Crypto for non-cryptonians

The breathless press releases, the excitement, the hype, the highs of the bull markets, the lows of bear markets, the tweets and the regulators’ concerns; the crypto sector has provided plenty of debate over the last few years. Unless you are directly involved in it, asking a question can feel like a multitude of superhero comic fans are giving you a half an hour, panel-by-panel account of what happened in issue #312 and how it explains the decisions made in issue #647, when all you actually asked was whether the chap in the red cape was a goodie or a baddie.

In an effort to help non-experts understand the crypto sector a little better, here is a very quick, non-technical explanation of some of the terms you may find yourself coming up against.

Crypto

Crypto is basically shorthand for cryptocurrency, a catch-all term that has come to cover the entire sector. We are two lines in it is already about to become complicated, but broadly speaking, the sector started to develop around the first cryptocurrency (Bitcoin, see below) and as people started to appreciate the different ways that the underlying technology could be used, it started to be applied to different assets. In the process, the currency part of cryptocurrency started to be dropped and the sector came to be known simply as crypto.

It is known as crypto because the way that crypto assets work is based around extensive decentralised databases known as ledgers. To access these ledgers, you need a complex mathematical key to decrypt the information. These are known as cryptographic keys, and this leads us neatly to crypto.

Fiat

Fiat is traditional, non-crypto money that is not backed by a commodity such as gold. Its coins do not have an intrinsic value, they are simply backed by government policy and regulation. Fiat currencies have dominated the global economic system since the 1970s.

Crypto enthusiasts suggest that fiat’s value is dubious because governments can simply print more money if it suits a particular policy or economic climate.

Bitcoin

Bitcoin was the first of the modern cryptocurrencies to wink into existence. Its heritage can be traced back several decades, but basically Bitcoin coalesced into existence in January 2009 when a mysterious person or group of people going by the name of Satoshi Nakamoto released it as open-source software onto an unsuspecting world.

The benefits of Bitcoin are that it can be traded directly globally without an intermediary, meaning that the financial costs of trading are significantly lower than moving money though a traditional bank network. It has several issues however: its anonymity has led to suggestions that it can be used to launder money, the lack of regulation means that it could be open to abuse, and the way that it works though a specific form of crypto mining means that it has a significant environmental footprint.

Crypto coins

Looking beyond Bitcoin there are a range of other crypto coins. Some of these, such as Ethereum and Dodge Coin, have been discussed widely for different reasons, but there are also hundreds of others out there with markets that enjoy varying levels of liquidity.

As is the nature of things, the technology behind some of these coins has moved on from what is used to manage Bitcoin. These enhancements reduce the environmental impact that crypto is thought to have, although Bitcoin still represents nearly half of the total cryptocurrency traded.

Tokens

While some crypto coins are intended to be simple digital stores of value in and of themselves, some are being used by small, innovative companies who are trying to raise funding. These coins, which tend to be known as tokens, rise and fall according to the fortunes of the projects that they support, and offer several benefits to both investors and the companies that issue them.

For a start, they are significantly simpler to manage than a traditional initial public offering (IPO). Token sales can be set up, companies can apply to have them traded on an exchange and investors can support a project without the significant costs of an intermediary or extensive back-office. Holding periods and other token management functions can be virtually automated and because they are so cheap, tokens can be offered to a potentially far wider pool of liquidity than traditional shares, creating a far larger potential market.

The problem, because there always is one, is that because the issuing of tokens has been basically unregulated, there have been several projects that have been created purely to take advantage of investors. There needs to be a balance between the freedom to operate and raise funds and enough regulation to remove the projects that do not offer acceptable levels of investor support and protection.

Stable Coins

Stable coins could be described as a hybrid of crypt and fiat, and aim to be the best of both worlds. Stable coins have all the benefits of crypto in terms of speed of transaction and low cost of trade, but they are pegged to a traditional currency.

They are unlikely to suffer the kinds of volatility that have been a feature of many crypto currencies over the last decade because their performance is directly linked to the traditional foreign exchange market.

I hope two things have become clear during the first part of linked set of articles. Firstly, crypto is a massively complex sector but it is possible to explain it relatively simply without going too far into the technicalities. Secondly crypto is not a panacea, for every problem it solves, new issues are often created. After the challenges of 2020, there is a massive opportunity for the financial markets to evolve and enhance the way that investors are supported over the next few years. The best way that we can support its development is through understanding.

In another article, I’ll try and shed light on several more crypto terms including DeFi and crypto mining.

About Marco Quacken

Marco has a passion for business development that helps projects succeed and businesses flourish. With a global network of contacts, he brings teams together, matching expertise to requirements and implementing strategies that help good ideas grow into sustainable businesses. He has experience across a range of sectors including finance, real estate, technology, advertisement, automotive, consumer goods, energy, retail, sports and telecommunications.