Over the past few years, the world of cryptocurrencies has ballooned from a niche experiment into a sprawling, trillion-dollar financial sector with its own heroes and villains and warring tribes.
You know it’s hilarious – Matt Damon and Tom Brady at super bowl. You know it’s controversial because you don’t live under a rock. (See: FTX’s train wreck)
But you might find yourself nodding at parties when the conversation turns to the collapse of the Sam Bankman-Fried empire, or the merits of proof-of-stake versus proof-of-work. (Or better yet, maybe your party isn’t dominated by insufferable nerds?)
Anyway, it’s 2022 and many people still don’t really understand cryptocurrencies. If you are one of them, please stay. We’re breaking down what this industry is and why it matters, even if you have no intention of investing in it.
tl;dr version: A cryptocurrency is a form of digital asset secured by a decentralized network of computers.
Unlike traditional “fiat” currencies like the euro or the dollar, cryptocurrencies reject the idea of being controlled by a central bank or government. The original cryptocurrency, Bitcoin, emerged in 2009 out of the ashes of the worst financial crisis in modern history.
The pioneers of the digital currency world basically said that against your government control, we want our own currency that cannot be manipulated by any single entity. (It is this anti-establishment origin that makes some cryptocurrencies faithful to, shall we say, intense when they get a chance to talk about it. )
The word “encryption” conjures up images of the way the web is secured, using an encryption system (think: really, really sophisticated encryption) to make tokens nearly impossible to counterfeit. When we talk about “cryptocurrency,” we may be talking about virtual tokens themselves, or the entire ecosystem of digital assets.
Another key element to be familiar with is blockchain. To save us all time, I’m going to greatly simplify here: a blockchain is a digital public ledger that records transactions. It is the record-keeping system on which most cryptocurrencies are built.
“Think of blockchain as Google Spreadsheets,” said Gareth Rhodes, former deputy superintendent of the New York State Department of Financial Services and now managing director of research and consulting firm Pacific Street.
“If Gareth gave Allison $10, and Allison gave someone else the same $10, how do you know that Allison gave the $10 she received from Gareth to her friend? Whether each entry in the table matches the entry before it.”
Basically, there is a large community of auditors invested in the project (more on that later).
Once a transaction is verified by the network, it is stored forever in an immutable “block”.
Bottom line: Blockchain is the foundational technology of the crypto world. It’s the bones. And if you’ve hired a crypto evangelist to get involved, you’ll be familiar with the fact that it’s the most important technological innovation of our time.
Like, of course, people are starting to adopt blockchain systems outside of the crypto world, and they do seem to have promise. Think about medical records — these need to be super secure, but have historically been messy and inefficiently transmitted. The global food supply is another area where blockchain makes it easier for large food producers and distributors such as Walmart to track items from farm to fork and react more quickly if contaminated items enter the mix.
But honestly, the hype surrounding blockchain feels out of proportion to the use cases its proponents have proposed so far.
If you want to dig deeper, tech news site The Verge has a useful article on blockchain here.
It seems like cryptocurrencies were invented out of thin air. In a way, this is true.
The Bitcoin network went public in 2009, created by an anonymous developer (or group of developers) using the name Satoshi Nakamoto.
Fast forward to today, and after several booms and busts, the community is now a massive global network of very expensive, very powerful computers whose sole function is to run algorithms, in a process called mining Solve math problems.
Mining is a tricky concept — there are no headlights or pickaxes — so Rhodes suggests thinking of it as an “audit.”
“Mining is basically just a process where people who invest in securing and validating the network verify these transactions on the blockchain/Google spreadsheet,” he said.
All computers in the network are essentially competing A “target hash” — that is, a very long sequence of numbers — and the first computer to spit out the correct sequence to match the target creates the new block and is rewarded with bitcoins.
it’s basically a game Two functions: verifying transactions and putting new bitcoins into circulation. Another way to think about it is in Powerball, where you have to match a set of numbers to win, the more tickets you buy — or in the case of cryptocurrencies, the more hashes your computer can spit out — your chances of winning bigger.
This computer competition is ongoing, with the winner creating a new block in the chain approximately every 10 minutes, 24 hours a day, 7 days a week.
The whole process consumes a lot of computing power, which is why you hear people say that Bitcoin is an environmental disaster.that could be something or That’s a bit of an exaggeration — proponents are quick to note that traditional finance isn’t exactly a green business — but mining requires a lot of electricity, much of it from fossil fuels, and it’s absolutely true.
This is one of the main arguments made by proponents of ethereum, the second-largest cryptocurrency, which uses a different protocol to verify transactions that are much less energy-intensive.
lol, not much. As of this writing, the number of things you can actually buy with cryptocurrencies is increasing, though it’s still pretty small. Several retailers and shopping platforms are already enthusiastic about using Bitcoin — Home Depot, Overstock, and Shopify, to name a few.
But most retailers don’t accept it. Which kind of undermines the whole “currency” part of the promise of cryptocurrencies.
Most people who own cryptocurrency see it as an investment (albeit a speculative one).
FOMO combined with bored people stuck at home due to the pandemic helped drive up demand for bitcoin and other tokens, a wave that peaked in late 2021. Since then, prices have plummeted. Bitcoin has lost about 75% of its value since its November 2021 high. The same goes for ethereum.
If you are considering investing, be prepared for wild and unpredictable fluctuations in value. Cryptocurrencies are not for the faint of heart.
indeed! U.S. regulators, which oversee the stock market, agree.
Gary Gensler, The chairman of the U.S. Securities and Exchange Commission announced earlier this year that the agency would nearly double the size of its cryptocurrency division and warned that unregistered cryptocurrency exchanges could be operating “illegally.” He also vowed to work with Congress to create regulations for the industry.
This won’t happen overnight.Crypto is the wild west, setting the rules for an industry that does its own thing outside of government oversight It’s…complicated. As Bloomberg’s Matt Levine puts it: “If you try to write all the rules from scratch at once, you’re going to make mistakes. Then people will ruthlessly exploit any mistakes you make.”
Ah, good question. The answer is yes. and no.
Are there scams in cryptocurrencies? 100% also has a lot of scams In traditional finance (or TradFi, in crypto terms). Beyond the usual high-stakes bets and shady companies with snappy names, there are actual crypto Ponzi schemes in play.
but yes all Cryptocurrency a scam? maybe not. There is still a lot of debate about the utility of assets like Bitcoin and Ethereum, and whether their grand vision for the future is something we all want to be a part of.
Rhodes told me that the potential utility of crypto can be a difficult concept for Americans, who have a very complex financial system. “We can keep our money in the bank and not worry about it.”
But things are not always so reliable exist rest of the world. “Outside of the U.S., you have all of these situations where government control of the financial system can give authoritarian regimes enormous power over their citizens, as well as some of the economic mismanagement of these countries.”
In theory, decentralization puts power in the hands of the people.
To be sure, the technology doesn’t exist yet. A person who wants to deposit money in bitcoin because the dictator in charge of the economy let inflation run wild, they can do that, they can transact within the crytpo ecosystem. But at some point, to use it to buy anything, they’ll likely have to convert it back to fiat currency, which is good old-fashioned government-issued fiat currency.