Crypto & digital assets: Understand the technology, markets and risks

Understanding cryptocurrency and digital assets

A digital asset here means a record on a ledger. A native asset belongs to one network and is used inside that network’s rules. A token can be issued on a network someone else runs. A public network lets anyone who follows the rules take part. A private ledger restricts who may write. The protocol, the application and the company that sells access are three different things.

A working network is not an investment case. The technology can function and the token can still be worth nothing. Holding a token does not, by itself, give you a share, a vote, or a claim on cash. Those rights exist only when a document and a law say they do.

How a blockchain records transactions

In a simplified public network, someone proposes a transfer, signs it with a private key, and sends it to nodes. The network orders transactions, writes a batch into a block or an equivalent record, and later records treat that batch as history. Finality — when a transfer is impractical to reverse — depends on the design. Some systems treat a block as reversible for a while. Some aim for faster finality. This page does not claim one rule for all of them.

Not every network uses mining or proof of work. The steps in the diagram are a teaching model: transaction, validation and ordering, inclusion, ledger update. The buttons walk that model. They do not submit a transaction.

Not all crypto assets work the same way

Bitcoin, a platform token, a stablecoin, a governance token, a utility token, a tokenised claim and an NFT can share a wallet screen and still be different legal and economic objects. The cards separate the function from the price. None of them is a recommendation.

How digital assets are traded

A centralised venue is a company with an order book or a quote, fees, and usually custody while you trade. A decentralised venue is a set of contracts: an automated market maker prices against a pool, and a network fee is due as well as any pool fee. Slippage is the gap between the price you saw and the price the pool or the book could fill.

Venues are not interchangeable. Two companies can both be “exchanges” and have different licences, different countries, and different ability to halt a withdrawal. Two pools can both be “decentralised” and have different admin keys.

Wallets, in one distinction

A self-custody wallet holds keys you control. A custodial wallet is a balance at a firm. Hot storage is connected. Cold storage, including a hardware signer, is not, until you use it. A multi-signature arrangement needs more than one key. A smart-contract wallet is code, with whatever recovery and upgrade rules that code has.

The public address is the destination you can share. The private key and the recovery phrase are the secret. This page has no field for either. Typing them into any website can empty the wallet, and a mistaken transfer is not reversed by the network.

Who controls the assets?

If the firm holds the keys, you have a claim on the firm. If you hold the keys, you can lose the asset with a mistake and there is no desk that can undo the signature. Neither side is automatically safer. Write down which one you are using before you look at a price.

How networks reach consensus

Proof of work spends computation to propose blocks. Proof of stake uses a locked stake and can penalise a validator who breaks the rules, which some designs call slashing. Other designs exist. Energy use, who may participate, and how quickly a payment is treated as final are properties of a specific network, not of “crypto.” Neither family is the better one in the abstract.

Staking is a programme, not a deposit rate

A staking reward is defined by a protocol or by a firm’s terms. It can change, the stake can be locked, and some networks can reduce it. Calling the figure interest imports a bank product that is not there. Read what can be paused or redefined.

What influences supply and demand?

Issuance, a stated maximum, tokens still locked, unlocks, burns, fees and staking rewards are supply facts when the protocol or the issuer publishes them. Adoption, speculation, depth and a concentrated holder are demand and market facts. A change in circulating supply can matter and still not set the next price.

The sketch uses numbers you type. It does not look up a live circulating supply. An unlock that increases the tradable amount is not a prediction of the price.

Why a stablecoin is not a bank deposit

A fiat-referenced token may hold reserves and offer redemption to some holders. A crypto-collateralised token depends on other assets and on liquidation. An algorithmic design has failed in public. A tokenised deposit or a central-bank instrument is a different legal object again. Reserve quality, who may redeem, and which law applies are product facts. A peg can break. Deposit insurance, where it exists for bank deposits, does not automatically cover a stablecoin. This page will not tell you that it does.

Contracts, pools and liquidations

Lending contracts take collateral and can liquidate it when a ratio is breached. Pools price trades from their balances. Oracles import a price. Bridges move a representation of an asset onto another network and have been a common point of loss. Governance can change the parameters, or a key can. A vulnerability in the code is a financial risk, not a footnote.

A displayed yield is a formula over current conditions. It is not income you are owed, and it can reverse. This page does not quote a yield.

Owning an asset versus trading a price

Direct holding, an exchange balance, an exchange-traded product, a future, an option and a CFD are different claims. Some countries restrict which of them may be sold to retail customers. The UK FCA has restricted the sale of crypto-asset derivatives, including CFDs and exchange-traded notes, to retail consumers. That sentence is not a map of every other country. Read the rule that applies where you live, and do not treat a website that loads as permission.

The rule depends on the country and the service

Classification of the asset, whether the firm holds custody, whether the product is a derivative, and whether you are in the UK, the EU, the US, Singapore or elsewhere can change the answer. The EU’s markets in crypto-assets regulation (MiCA) is a framework with its own scope and timing. The FCA’s financial-promotions and derivatives restrictions are UK rules. The SEC and the CFTC divide US questions and do not produce one combined licence. The Monetary Authority of Singapore licenses specific activities. A registration aimed at money laundering is not authorisation to offer an investment product.

This page separates rules that are in force from proposals. It does not state that a compensation scheme or a deposit guarantee covers a crypto balance. Where that is true it will be in the scheme’s own rules, for a named product, and it is often not true.

Protecting yourself

Phishing, a fake venue, a wallet-draining contract, a rushed “investment,” a SIM swap and a request for a recovery phrase are ordinary patterns. So is an exchange or a custodian that fails. General care is: check the domain, do not install a signer you did not seek, do not share a phrase, and treat a promised return that requires secrecy as a reason to leave. This page will not demonstrate how to handle a live seed phrase.

How to research a crypto asset or service

Completing the list does not make an asset or a firm legitimate.

Questions

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