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You’ve probably been listening to your kids or even your grandkids for months now, talking about cryptocurrencies and all the money they’re making (or losing!).
It’s probably been like watching a foreign language film without any subtitles. You have a slight inkling of what it’s about, and that’s it.
So, what is crypto? By the end of this article, you’ll know what it is, along with the advantages and disadvantages of owning it and using it.
A mouthful, right? That’s why you’ll often read or hear people using the term “crypto.”
A cryptocurrency (I’ll use crypto for the rest of the article) is many things.
Crypto is a medium of exchange. I can buy something from a seller, and pay in Bitcoin, if the seller accepts it.
It currently takes about one hour to confirm a Bitcoin transaction, so although it’s a medium of exchange, it’s not a useful one for live transactions (e.g., paying for a coffee in a coffee shop).
Crypto is a unit of account, or a measure of value. It’s valuable because those who own some agree that it has value. That value is determined by the price that buyers and sellers agree to in the open market.
Crypto is a store of value. You and I can save it. We can store it (in a crypto wallet), and retrieve it when we want to use it for some purpose.
Crypto has the same properties as money:
Divisible – It can be divided into small units.
Crypto can be divided into parts as small as one one-billionth (depending on the crypto).
Fungible – Each unit can replace any other unit and have the same value and use.
Each of those small parts of a crypto coin or token is exactly the same as any of the other units.
Durable – It can be used over and over again without wearing out.
Crypto only exists electronically, so it will never wear out. It does depend on the continued existence of the internet, though. And electricity.
Portable – It’s easy to carry it and transport it.
I could put $1 billion of crypto onto a hard wallet (a physical device as small as a USB thumb drive) and take it anywhere.
Acceptable – People and businesses accept it for payments.
These days, crypto isn’t used much for buying and selling things. It’s used mostly for rewarding users for performing certain actions or sharing things with others.
Uniform – All units have the same value.
Every Bitcoin has the same value as any other Bitcoin, and every Satoshi (the smallest unit of a Bitcoin) has the same value as any of the other 100 million Satoshis that make up a Bitcoin.
Limited in supply – The number of units must have a set limit.
Bitcoin has a limit of 21 million, which won’t be reached for over a century. However, other cryptos don’t have a limit, so they’re considered inflationary.
Bitcoin has likely saved the lives of tens of thousands of Venezuelans.
Many Venezolanos have relatives living overseas, many of them in the U.S. As with expats from many other countries, they remit money to their families in Venezuela.
When hyperinflation began there, many started remitting money as Bitcoin. Family in Venezuela then used the Bitcoin to buy goods from black marketeers who would not accept the bolívar as payment.
So, in Venezuela anyway, crypto has definitely been a payment system.
It is in the developed world as well, if the seller is willing to accept it.
Just as workers exchange their time and/or their skills and knowledge for money, crypto is used to reward people for actions they take or things they share.
Mining crypto is the process of confirming transactions and securing the blockchain. In return, the miner is rewarded a predetermined number of units of that crypto.
A Bitcoin miner currently receives 6.5 Bitcoin, plus transaction fees, for each block it mines.
Staking crypto is a different process from mining. Validators confirm transactions and secure the blockchain, in return for a set number of crypto tokens.
Rewards, in the form of interest, are given for providing liquidity on decentralized exchanges. The more liquidity there is, the more stable the price between two cryptocurrrencies.
Sharing is another way to be rewarded. There are crypto projects that will reward you for making your computer’s storage or an external solid state drive available for others to store their files.
Another project will pay you to make your computer’s graphics processing unit (GPU) available to help render virtual reality video, which requires vast amounts of processing power.
The first crypto, Bitcoin, began in 2009 with the goal of having a financial system that was not and could not be influenced by centralized authorities (governments, central banks and financial institutions).
Peers (e.g., you and I) would be able to transact directly without intermediaries (e.g., Visa, Mastercard, PayPal, banks, etc.).
Fiat money has its disadvantages, which crypto alleviates.
High Fees – If you’ve ever sent money overseas by wire, you know how expensive it is. The sending bank charges a fee, the receiving bank takes a cut, and any intermediary bank also extracts a fee.
I can send Bitcoin around the world for $5 or $10.
Slow Transfers – A wire transfer sent when my bank is open (no sending on weekends!) won’t arrive in the destination account for at least a day, usually two or three if it’s international.
And there’s often the risk that it doesn’t get there are at all.
Crypto transactions are completed in seconds or, at most, one hour.
