Understanding Crypto is now an international iTunes top-rated Investing podcast! 

James Burtt and Paul Abercrombie are giving listeners a simple primer on crypto coins and tokens in this week’s show. They describe Bitcoin, altcoins and stablecoins and explain how exchanges work. You will understand why the crypto market is volatile and learn tips on how to protect your crypto investment. 

Altcoins

You can listen to episode x for a detailed exploration of Bitcoin. Altcoin means alternative to Bitcoin and there are about 4000 altcoins in existence. “The reason they're called cryptocurrencies is because there's cryptography which encrypts them and makes them work in the background,” Paul explains. However, with the exception of Bitcoin, altcoins are not truly currency. Instead, they represent innovative Blockchain projects. “Each one of them … was originally a fundraising exercise or way of people sharing governance or sharing rewards or sharing an interest in a new piece of innovation or technology,” Paul continues. “There are many projects … and the way that they would represent themselves is with a cryptocurrency that they create themselves…” Some altcoins such as Ethereum have been very successful, and many others are not. You can go to an exchange and trade altcoins, similar to the stock market. Similarly, investing in altcoins comes with the same caveats as investing in the stock market. [Listen from 2:31]

Exchanges and Liquidity Pools

There must be demand and supply for a market to exist. Exchanges make trading possible, simple and immediate by holding liquidity pools. When you want to buy or sell your crypto, an exchange provides instant settlement since the funds already exist in the liquidity pool. Altcoin prices fluctuate quickly because of this. If you create an altcoin and want to list it on an exchange, you must decide which crypto to pair it with. Investors would then stake their assets into the liquidity pool to back your altcoin so it holds its value. Paul explains the mathematical process which dictates how crypto prices increase and decrease based on trading activity. “In many cases there's not a huge market cap on some of these coins so it doesn't take a lot to move that coin in either direction, which is why you see lots of volatility” he remarks. He dispels the common misconception that volatility is because the crypto market is unstable. “It's volatile because of mathematics, because of the way the liquidity pools work,” he emphasizes. If a major holder decides to sell their coins it would affect the price in the same way a major shareholder selling their shares in a company would affect the share price. [Listen from 6:15]

Stablecoins

Stablecoins are an iteration of altcoins cleverly designed to overcome the issue of volatility. Paul gives an example of how volatility affects the value of assets. If you sold your house as a token, that transaction must occur in the Web 3.0 Blockchain world with a cryptocurrency, which risks you being caught out by the volatility if you do it at the wrong time. This may cause your assets to massively depreciate because of a conversion. “A stable coin is designed to be tethered against an actual physical asset,” he adds. USDC, or US Digital Currency, is tethered against the US dollar; this means that one USDC roughly equals $1 US. Its volatility is also decreased because the US dollar fluctuates less in currency value. “[USDC] can be [tethered to] other assets as well.” Paul describes how stablecoins are linked to a much larger pool of assets, and how they are used to store value for various purposes. [Listen from 11:28]

Function of an Altcoin

Paul breaks down the three ways altcoins are used. Mining based altcoins are cryptocurrencies that are mined as a reward for donating your computing power as a service; security tokens are linked to a particular business and are the equivalent of stocks and shares; and utility tokens grant their holder utility, in the form of access to information, events, or a network. All 4000 altcoins typically serve one or two of these functions. “Ethereum is a mining based token; people can earn Ethereum by putting their technology to work on the Ethereum network, but just because you have Ethereum doesn’t mean you have any security or ownership of the Ethereum project,” Paul advises. James and Paul explore why the NFT market has gotten as popular as it is.  [Listen from 20:47]

Creating Your Own Currency

Minting an NFT is easier than creating your own currency, and then underpinning and holding that value. The concept of tokenomics is an integral part of creating your own currency, and it involves investing a certain amount of coins over time so they are released over time, which stops the value from crashing. “Effectively, you have to create a structure, and all the good coins have done this,” Paul says. “They’ve created a structure so that nobody can do a ‘rug pull’ and effectively take all the value back out of the liquidity pool before disappearing into the sunset.” [Listen from 25:45]

Resources

James Burtt on Twitter | LinkedIn | Instagram | Clubhouse

Paul Abercrombie on Website | Twitter | LinkedIn | Instagram