Frequently Asked Questions

A number of the most frequently asked questions related to Bitcoin and Cryptocurrencies

This article has been created as a response to common questions that are often asked (or assumed) by new-commers. Before we dive in to the questions and answers however, there is perhaps a 'common sense' mantra that must be adopted at all times.

1. UTILITY: Rather than thinking solely in terms of an investment - crypto must be also be seen for its utility value
2. It is not EITHER / OR (it does not need to be a binary decision)
3. ... take a balanced view
4. Where does a person form their viewpoint from (subconciously or otherwise).
5. politics - who is providing my information and what vested interest or bias is there ?
6. never invest all your money - diversify - never invest more than you can afford to loose

Volatility: "The wild price swings in the crypto market make it more akin to gambling than a stable investment."

Volatility is not always a negative attribute and it does not make it gambling to invest in such assets if one has researched sufficiently and believes the long term trajectory is favourable.

Young markets, illiquid markets and highly speculative markets often exibit a high degree of fluctuations but it is still possible to mitigate the risks from volatility by investing in smaller amounts.

Conversely one could also discuss the volatility in the housing market during the Golbal Financial Crisis (GFC), or indeed the volatility of internet stocks during the dot-com boom. Some of the early internet stocks eventually stabilised and now form part of many individual's balanced portfolios.

Lack of Regulation: "Without proper regulation, there's no safeguard for investors, and it opens the door to fraudulent activities."

Regulation arrives late. It arrives based on demand and only after suffcient number of investors have already adopted the assets within their portfolios.

The SEC in the United States has been requested to form a regulatory framework for many years by Crypto industry leaders such as Coinbase.

In avoiding such action, the SEC buys time, keeps the crypto industry operating in a gray area and deters retail investors who require safe guards.

There are indeed frudulent players and investors must be prepared to tread carefully, dealing with the well known, respected names within the industry.

Security Risks: "The high-profile hacks of crypto exchanges demonstrate that the technology is not secure enough for widespread adoption."

The crypto community generally advises people to store their assets in self-custody wallets rather than on exchanges.

Hacking, however, remains a risk (especially with smaller exchanges) just as much as it does with non-crypto related companies.

On the other hand, risks in the traditional banking system such as bank-runs, solvency concerns and financial crisis are also present.

In September 2007 concerned customers queued outside branches of Northern Rock unsure as to whether their savings were safe.

Fraud and Scams: "The prevalence of scams and fraudulent ICOs highlights the lack of accountability in the crypto space."

Many scams target greedy individuals looking to get-rich-quick. An investor who doesn't wish to conduct any research at all into their investment is a prime target for crypto scams.

Investors who expect unreasonable gains with no research are often likely to shout the loudest when something untoward happens.

Fraudulent ICOs do indeed highlight lack of accountability, but I would argue that it highlights lack of accountability on the part of the investor just as much as the scam and con-artists.

If you are an investor who places money behind investments without any research then indeed the crypto market is not for you.

Market Manipulation: "Small market caps make many cryptocurrencies susceptible to manipulation by a few large players."

The market cap depends very much on each respective cryptocurrency. Bitcoin has a market cap of approx. 550 billion pounds (as at Nov 2023) and as such is not considered subject to market manipulation by individuals or small groups.

For investors who are new to crypto is is usual to first research and potentially invest in these larger cryptocurrencies.

Other 'small cap' crypto (XRP, SOL, ADA etc) have much lower market capitalisation and are more volatile as a result.

It is speculation that they are deliberately 'manipulated' adversely by certain cohorts - every investor is entitled to take a position in markets as they see fit.

Short selling and 'whales' often do own larger percentages of these coins and as such their buying-selling activity does move the price more than 'large cap' crypto.

If you are investing in 'small cap' crypto you should understand the pros and the cons for that decision.

Perceived Complexity: "The average person finds blockchain technology and the mechanics of cryptocurrencies too complex to understand."

