Crypto 101

May 11

CRYPTO 101

Written by: Tuukka Pöri

Bitcoin, Ethereum, NFTs..

You might have heard of these terms at some point. Crypto has been getting into news headlines more and more, and there’s a lot of strong opinions. People getting rich, people losing money. Some say crypto is the future while others claim it’s worthless.

With all this noise, it can be hard to make sense of the space. This blog post is here to help you!

In the next 5 minutes, you will learn

What is crypto
How is crypto used
How to invest in crypto

Disclaimer:

Nothing in this blog should be considered investment advice. Aalto Investment Club does not promote nor endorse any of the cryptocurrencies or companies mentioned in this post, they serve for educational examples only. Do your own research and only invest money you can afford to lose.

Okay, let’s jump straight into the topic!

What is crypto

Crypto, short for cryptocurrencies, means decentralized digital currencies and assets, secured by cryptography and blockchain technology.

Being decentralized means that cryptocurrencies aren’t issued by governments or central banks. Instead, cryptocurrencies are created, exchanged, and overseen by groups of individuals. Crypto transactions happen over a distributed peer-to-peer network, called the blockchain.

The term “cryptocurrency” is actually a little confusing since there is a distinction between crypto coins and crypto tokens.

Crypto coins are meant to act like a currency, to transfer value and pay for transactions. Crypto tokens (like NFTs), on the other hand, can have more utility than that. They can, for example, act as a proof of ownership of some asset. More on that later.

From an investor’s perspective, coins and tokens act similarly. They can both be traded and they can appreciate in value. For the sake of simplicity, we’ll use those terms a little interchangeable in this text.

Blockchain

Blockchain is the technology that makes crypto possible. But what actually is a blockchain? There’s many definitions, but we’ll go with this one:

A blockchain is a decentralized ledger of transactions.

Essentially, it’s a software program that runs on a network of independent computers or computer clusters. These are called miners.

The miners process and verify the transactions happening on the blockchain and get rewarded with some cryptocurrency for doing so. These transactions are grouped together in “blocks”, hence the name blockchain.

Here’s some benefits that could be achieved through blockchain technology:

No need for a middleman.
- In traditional centralized systems, banks and institutions act as middlemen to make the transactions possible. With blockchain, the transactions can be made over the blockchain in a peer-to-peer style.

Transparency.
- In most cases, the transactions happening on a blockchain are public and open for anyone to view.
Security.
- Blockchains are immutable, meaning that once a transaction is stored in a blockchain, it cannot be reversed. This increases security, but can also lead to expensive mistakes.

Different types of crypto

Cool, now you have a basic understanding of what a blockchain is.

There are many different blockchains, and even more crypto tokens out there.

Let’s go through some common names you’ll come across in crypto.

Bitcoin

Bitcoin is the first and biggest cryptocurrency by market cap.

It was created in 2008 by the pseudonym Satoshi Nakamoto. The real identity of Satoshi still remains a mystery. It could be one person or a group of people, nobody knows.

Bitcoin was created as a way to store and transfer value. The miners on the Bitcoin blockchain process and validate the transactions. New Bitcoin get created as a reward for the miners.

The protocol was designed so that new Bitcoin get created at a slowing pace. There will only be 21 million Bitcoin to ever exist, and that scarcity is why some people view it as valuable.

While Bitcoin remains dominant, some people figured out that the underlying technology could do much more than that. That brings us to:

Ethereum

Ethereum is a blockchain platform.

What does that mean?

Ethereum is a blockchain, that has its own native currency, Ether. Miners get rewarded with Ether when they confirm transactions.

But being a platform means that other people can also create their own currencies and tokens, and build decentralized applications “on top of” Ethereum.

These applications can be built for various purposes, like finance, gaming and social media. The transactions happening in these applications are validated by the Ethereum network.

Some examples of decentralized applications, or dApps, as they’re called:

Uniswap - a crypto trading protocol

Aave - a crypto lending platform

Learn more about dApps here.

NFTs

NFT is short for Non-fungible token. It is essentially a piece of data with a unique identifier stored on the blockchain.

NFTs represent ownership of some digital, physical or even abstract thing. They act as a public certificate of authenticity and as a proof of ownership.

The most notable use case lately has been digital art and collectibles. These can being bought and sold on different platforms.

We won’t go too much into this, but you can learn more here.

