2020 and 2021 have been amazing years for Cryptocurrency. Dozens of cryptocurrencies have reached new all time high prices. Bitcoin, easily the most identifiable of the cryptocurrencies and already a major hit with Main Street investors, has become mainstream with Wall Street, with seasoned traders and analysts from JP Morgan Chase (one of the largest banks in the world) to BlackRock (the largest asset manager in the world) showering it with accolades and rosy predictions about its short-term and long-term future. And a whole new world of finance and investing has opened up to millions of people with the explosion in Summer 2020 of Decentralized Finance (aka “DeFi”) which allows users to access traditional financial services like mortgages, loans, and insurance without having to go through traditional financial companies like banks. Not to mention the resurgence of Non-Fungible Tokens (aka "NFTs") in Spring 2021 that allow people to cash in on art and other collectibles in a secure and digitized manner.
Perhaps you already know all of this and are a veteran in the cryptocurrency space. Or perhaps you’re like I was in the middle of 2019: completely new to crypto but itching to learn and understand more.
What is Cryptocurrency?
A cryptocurrency is a digital asset. But what does that mean?
First and foremost, cryptocurrencies are completely online and there are no coins or paper money that you can use or hold. While some cryptocurrencies do represent real-world objects (more on this later), the value of most cryptocurrencies is tied to the intangible benefits that they offer, such as being easy to transport and transfer, being safe and secure for online or real-world payments, and, in many cases, being a solid store of value and potential investment opportunity (cue disclaimer about how this is not investment advice).
We’ve touched on it a bit already, but it’s important to understand that cryptocurrencies serve a variety of purposes. For example, millions of merchants currently accept them as payment for goods or services. Can you imagine paying for your groceries or for a haircut with Bitcoin? It’s completely possible thanks to the businesses that accept cryptocurrencies directly and other companies, like PayPal and BitPay, that act as crypto payment processors for businesses that want to accept crypto but receive cash instead.
Maybe you’ve heard Bitcoin and Ether (another major cryptocurrency) being compared to gold and silver. How is that possible since gold and silver are shiny, physical, and have been used for thousands of years? Simply put, a lot of users and other smart people understand that there is significant value in an asset that isn’t controlled by a government or company who can simply create more of it whenever they feel like it. Do you ever wonder why the purchasing power of the U.S. Dollar continues to shrink with each passing year while the value of gold and Bitcoin go up? It’s because the U.S. government and U.S. banks continue to “print” trillions of dollars worth of money each year that simply didn’t exist before. Meanwhile the “creation” of new gold or Bitcoin on an annual basis is tiny by comparison.
Why should I trust Cryptocurrency?
A valid question to ask for any asset in which you might be considering investing a lot or a little money.
Perhaps one of cryptocurrencies’ greatest value propositions is that they can be completely separated from the control of governments, companies, or any one individual. Many cryptocurrencies have achieved a complete or almost complete level of “decentralization”, which simply means that the cryptocurrency is completely run and controlled by the people who use it. If the fact that a cryptocurrency is controlled by normal people rather than an all-powerful government or bank worries you, remember that most people are just like you and me. They want the cryptocurrency to maintain its purchasing power. They want to use the cryptocurrency for whatever purpose they purchased it. And since most cryptocurrency users are normal people like you and me, it’s extremely difficult for a bad actor like a criminal or rogue government to take control of the cryptocurrency for “evil” purposes like stealing money or information. People just won't allow that if they can help it.
It’s also crucial to cryptocurrencies’ success that they be safe and secure. We don’t want to get too bogged down by the technical aspects of cryptocurrency, but it will suffice to know for now that many cryptocurrencies are secured by some of the most sophisticated encryption tools that exist in today’s world (such as SHA-256 for Bitcoin).
