limit on the price. In general, you can place following orders:
Buy order (You want to buy bitcoin) - limit and market
Sell order (You want to sell bitcoin) - limit and market
Sign up to our daily newsletter here which covers all the latest information which you need to stay up to date with the crypto markets and help you with your crypto portfolio management.