Crypto Explained Simply
Most people already know about crypto, but this guide is for those who want an easy way to explain it to their computer-illiterate family or friends.
The format I tried to get is like a dictionary. Every header below is one topic, with a simple (simplistic) explanation of what it is as well as an apt analogy.
I think I covered most of the crypto space, but if you find something else I should cover (or cover better), please comment & I’ll investigate.
Blockchain
Imagine a notebook that everyone in town has a copy of. Whenever someone writes something in it, everyone's copy updates automatically. Nobody can tear out pages or change what was written before - it's permanent. That's blockchain - a shared record book that everyone can see but nobody can cheat. Every transaction ever made is recorded in order, like a diary that goes back to the very first entry. This creates trust because everyone can verify what happened, but no single person controls the records.
Bitcoin (BTC)
Bitcoin is like digital stamps that people collect and trade. There's a limited number of them (only 21 million will ever exist), and people use computers to solve complex puzzles to create new ones. When you send Bitcoin to someone, it's like mailing cash - once it's sent, it's gone from your wallet and in theirs. People buy and sell these digital stamps hoping their value will change, just like any collectible. The main purpose is to send money directly to someone else without going through a bank, like handing cash to your neighbor instead of writing them a check.
Ethereum (ETH)
If Bitcoin is digital stamps for collecting, Ethereum is like a digital Swiss Army knife. Yes, you can send money with it, but it can also run little programs called "smart contracts". Think of it like a vending machine that can do more than just sell sodas - it could also check your ID, give you lottery tickets, or even let you vote in an election. These programs run automatically without anyone controlling them. For example, you could set up a program that automatically pays your grandchildren their allowance every week, or one that only releases money when certain conditions are met.
Ripple (XRP)
XRP is like having a friend at every bank in the world who can help move your money quickly. While sending money internationally usually takes days (like mailing a package overseas), XRP makes it happen in seconds, like making a phone call instead. Banks actually use XRP to settle payments between countries. Instead of keeping accounts at hundreds of banks worldwide, they can just convert to XRP, send it, and convert back - all in under 5 seconds. It's specifically designed for banks and financial institutions rather than individual users.
Solana (SOL)
Solana is like the express lane at the grocery store. While Bitcoin processes about 7 transactions per second (like having one cashier for everyone), Solana can handle up to 65,000 transactions per second - imagine having thousands of cashiers all working at once. This speed makes it popular for applications that need quick responses, like online games or trading platforms. The trade-off is that it requires more powerful computers to participate, like needing a sports car instead of a regular car to use the highway.
Proof of Work
This is how Bitcoin stays honest. Imagine if, to add a page to our town's shared notebook, you had to solve a really hard puzzle first - like completing a 10,000-piece jigsaw. The first person to finish gets to add the page and receives a reward. This hard work prevents cheaters because faking it would require doing more puzzles than everyone else combined. It's like having to dig a very deep hole to bury treasure - the effort required makes it not worth trying to fake multiple treasures. The downside is it uses as much electricity as some small countries.
Proof of Stake
This is Ethereum's newer method, which uses much less electricity. Instead of solving puzzles, it's like a raffle where your chances of winning depend on how many tickets you hold. If you own more of the cryptocurrency and promise to lock it up (like putting money in a savings account you can't touch for a while), you get more chances to add pages to the notebook and earn rewards. The key difference from a pure lottery is that validators are chosen based on their stake, not randomly - those with more at risk have more chances. If you try to cheat, you lose your locked-up money - like losing your security deposit if you damage a rental property.
Mining
Mining cryptocurrency is like participating in a global guessing game where your computer tries billions of number combinations per second. When your computer finds the right combination, you get rewarded with new coins. It's similar to trying every possible combination on a giant safe until one works. The more powerful your computer (like having more people helping you guess), the better your chances. However, as more people join the game, the combinations get harder to prevent too many coins from being created too quickly.
Wallets
A crypto wallet is like a special mailbox where only you have the key. Your wallet address (like your mailbox number) is public so people can send you money, but only you can open it and take money out. The key is actually a very long password that you must keep secret and safe. Lose your key, and your money is locked forever - there's no locksmith who can help, no customer service to call. Some people write their key on paper and put it in a safe, while others use special hardware devices that look like USB sticks.
Smart Contracts
These are like vending machines for agreements. You put in the right amount of money, push the right button, and automatically get what you're supposed to - no middleman needed. If you buy a house with a smart contract, the deed transfers to you automatically when your payment goes through. Or imagine a will that automatically distributes inheritance when certain conditions are met, without needing lawyers or courts. Once deployed, these contracts run exactly as programmed and can't be changed, which is both their strength and weakness.
Gas Fees
Gas fees are like paying for delivery. Every time you do something on the network - send money, use a smart contract, or trade tokens - you pay a fee to the computers processing your transaction. When lots of people are using the network (like during rush hour), fees go up. When it's quiet, fees are cheaper. This is why sometimes sending $50 costs $2 in fees, and other times it might cost $50 in fees.
Private Keys vs Public Keys
Your public key is like your email address - you can share it with anyone who wants to send you crypto. Your private key is like your email password - never share it with anyone, ever. If someone gets your private key, they can take all your cryptocurrency. There's no "forgot password" button or customer service to help you. This is why people say "not your keys, not your coins."
Stablecoins
Stablecoins are cryptocurrencies designed to maintain a steady value, usually $1. Think of them as digital dollars - they combine the stability of regular money with the speed and convenience of crypto. Popular ones like USDC and USDT keep real dollars in a bank to back each digital coin. They're useful for trading without converting back to regular money, or sending dollars instantly around the world.