The average person doesn't understand the mainstream financial system either (to varying degrees). Most do not understand the economics behind the monetary system.

They are unfamiliar with the money supply and central bank policies such as quantitative easing or tightening.

Unfortunately many people are unfamiliar even with interest rates and how they affect mortgages, credit card debt or price inflation.

In this sense it is pointless trying to descibe the differences and virtues of crypto currency compared to the fiat money system.

However my comment would be (to the average person) that they should 'want/try' to understand at least the basics behind the supply of money both in traditional finance and in crypto currency.

Association with Criminal Activity: "Cryptocurrencies have a dark history of being used for illegal transactions, raising ethical concerns."

All finance, traditional and non-traditional is subject to use by criminals.

The same advantages of cryptocurrencies, i.e. fast and cheap transactions, are simultaneously being considered as its disadvantages if they facilitate a smoother transfer for would-be criminals.

It is naive to think that cash in USD dollar bills (in conjunction with money laundering) is used less as a means of facilitating crime.

In many ways it is easier to trace fraudulent transactions in the blockchain due to the clarity of the public ledger. All transactions are visible.

Lack of Consumer Protection: "Traditional banking systems offer consumer protections that are absent in the unregulated world of cryptocurrencies."

The protections cited come at a cost. Many cryto enthusiasts are looking to break away from the oversight, limitations and restrictions that the banking institutions place on our money.

Limits on withdrawals, invasive questions asked and judgement applied to how, when and where our money is spent. These restrictions are applied under the banner of "Consumer Protections".

Whether they are are not doesn't change the fact that every day people often face challenges in obtaining their own money during important life-events.

In the event of multiple bank runs or a domino effect of failures in the banking system is is faesilble to think the protections that are in place would not operate as intended.

It is not EITHER / OR !

Environmental Concerns: "The massive energy consumption of proof-of-work cryptocurrencies, like Bitcoin, is ecologically unsustainable."

It is true that "Proof-of-work" cryptocurrencies use a great deal of energy - it is also part of what makes it valuable.

Many of the technologies we take for granted today, such as satellite TV and GPS, were first developed during the "space race" of the 1950s between the Soviet Union and the USA.

Whenever humanity has a need or strong desire for something it overcomes the hurdles. Without a clear need there is less impetus.

With this in mind, many Bitcoin miners are pushing clean energy technology forwards - some are infact pushing the boundaries of renewable energy, such as developing hydro-electric solutions.

Meanwhile most of the new generation blockchains/cryptocurrencies use "Proof-of-Stake", a far less energy intensive mechanism for reaching consensus.

Unpredictable Regulatory Changes: "The constant changes in regulatory environments create uncertainty, making it risky for investors."

Regulatory frameworks are currently being developed in many countries. Most are attempting to provide a balanced, fair system that doesn't restrict innovation.

Lack of Understanding: "Most people don't understand how cryptocurrencies work, and investing in something you don't understand is inherently risky."

This is correct - investing in something you dont understand is risky.

Most investors do not research very deeply for any asset class. It has been the same story for over a century whether it be railroad stocks, telecommunications the internet boom or any tech stock.

However for the investor who wishes to do reasonable due-dilligence their is sufficient information available (including this site) to begin their journey of understanding and to make informed decisions.

Fear of Losing Funds: "The risk of losing access to digital wallets or forgetting passwords is a serious concern for the average investor."

There are different types of solution for different types of investor.

Centralised exchanges such as Coinbase and Binance operate in very similar ways to online banking and do not require the user to retain seed phrases.

Other crypto enthusiasts may decide to take full control of their wallets and safe keeping of their private keys or seed phrases specifically to avoid third party involvement.

Competing Technologies: "The constant emergence of new cryptocurrencies and blockchain technologies creates confusion and dilutes the market."

Just like the early internet there are many new technologies competing. The potential maket size for blockchain applications however is astronomical.

Lack of Intrinsic Value: "Cryptocurrencies lack the intrinsic value that traditional assets like gold or real estate possess, nor are they backed by banks or other institutions.”

