Over the past few years, the cryptocurrency world has grown from a niche experiment into a sprawling trillion-dollar financial industry, with its own heroes and villains and warring tribes.
But maybe you find yourself nodding your head at parties when the conversation turns to the collapse of Sam Bankman-Fried’s empire, or the merits of proof-of-stake versus proof-of-work. (Or better yet, maybe your parties aren’t dominated by insufferable nerds?)
Either way, it’s 2022, and a lot of people still can’t figure out cryptocurrencies. If you are one of them, stick around. We break down what this industry is and why it matters, even if you have no intention of investing in it.
The tl;dr version: Cryptocurrencies are a form of digital assets secured by a decentralized network of computers.
Unlike traditional “fiat” currencies, such as the Euro or US Dollar, cryptos reject the idea of being controlled by a central bank or government. The original crypto, bitcoin, emerged in 2009 from the ashes of the worst financial crisis in modern history.
The pioneers of the digital currency world basically said, to hell with your government control, we want our own currency that cannot be manipulated by any entity. (It is this anti-establishment background that makes some of the crypto-devotees rather, shall we say, intense when they have a chance to talk about it.)
The term “crypto” refers to how networks are secured, using cryptographic systems (think: really, really elaborate encryptions) that make tokens virtually impossible to counterfeit. When we talk about “crypto”, we can be talking about the virtual tokens themselves or the entire ecosystem of digital assets.
The other key ingredient to be aware of is blockchain. To save us time, I’m going to oversimplify here: Blockchain is a digital public ledger that records transactions. This is the system of record that most cryptos are built on.
“Think of blockchain as a Google spreadsheet,” said Gareth Rhodes, former deputy superintendent of the New York State Department of Financial Services, who is now chief executive of research and advisory firm Pacific Street.
“If Gareth gives Allison $10 and Allison gives someone else the same $10, how do you know Allison is giving that same $10 she got from Gareth to her friend? You have need some sort of way to verify that each entry in this Google Spreadsheet follows the one before it.
Basically, there is a large community of listeners who are invested in the project (more on them in a minute).
Once the transaction is verified by the network, it is stored – forever – in an immutable “block”.
Conclusion: Blockchain is the underlying technology of the crypto world. It’s the bones. And if you hire a crypto evangelist on it, you’re bound to know how it’s the most important technological innovation of our time.
And as, of course, people are starting to adopt blockchain systems outside of the crypto world, and they seem to be showing promise. Consider medical records – these should be extremely secure, but historically have been messy and inefficient to transfer. The Global food supply is another area where a blockchain makes it easier for large food producers and distributors like Walmart to track items from farm to fork and respond more quickly when contaminated items enter the mix.
But if I’m being honest, the hype around blockchain seems out of proportion to the use cases that have so far been showcased by its proponents.
If you want to dive deeper, tech news site The Verge has a helpful article on blockchain. here.
It may seem like crypto was invented from scratch. To some extent, that’s true.
The bitcoin network went public in 2009, created by an anonymous developer (or group of developers) as Satoshi Nakamoto.
Fast forward to today, after many ups and downs, and this community is now a massive global network of very expensive and very powerful computers whose sole function is to run algorithms that solve mathematical problems in a process called mining.
Mining is a tricky concept – there are no headlights or pickaxes – so Rhodes suggests considering it an “audit”.
“Mining is basically just a process by which people invested in securing and verifying the network verify these transactions” on the blockchain/Google spreadsheet, he said.
All computers on the network are basically rushing to a “target hash” – i.e. a very long numerical sequence – and the first computer to spit out the correct sequence to match the target can create the new block and is rewarded with bitcoin.
It’s basically a game with two functions: to verify transactions and to put new bitcoins into circulation. Another way to think about it is to play Powerball, where you have to match a set of numbers to win, and the more tickets you buy – or in the case of crypto, the more hashes your computer can spit out – the better your odds. to win. .
This computer contest runs all the time, with a winner creating a new block in the chain roughly every 10 minutes, 24 hours a day, seven days a week.
The whole process consumes a stupid amount of computing power, which is why you hear people say bitcoin is an environmental disaster. Maybe it’s something an exaggeration – and proponents are quick to note that traditional finance isn’t exactly a green business – but it’s absolutely true that mining requires an enormous amount of energy, much of it coming from fossil fuels .
This is one of the main arguments made by followers of the second largest crypto, ether, which uses a different protocol to verify transactions which is much less energy intensive.
LOL, not much. As of this writing, the number of things you can actually buy with crypto is growing, although it’s still very small. Some retailers and shopping platforms have warmed up to bitcoin – Home Depot, Overstock, and Shopify, to name a few.
But the vast majority of retailers do not accept it. Which undermines its entire “currency” part of the cryptocurrency promise.
Most people who own cryptos treat them as an investment (albeit speculative).
The combination of FOMO and a bored population stuck at home during the pandemic helped drive up demand for bitcoin and other tokens, a surge that peaked in late 2021. Since then, prices have cratered. Bitcoin has lost some 75% of its value since its November 2021 high. Same for ether.
If you’re thinking of investing, be prepared for wild and unpredictable fluctuations in value. Crypto not for the faint of heart.
In effect! And the US regulator responsible for overseeing stock markets agrees.
Gary Gensler, head of the Securities and Exchange Commission, earlier this year announced that the agency was nearly doubling the size of its crypto department and warned that unregistered crypto exchanges could operate “outside the law”. He also pledged to work with Congress to develop regulations for industry.
It won’t happen overnight. Crypto is the Wild West writing rules for an industry based on doing its own thing outside of government oversight it is complicated. Like Bloomberg Matt Levine said it: “If you try to write all the rules from scratch at once, you’ll get it wrong. And then people will ruthlessly exploit whatever you get wrong.
Oh, good question. The answer is yes. And no.
Are there scams in crypto? 100%. There is also lots of scams within traditional finance (or TradFi, in crypto jargon). In addition to generally high-risk bets and shady companies with catchy names, there are real crypto Ponzi schemes.
But are everything are cryptos a scam? Probably not. There is still much debate about the usefulness of assets such as bitcoin and ethereum, and whether their grand vision of the future is the one we all want to embark on.
The potential usefulness of cryptos can be a difficult concept for Americans to grasp because the United States has a very sophisticated financial system, Rhodes tells me. “We can put our money in the bank and we don’t have to worry about it.”
But things aren’t always so reliable in other parts of the world. “You have all these scenarios outside of the United States where government control over the financial system can give authoritarian regimes tremendous power over citizens, as well as mismanaging the economies of some of these countries.”
Decentralization places power, in theory, in the hands of the people.
Admittedly, the technology is not there yet. A person wanting to hide their money in bitcoin because the dictator running the economy is letting inflation run wild could do so, and they could trade it within the crytpo ecosystem. But at some point, to use it to buy anything, they will most likely have to convert it back to fiat, which is the good old-fashioned legal tender issued by a government.