The most important security aspect of a cryptocurrency is likely a part of the software that it is built upon: the blockchain. In the simplest terms a blockchain is a digital record of all transactions ever performed using the cryptocurrency that runs on it. Blockchains for most cryptocurrencies are public, meaning that anyone with internet access can review the entire list of a cryptocurrency’s transactions at any time anywhere. Blockchains are unchangeable and no one can reverse a transaction and take back money that you’ve sent or received. And blockchains are protected by the thousands or tens of thousands of computers around the globe that are actively running the software at any given time.
What types of Cryptocurrencies are out there?
We’ve been talking mostly about public cryptocurrencies like Bitcoin and Ether so far. These are the cryptocurrencies that you’ve most likely heard about from the news, on social media, or from that relative over Christmas dinner who you thought was out of their mind until Bitcoin and other cryptocurrencies went up by 300% or more in value in 2020.
However, there are other types of cryptocurrencies that you might not have heard of up to this point. One type is digital tokens that are directly tied to the value of an asset or commodity, physical or otherwise. The most recognizable of these digital tokens are called “stablecoins”. The value of a stablecoin is tied to and commonly backed by a national currency like the U.S. Dollar, Euro, or Japanese Yen. Since stablecoins are digital versions of these national currencies that people use every day, they can be more easily and conveniently transferred than using a physical currency or a bank while also having almost no risk of losing value since they are tied to the national currency directly through real reserves or indirectly through algorithms. In fact, stablecoins have been so successful that various governments like the U.K., China, and the U.S. are currently preparing or running pilot programs of “Central Bank Digital Currencies”, which are simply stablecoins that are created by a government. While stablecoins are the most recognizable type of digital tokens, there are many others that represent the value of other assets like precious metals, art, and real estate.
Another type are what I’ll call “private” cryptocurrencies in that they are controlled by a third-party entity rather than controlled exclusively by users. For example, JP Morgan Chase recently created the “JPM Coin” which it bills as a “digital coin designed to make instantaneous payments using blockchain technology”. A similar, slightly older, private (depending on whom you ask) cryptocurrency is XRP, one of the largest cryptocurrencies out there. XRP was created and is largely managed by the company Ripple. While these companies would likely argue that they provide value not shared by public cryptocurrencies, there is also a substantial risk suffered by private cryptocurrencies not shared by public cryptocurrencies: the risk of the company’s failure or circumstances impacting the cryptocurrency’s viability and value. In this regard, XRP provides a perfect example, having lost almost two-thirds of its value in December 2020 due to the U.S. Securities and Exchange Commission (the “SEC”) having sued Ripple while claiming that XRP is an “unregistered security”.
Why should I use Cryptocurrency?
The decision to use or not use cryptocurrency is very personal and unique for everyone. No matter your individual circumstances, you should make every effort to research a cryptocurrency and may want to consult an expert or investment adviser before you buy it. Most importantly, understand that all cryptocurrencies, even Bitcoin, are relatively new and carry significant risk of partial or total loss for a variety of reasons.
I can’t make the decision for you as to why you might buy cryptocurrency. But let me give you a few common (paraphrased) reasons I often hear:
“The current financial system is broken, it excludes too many people, and it only makes rich people richer and poor people poorer. Cryptocurrencies are open to everyone and the benefits are shared by everyone.”
“Cryptocurrencies can only be accessed by the user/owner. No government, bank, or thief can take them from you if you don’t let them.”
“Certain cryptocurrencies (like Bitcoin) will maintain their value as, thanks to inflation from printing of money by governments, prices go up.”
I’ll also tell you that the biggest reason why I use cryptocurrencies is because of the financial freedom and opportunity they provide. Cryptocurrencies can be a great way to build and maintain wealth. Cryptocurrencies and the communities built around them don’t need to know who you are to operate successfully, so anyone is free to join and participate in the benefits. History may look back on the creation of cryptocurrency as the greatest financial revolution that the world has ever known. Either way, you certainly don’t want to miss the chance to find out more about cryptocurrency and the ways it may improve or even change your life.
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