All 'fiat' currencies, after the Gold Standard was removed in 1971, have no intrinsic value - it is purely sentiment that dictate their value.

Gold and real estate have intrinsic value however they are not currencies because they cannot be easily used as a medium of exchange.

When examining the worth of a currency, instead of looking for intrinsic value, the following characteristics are important :

(1) durability, (2) portability, (2) divisibility, (3) uniformity, (4) limited supply, and (5) acceptability.

We will examine the strengths and weaknesses of various currencies (both traditional and cryptocurrency) in more detail in this site.

Limited Use Cases: "Despite the hype, cryptocurrencies have yet to prove themselves as viable for everyday transactions or widespread use."

Whilst still not considered mainstream it is likely more widespread than many people believe, with millions of transactions taking place daily for all manner of use cases.

Amonst others; Visa and Mastercard have both conducted successful pilot programs using blockchain to achieve faster, more efficient transactions.

Corporates such as Casio, Starbucks, Disney, Stripe and Adidas are all using blockchain for various applications. We will dive into the specifics in other areas of this site.

Technological Risks: "Blockchain technology is relatively new and untested, and there's a risk of undiscovered vulnerabilities."

Bitcoin is now 15 years old and has been well tested during that period. The cryptographic basis of its security is considered unbreakable when used correctly. Rather than the technology itself, the human factor remains the weakest link in the chain.

Some of the newer generation of blockchains have been designed with greater complexity in an attempt to add greater functionality and this has often lead to vulnerabilities being exploited by hackers.

As each technology matures the risk of major vulnerability decreases over time. It is important to consider how close to the 'cutting edge' and how much risk you are prepared to take.

Market Saturation: "The sheer number of cryptocurrencies flooding the market suggests a lack of uniqueness and purpose for many."

Whilst there certainly are overlaps in terms of the objectives for many cryptocurrencies - it is inaccurate to apply old-school thinking to the world of Web3.

The name 'crypto-CURRENCY' draws analogies to the existing idea of currency and how we use it in the world today. However the concept of 'tokenisation' (which is perhaps a better term), is far larger in scope and capabilities than legacy currency.

The variables of economics that each crytocurrency utilises are refered to as 'tokenomics' and are controlled by communites rather than central banks or centralised institutions. Blockchain and tokenisation have brought about concepts such as on-chain voting and facilitated the introduction of 'decentralised organisations' (DAOs). These concepts alone already far exceed what is possible when limited by the prior, out-dated notion of a static, centrally controlled monetary system.

Insider Trading: "Allegations of insider trading and market manipulation undermine the integrity of the crypto market."

Insider trading has always been rife in non-crypto related financial markets - it has never undermined the integrity of the stock markets. Politicians have especially bad reputations. If the statement above is true, and if the transparancy of the public blochain ledger provided no additional traceability then blockchain would be no better or worse than prior systems.

Lack of Regulation Adoption: "The reluctance of mainstream institutions to fully adopt cryptocurrencies raises questions about their legitimacy."

As of 2023 this is now incorrect. Mainstream institutions ranging from Blackrock, Investco, Fidelity through to JP Morgan are taking cryptocurrency seriously either on behalf of their clients or adopting the technologies themselves.

Historical Bubbles: "The history of bubbles and crashes in the crypto market reveals its speculative nature rather than a stable investment."

The property market collapse in 2008 that lead to the Global Financial Crisis (GFC) followed one of the largest bubbles of all time - a bubble in the prices of our homes. However people continue to buy houses.

The dot-com bubble and subsequent crash of internet stocks in 2001 was the real beginning of a technological wave that has lasted two decades and ushered in profound change to almost everones lives. However people continue to invest in tech stocks.

Bubbles and crashes simply mirror human emotions that range from fear to greed.
Investors simply need to look objectively and consider whether they think the market shows signs of being overbought or, conversely, oversold before jumping in with both feet.