Market Cap
Market cap tells you the total value of a cryptocurrency. It's calculated by multiplying the current price by how many coins exist. A coin worth $1 with a billion coins has the same market cap as a coin worth $1,000 with a million coins. This is why price alone doesn't tell you if something is "cheap" or "expensive" - you need to know how many coins there are.
Decentralized Finance (DeFi)
DeFi is like banking without banks. Using smart contracts, you can lend money and earn interest, borrow against your crypto, or trade tokens - all without a company in the middle. It runs 24/7, works globally, and doesn't require credit checks or paperwork. The trade-off is there's no customer service if something goes wrong, and you're responsible for your own security.
Non-Fungible Tokens (NFTs)
NFTs are like certificates of authenticity for digital items. While anyone can copy a digital image, the NFT proves who owns the original. Think of it like owning an original painting versus having a poster - both show the same image, but only one has value as the authentic piece. NFTs aren't just for art - they can represent tickets, memberships, game items, or any unique digital asset.
Tokens vs Coins
Coins have their own blockchain (like Bitcoin or Ethereum), while tokens are built on top of existing blockchains. Think of coins as major currencies (dollars, euros) and tokens as gift cards or arcade tokens that work within specific systems. Most cryptocurrencies you hear about are actually tokens, not coins.
Liquidity
Liquidity is how easily you can buy or sell something without affecting its price. High liquidity means you can trade large amounts quickly at fair prices (like major cryptocurrencies). Low liquidity means even small trades can cause big price swings (like obscure tokens). It's the difference between selling water at a beach versus selling a rare collectible.
Hot Wallets vs Cold Wallets
Your crypto always exists on the blockchain (which is online), but wallets just store the private keys that control it. Hot wallets keep these keys on internet-connected devices - convenient but hackable. Cold wallets store keys completely offline on hardware devices or paper. When you want to send crypto from a cold wallet, you briefly connect it to sign the transaction, then disconnect again. Think of it like the difference between keeping your house key on your keychain (hot) versus in a safe (cold) - your house is always there, but the key's accessibility differs.
Seed Phrase
Your seed phrase is a list of 12-24 words that can restore access to your cryptocurrency if you lose your wallet. It's like the master key to your wallet. Write it down on paper (never digitally), store it somewhere safe, and never share it with anyone. Lose these words, lose your crypto forever. Anyone who finds them can take everything.
CEX vs DEX
Centralized exchanges (CEX) like Coinbase work like traditional companies - easy to use, customer support, but they control your crypto. Decentralized exchanges (DEX) like Uniswap are just smart contracts - you keep full control, but they're more complex and have no customer service. Beginners usually start with CEX, advanced users often prefer DEX.
Yield Farming
Yield farming is earning rewards by lending your crypto to DeFi protocols. It's like earning interest at a bank, but rates can be much higher (and riskier). You might lend tokens to a trading pool and earn fees from every trade, or stake tokens in a protocol to earn new tokens as rewards. High returns often mean high risks.
DAOs
DAOs (Decentralized Autonomous Organizations) are like companies run by community voting instead of CEOs. Token holders vote on all decisions - from spending money to changing rules. Everything is transparent and executed automatically by smart contracts. Think of it as a co-op where every member has a say proportional to their ownership.
Rug Pull
A rug pull is when crypto project creators steal investor money and disappear. Like someone setting up a fake store, collecting payments, then vanishing overnight. Common in new tokens and DeFi projects. Red flags include anonymous teams, unrealistic promises, and pressure to invest quickly. If it sounds too good to be true, it probably is.
HODL
Standing for “Hold On for Dear Life”, HODL (originally a typo of "hold") means keeping your cryptocurrency long-term instead of trading it. HODLers believe in the long-term value and ignore short-term price swings. It's like buying a house to live in versus flipping houses for quick profit.
FUD and FOMO
FUD (Fear, Uncertainty, Doubt) is negative news or rumors that cause panic selling. FOMO (Fear Of Missing Out) is the opposite - buying because prices are rising and you don't want to miss gains. Both are emotional reactions that often lead to poor investment decisions.
Web3
Web3 is the vision of an internet where users own their data and digital assets. Instead of companies like Facebook owning your posts, you would own them and take them anywhere. It's built on blockchain technology and emphasizes user control, privacy, and community ownership over corporate control.
Thanks for taking the time to explain. A whole new financial vocabulary to digest. A few concerns I'm wondering about. Given the huge amount of energy required and shared resources going into mining (water and electricity), it seems like the folks in the commons have the burden of financially supporting this new system with NO benefit to themselves. Will rate payers of the local utility blithely take on the additional costs of supporting an enterprise (mining) that does not benefit them? Hmm. It seems that this new system likely requires another look at nuclear energy, just to keep the thing afloat. I live within a 15 min walk to Lake Michigan--water concerns?
It seems the doors close to all that are not "early adapters". I'd liken it to Prop 13 in California where a certain class of home owner derives a tax benefit that closes to others...affecting how RE transfers likely become constrained. In other words, a distorted RE market, if only on a local level.
I'm curious as to how the "gold bugs" feel about this new reality. It seems crypto is inherently inflationary, in a sense, not because of fiat based money printing (cf USG presently) but rather a shortage of coins and entry entry points because the whole system favors the "first in" rather than my one year old granddaughter who likely gets priced out forever. I've always wondered about the "gold exuberance"...sure you can buy at market prices but what happens when everyone or a large percentage of "holders" wants to sell? Supply...meet demand.
Again, thanks for the help in understanding this business. I think of the '49ers in CA digging like moles (mining) and buying Levis, bacon, cook pots and hookers at inflated prices. The real money then was not really the shiny yellow but ancillary services supporting the enterprise. Qui Bono...
One of my fave financial quotes: "A man is rich in proportion to the things he can live without."
Has the ring of Thoreau but I'm too lazy to look up for attribution.