Over the past few years, the world of cryptocurrencies has ballooned from a niche experiment to a sprawling, trillion-dollar financial sector, complete with its own heroes and villains and warring clans.
You know it’s buzz – Matt Damon and Tom Brady promoted it during the Super Bowl. And you know it’s controversial because you don’t live under a rock. (See: the train wreck that is FTX)
But maybe you find yourself nodding along at parties when the conversation turns to the collapse of Sam Bankman-Fried’s empire, or the merits of proof-of-play versus proof-of-work. (Or better yet, maybe your parties aren’t dominated by insufferable nerds?)
It’s 2022 anyway, and many people still can’t really wrap their heads around cryptocurrencies. If you are one of them, stay tuned. We break down what this industry is and why it matters, even if you have no intention of ever 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 screw with your government control, we want our own currency that cannot be manipulated by any entity. (It’s that anti-establishment origin that makes some of the crypto rather faithful, shall we say, intense when they get a chance to talk about it.)
The term “crypto” refers to the way the networks are secured, using cryptographic systems (think: really, really extensive encryption) that make the tokens virtually impossible to forge. When we talk about “crypto”, we can talk about the virtual tokens themselves, or the whole ecosystem of digital assets.
The other key ingredient to be familiar with is the blockchain. To save us all time, I’m going to dramatically oversimplify here: The blockchain is a digital public ledger that records transactions. This is the record keeping system that most cryptos are built on.
“Think of the blockchain as a Google spreadsheet,” says Gareth Rhodes, former deputy superintendent at the New York State Department of Financial Services, who is now the managing director at research and advisory firm Pacific Street.
“If Gareth gives Allison $10, and Allison gives someone else the same $10, how do you know that Allison is giving the same $10 she received from Gareth to her friend? You need some way to verify that each entry on that Google spreadsheet follows the one before it.”
Basically, there’s a huge community of auditors out there 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”.
Bottom line: Blockchain is the underlying technology of the crypto world. It’s the legs. And if you engage a crypto evangelist about it, you’re sure to hear how it’s the most important technological innovation of our time.
And like, sure, people are starting to adopt blockchain systems outside of the world of crypto, and they seem to hold promise. Think of medical records – they should be very secure, but have historically been messy and inefficient to transfer. The global food supply is another area where blockchain makes it easier for large food producers and distributors like Walmart to track items from farm to fork and react more quickly when contaminated items enter the mix.
But if I’m being honest, the hype surrounding blockchain feels out of proportion to the use cases outlined by its proponents so far.
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 out of thin air. To some extent this is true.
The bitcoin network became public in 2009, created by an anonymous developer (or group of developers) named Satoshi Nakamoto.
Fast forward to today, after several booms and busts, and that community is now a massive global network of very expensive, very powerful computers whose sole function is to run algorithms that solve math problems in a process called mining.
Mining is a difficult concept—there are no headlamps or pickaxes—so Rhodes suggests thinking of it as “auditing.”
“Mining is basically just a process by which people who are invested in securing and verifying the network verify those transactions” on the blockchain/Google spreadsheet, he said.
All the computers in the network are essentially chasing a “target hash” – aka a very long numerical sequence – and the first computer to spit out the correct sequence to match the target gets the new block, and is rewarded with bitcoin.
It’s basically a game with two functions: to verify transactions and put new bitcoin into circulation. Another way to think of it is playing 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 chance to win.
This computing competition happens all the time, with a winner creating a new block in the chain approximately every 10 minutes, 24 hours a day, seven days a week.
The whole process eats up a stupid amount of computing power, which is why you hear people say bitcoin is an environmental disaster. It might be something from an exaggeration – and advocates are quick to point out that traditional finance is not exactly a green business – but it is absolutely true that mining requires a large amount of power, much of which is derived from fossil fuels.
This is one of the main arguments put forward by fans of the second largest crypto, ether, which uses a different protocol to verify transactions that is much less energy intensive.
LOL, not much. At the time of this writing, the number of things you can actually buy with crypto is growing, though still very small. Some retailers and shopping platforms have warmed to bitcoin — Home Depot, Overstock and Shopify, to name a few.
But the vast majority of retailers don’t accept it. Which kind of undermines his whole “currency” part of the cryptocurrency promise.
Most people who own crypto treat it like an investment (albeit a speculative one).
The combination of FOMO and a bored population stuck at home in the pandemic helped drive demand for bitcoin and other tokens, a wave that peaked at the end of 2021. Since then, prices have cratered. Bitcoin has lost about 75% of its value since its peak in November 2021. Ditto for ether.
If you are thinking about investing, be prepared for wild and unpredictable fluctuations in value. Crypto not for the faint of heart.
Indeed! And the US regulator in charge of overseeing stock markets agrees.
Gary Gensler, head of the Securities and Exchange Commission, announced earlier this year that the agency was nearly doubling the size of its crypto division and warned that unregistered crypto exchanges may be operating “outside the law.” He also promised to work with Congress to set regulations for the 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 is… complicated. As Bloomberg’s Matt Levine put it: “If you try to write all the rules from scratch in one go, you’ll get things wrong. And then people will mercilessly exploit whatever you do wrong.”
Ah, good question. The answer is yes. And no.
Are there scams in crypto? 100% There are also many scams within traditional finance (or TradFi, in crypto lingo). Besides just generally high-risk bets and shady companies with cheesy names, there are actual crypto-Ponzi schemes at play.
But is everyone crypto a scam? Probably not. There is still much debate about the utility of assets like bitcoin and ethereum, and whether their grand vision for the future is one we all want to get on board with.
The potential utility of cryptos can be a difficult concept for Americans to grasp because the US 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 are not always so reliable in other parts of the world. “You have all these scenarios outside of the United States where government control of the financial system can give authoritarian regimes enormous power over citizens, and also the mismanagement of some of these countries’ economies.”
Being decentralized puts the power, in theory, in the hands of the people.
To be sure, the technology is not there yet. A person who wants to store their money in bitcoin because the dictator running the economy is running inflation can do so, and they can trade it within the crytpo ecosystem. But at some point, in order to use it to buy anything, they will most likely have to convert it to fiat, aka good old-fashioned government-issued legal tender.