Explain it like I'm 5 - how does money become crypto?

As above. I have a basic understanding of crypto and Bitcoin mining, but there's something i cant get my head around.

Say you have some isolated system in which only £1,000,00 exists at any given time. One person in the system invents a crypto currency, and it's agreed that one 'cryptocoin' = £1

So this person exchanges everyone's money for equivalent crypto. That person has £1,000,00, but there's £1M worth of crypto, so now there is £2m ik currency in this isolated system. The available money has doubled, it's worth the same amount intrinsically. How does this work?

Money is limited to how much is printed, and Bitcoin is limited by how much money exists, and how much it's worth. Is there just more currency around these days? Does currency become less valuable to more of it there is? How does this not lead to some kind of economic crash? Does this just make money less valuable basically?