Frequently Asked Questions
Here are some of the questions I get most frequently asked:
What does the market capitalisation of Bitcoin mean?
The market capitalisation of Bitcoin is calculated by multiplying the last price paid for one Bitcoin by the number of BTC in circulation.
If the market capitalisation increases by $10bn, does this mean there has been $10bn of new capital flowing into the system?
No. The amount of new capital flowing into the system will be far less than the increase in market capitalisation because as described above, market capitalisation multiples the price of the last sale by all of the coins in circulation. It does not mean that all of those coins were just bought/sold.
e.g. I buy 10 UntangledCoins off Alice for £10, the only 10 coins in existence. This means the market capitalisation of UntangledCoin is £10. The next day I sell 1 coin to Bob for £10. This means the market capitalisation of UntangledCoin is now £100 – but only £10 has entered the market.
Can the government shut Bitcoin down?
Bitcoin is decentralised and therefore can’t be shut down in a typical manner of taking down a server. However, governments can make it harder to buy/sell/mine Bitcoin – by making it illegal, forcing banks to cut off providing services to exchanges and prosecuting anyone involved in the process.
Should I trade against fiat or ETH/BTC?
I personally trade against ETH because my only goal is to increase the amount of ETH I hold, but I also find that most of the pairs I want to trade are increasingly against ETH only (with decentralised exchanges on the Ethereum network like EtherDelta a large factor). Others will prefer to trade against fiat or BTC – it just depends on your priorities.
Are there any basic books or documents I should read?
I would recommend reading the Bitcoin and Ethereum whitepapers as well as Blockchain Revolution by Don and Alex Tapscott and Mastering Bitcoin 2e by Andreas Antonopoulos. The Internet of Money, also by A. Antonopoulos, is also worth reading. The space is so fast changing that books become out of date quite quickly, but there is a trove of information available online.
What is a pump and dump?
A pump and dump is when an entity (either individual or group) acquire large amounts of a coin in order to artificially inflate the price of the coin (pump). As the coin picks up attention, momentum and trading volume, the entity will then sell off (dump) to unsuspecting investors. These people are then left holding the bag of a coin which might never recover in price. It is illegal in normal markets, but happens frequently in crypto. Be wary in particular of coins with historically very low trading volumes which have suddenly picked up quickly and for no apparent reason (i.e. no news that fundamentally alters the coins worth).
Why is it harder for larger coins to increase in price quickly?
It is much easier to move prices (also known as moving the market) if a coin has a very low trading volume, and larger coins will always have higher daily trading volumes. If a coin has a daily trading volume of £100 then I could buy up the entire order book which would likely force prices much higher. Prices would be artificially raised as a result of this low liquidity – the lower the trading volume, the more likely it is that price discovery is less efficient. With Bitcoin, however, which has a daily trading volume of c. $8bn, my £100, £1,000 or £10,000 would have no impact on the price. The weight of capital needed to double a £1m project to £2m is far less than the amount needed to double a £100bn project to a £200bn project.