Crypto & Digital Assets

What Is a Blockchain?

A blockchain is a distributed ledger — a database replicated across thousands of nodes (computers) worldwide, with no central authority controlling it. Records (blocks) are linked cryptographically, making them tamper-resistant.

Key Components

• Block — contains a batch of validated transactions + timestamp + hash of previous block + nonce
• Hash — a unique cryptographic fingerprint of a block's data (SHA-256 in Bitcoin). Changing any data changes the hash entirely
• Chain — each block references the hash of the previous block, creating an immutable chain of history
• Nodes — any computer participating in the network; full nodes store the complete blockchain; light nodes store only headers

Consensus Mechanisms

• Proof of Work (PoW) — miners compete to solve computationally hard puzzles; winner adds the next block and earns the block reward. Used by Bitcoin. Energy-intensive but highly secure.
• Proof of Stake (PoS) — validators are chosen to propose blocks based on their staked crypto. Used by Ethereum (post-Merge). Energy-efficient; different security tradeoffs than PoW.
• Delegated PoS, PoA, etc. — variations used by different networks

Smart Contracts

Self-executing code deployed on a blockchain (primarily Ethereum). When pre-defined conditions are met, the contract executes automatically without intermediaries. Foundation of DeFi, NFTs, and DAOs.

Origins & Design Philosophy

Created in 2008 by the pseudonymous Satoshi Nakamoto. The Bitcoin whitepaper describes a "peer-to-peer electronic cash system" that requires no trusted third party. Its primary innovation is solving the double-spend problem without a central authority.

Supply Mechanics

• 21 million cap — there will never be more than 21 million Bitcoin. This is enforced by the protocol code.
• Halving — approximately every 4 years (every 210,000 blocks), the block reward paid to miners is cut in half. This is Bitcoin's built-in disinflationary mechanism.
• Block reward history: 50 BTC (2009) → 25 (2012) → 12.5 (2016) → 6.25 (2020) → 3.125 (2024)

The UTXO Model

Bitcoin uses an Unspent Transaction Output (UTXO) model rather than accounts. Your "balance" is the sum of UTXOs that can be unlocked by your private key. This is different from Ethereum's account model.

Why Bitcoin Is Considered Sound Money

• Scarcity: fixed supply (unlike fiat currency which can be printed indefinitely)
• Decentralisation: no single point of control or failure
• Censorship resistance: no entity can block valid transactions
• Portability: can be sent anywhere in the world in minutes
• Divisibility: 1 BTC = 100,000,000 satoshis

Layer 1 vs Layer 2

• Layer 1 (L1) — The base blockchain (Bitcoin, Ethereum, Solana, Avalanche). All final settlement occurs here. Security and decentralisation come at cost of throughput.
• Layer 2 (L2) — Built on top of L1 to increase throughput and reduce fees. Examples: Lightning Network (Bitcoin), Arbitrum/Optimism/Base (Ethereum). Periodically "settle" back to L1.

Token Types

• Native coins — ETH, SOL, ADA etc. — used to pay network fees
• ERC-20 tokens — fungible tokens on Ethereum (most altcoins, DeFi governance tokens)
• Stablecoins — pegged to fiat (USDC, USDT = fiat-backed; DAI = crypto-collateralised; algorithmic stablecoins carry collapse risk)
• NFTs (ERC-721) — non-fungible; each token is unique. Used for digital art, gaming assets, identity

Decentralised Finance (DeFi)

• DEXs (Decentralised Exchanges) — trade directly from your wallet without a centralised intermediary (Uniswap, dYdX)
• Lending Protocols — deposit collateral, borrow against it (Aave, Compound)
• Liquidity Pools — provide assets to trading pairs; earn fees; subject to impermanent loss
• Yield Farming — earn additional token rewards for providing liquidity; higher risk/higher reward

How Wallets Work

A crypto wallet doesn't "store" crypto — it stores your private keys. The crypto lives on the blockchain; your private key proves ownership and authorises transactions.

• Private key — a 256-bit number that proves ownership. Anyone with your private key controls your crypto. NEVER share it.
• Public key — derived from the private key. Your wallet address is derived from your public key. Safe to share.
• Seed phrase — 12 or 24 words that generate your private key(s). This IS your crypto. Back it up offline on paper or steel.

Hot vs Cold Wallets

• Hot wallets — internet-connected (MetaMask, Trust Wallet, exchange accounts). Convenient but vulnerable to hacks.
• Cold wallets (hardware wallets) — offline signing device (Ledger, Trezor, Coldcard). Private keys never touch the internet. Best for significant holdings.

Golden Rules of Self-Custody

• Never store your seed phrase digitally (no photos, cloud, email, notes apps)
• Store seed phrase copies in multiple physically secure locations
• Never enter your seed phrase on ANY website — it's ALWAYS a scam
• Verify addresses character-by-character before sending
• Consider multi-signature (multisig) wallets for large holdings

→ Complete the Crypto Safety Checklist

Market Structure Basics

• Spot market — buying and selling the actual asset. You own the crypto.
• Futures/perpetuals — leveraged contracts that track price. Higher risk; liquidation possible.
• Market cap = current price × circulating supply. Used to compare asset sizes.
• Liquidity — ease of buying/selling without moving the price. Low liquidity = high slippage risk.

Risk Management — The Foundation

• Position sizing — never risk more than 1-2% of your portfolio on a single trade
• Risk:Reward ratio — aim for minimum 1:2 (risk $1 to potentially make $2). At 1:3 you only need ~33% win rate to be profitable.
• Stop losses — predefined exit price if the trade goes against you. Not optional.
• Take profit levels — predefined exit levels on the way up. Reduces emotional decision-making.
• Dollar-cost averaging (DCA) — invest fixed amounts at regular intervals. Removes timing pressure; reduces average cost during downtrends.

Market Cycles

Crypto markets follow cycles driven by the Bitcoin halving (~4 years), liquidity conditions, and sentiment. Understanding where you are in the cycle is more valuable than predicting daily price movements.

• Accumulation phase → Bull market → Euphoria → Correction → Bear market → Accumulation
• Most retail traders buy at euphoria and sell at despair — the opposite of optimal

Trading Psychology

• FOMO (Fear of Missing Out) — buying at market tops due to greed and social pressure
• FUD (Fear, Uncertainty, Doubt) — panic selling at market bottoms due to negative news
• The solution — a written trading plan executed mechanically, not emotionally