Exchange Rate Fees – There’s an “official” exchange rate for every currency pair, which is usually determined in the foreign exchange (Forex) markets.
But that’s never what you or I will receive, because PayPal, currency exchange shops, and banks always want their cut (often 5% or more).
Crypto eliminates those takings.
Centralization – Governments and central banks control all aspects of fiat money.
That means that they can be persuaded, corrupted or coerced to act in the interests of a small group of institutions and people.
No one controls crypto once its blockchain goes live. An algorithm runs everything.
Unlimited Supply – I mentioned this earlier — central banks can print as much money as they want. This is inflationary.
Many cryptocurrencies have a set limit coded into the algorithm that runs everything. When that limit is reached, no more new ones can be mined or validated.
Devaluation – Related to unlimited supply. When more and more currency units are added to the monetary system, each is worth less.
For example, since 1913, the U.S. dollar has dropped in buying power by 98%.
Crypto prices go up and down, but the underlying value of each unit remains the same.
Crypto has several advantages not discussed above. These include:
You, and you alone, are responsible for protecting your crypto assets. There’s no deposit insurance in case of bank failure. There’s no broker insurance fund in case your stock broker goes under.
It’s all on you. So security protection options included in wallets, exchanges and rewards platforms are usually higher than in traditional finance and other apps on your computer or phone.
To log in, you’ll need a username and password. You’ll also need a 6-digit code.
The most secure option is Google Authenticator, an app that’s available for both iPhones and Android phones. It provides a different 6-digit code every 30 seconds.
The Coinbase default is to send a text message to your phone with a 7-digit code. This isn’t as secure as Google Authenticator.
Coinbase provides the option to set up two-factor authentication for your account. Be sure to use Google Authenticator if you’re already using it for other exchanges or platforms.
If anyone was able to convince your phone company to send a new SIM card for your phone number (known as a SIM swap), that person would have access to your text messages, and thus all the crypto in your Coinbase account.
Another security tool is the whitelisting of receiving addresses. If anyone ever did gain access to your account and tried to send crypto somewhere else, they wouldn’t be able to.
Whitelisting of addresses usually has a 24-hour lock period. Until the lock is over, no crypto can go to that address.
Unfortunately, some services, like BlockFi, make whitelisting optional. I recommend that you always activate it.
The biggest security risk in crypto is usually the owner, i.e., you and I.
Every day, people do things that put their assets at risk.
Phishing catches a lot of people, and costs them a lot. Exchanges, wallet providers and rewards platforms will never ask you, in an email or a phone call, for your login information or your private key.
That goes for their Support teams as well. If you ever receive an email asking you to contact Support, and then they ask you for your login info, hang up or don’t send the information.
As I said above, you and you alone are responsible for your crypto assets. If you don’t feel that an exchange or other service has sufficient safeguards to protect your crypto, don’t use it!
Many early crypto adopters thought it was a completely anonymous system, that their transactions could never be traced.
They were wrong. Crypto is not anonymous. It’s pseudonymous. Your sending and receiving addresses act as aliases that replace your real name in transactions.
All addresses can be tracked and traced. There are businesses that do nothing but trace crypto transactions to their source, on behalf of the FBI, the IRS, and agencies of other countries.
That said, crypto is private. On an exchange, the person you complete a trade with doesn’t know who you are.
If you spend any of your crypto, the seller doesn’t have to know who you are, depending on what you’re buying.
At that same time, crypto is transparent. Anyone can view any transaction using a blockchain explorer.
All that’s needed is the sending address, the receiving address or the transaction address.
If you know the sending or receiving address, you can see the transactions made to and from that address. That includes the date/time and the amount of each transaction.
You won’t, however, see any information about the person who owns that address.
Complete transparency along with privacy.
In traditional finance, the transaction is private and the people or businesses involved are transparent, especially with digital payments.
Once a transaction is confirmed and is recorded in a block on the blockchain, it can never be altered. There’s a permanent history of the sending address, the receiving address, the date and time, and the amount of the transaction.
There can be no second set of books. There can be no claim that someone didn’t send or receive a payment, a reward or a transfer of crypto. If it’s in the blockchain, it happened, and it can never be hidden or removed.
Ultimately, crypto is a new form of money. And a new way of doing things.
And access to Web3 — the metaverse, where people, businesses and institutions can recreate themselves digitally.
Whether or not you choose to add yourself to the metaverse, it’s coming. In fact, it’s almost here.
And crypto blockchains are helping to power it.