Other crypto projects

According to CoinmarketCap, there’s over 19,000 cryptos in traded on different platforms. Why are there so many of them?

People are creating coins and tokens for different use cases and industries. There’s Decentralized finance, DAO’s and a whole set of topics that each would need own blog post.

There’s links at the end of this post if you want to dive deeper into those things.

Do I have to know all this stuff to become a crypto investor? Absolutely not. Now, let’s take a look at crypto investing.

Investing in crypto

Crypto is still in its early days. Even though there are lot of big plans and promises for crypto, lot of the trading activity is driven by speculation.

Price goes up and down

Crypto prices are controlled by supply and demand. When more people want to buy than sell, the price goes up. It also works the other way around.

There’s very little regulation in crypto, and the prices are extremely volatile. Price swings of 5-20% in a week are completely normal.

That means high risk, high potential reward. This can be exciting, but also stressful.

But when is the perfect time to start investing in crypto?

Looking back, 2021 was a great year to be invested in crypto. Bitcoin went up over 50%, while Ether did almost 400%.

2022, not so much. At the time of publishing, Bitcoin and Ether are both down over -30%, with rest off the crypto market following the same trend.

Zooming out, crypto has experienced many bull and bear markets in the past 10 years. These price cycles have happened around every 4 years. There seems to be correlation with the stock market (and also the Bitcoin halving event).

Bitcoin price in US dollars since 2013. Notice the logarithmic scale.

With some drops in the middle, the overall trend has been upwards.

But does that mean the price will continue to go up in the future and the cycles will always be at the same time? Nobody knows that for sure.

Ten years is still a short time and anything can happen in the future.

However, historical data shows that cryptocurrencies have performed well and they offer a way to diversify your investment portfolio.

Before buying any crypto, you should make yourself some type of investing strategy. Few things you can consider:

Risk profile.
How much risk am I willing to take? The bigger cryptocurrencies (Bitcoin, Ether) are generally viewed as more safe options (safe is relative in crypto context).
However, biggest gains (in short amount of time) are often made by investing early in smaller, less known cryptos. This comes with big risk, since the value can easily drop and the projects can complete fade away.
Time frame
How long are you planning to hold crypto? Do you want buy and sell quickly, or hold your cryptos for months or years?

How to evaluate different cryptos

How to predict if a certain crypto project is a good investment? As mentioned, prices are often very speculative and sometimes it’s not clear why certain crypto is going up in price.

Here’s few ways you can do research on specific crypto project. Every legitimate project has a website, and from there, you pay attention to things like

Vision. What is the vision of the project? What is it trying to accomplish
Team. Who is actually building this project? Are they competent enough to deliver what’s promised?
Tokenomics. How is the actual crypto coin or token designed? Does it have a real function? Does it provide value to all stakeholders, what are the long term incentives to hold the token? How are the tokens distributed?
Community. Are people excited about this project and actually using it and building something with it? Places like Reddit, Twitter, Discord etc. are also great places to find discussions about the project. But be careful and take things with a grain of salt. It’s easy to create fake hype on the internet.

That said, sometimes these fundamentals are completely thrown out of the window.

Doge coin is a perfect example of that. Created originally as a joke, this cryptocurrency saw huge growth in price in 2020 and 2021.

Whether buying these “meme coins“ is considered investing or gambling is debatable, but buying early on those trends can still make you a lot of money.

As mentioned earlier, you don’t have be an expert and do all the in-depth analysis. Many people just go and buy some crypto, and try to sell it for profit later.

Whatever your strategy ends up being, the first step is to actually buy some crypto.

Here’s how to get started:

Open an account to a trusted crypto exchange
Choose a big and trusted platform, like Coinbase or Binance, for example.
Deposit money to your account
The big exchanges allow you to transfer money securely from your bank account. Always invest only the money you can afford to lose.
Choose which crypto you want to buy
This is up to your personal strategy.
Choose the amount and hit the buy button
If the buy order was successful, you own some crypto now! You can hold it and hopefully sell it with profit in the future. Prepare yourself for ups and downs, stick to your strategy and don’t let emotions take control of your decisions.

Summary

To recap, crypto means decentralized digital currencies and assets. Investing in crypto comes with a high risk with a possibility for high reward. Before investing, do your own research and only invest money you can afford to lose.

That’s it for now, hopefully you found this useful! If you have any feedback, feel free to leave a comment below!

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