Crypto. Blockchain. Digital Currency. Bitcoin. From the front page of the New York Times to Reddit posts, lots of terms are floating around that most people know have _something_ to do with money and tech, but they aren’t quite sure of the details. And, given the host of ads that ran in this year’s Super Bowl, people are bound to become even more crypto-curious.
If you are one of them, this article is for you. We’ll start with a list of some of the more common words used in the media, and then talk about what this all actually means for the world today.
- Crypto used to be (and still is in some circles) short for cryptography, the study of making communications between two parties absolutely secure (there’s usually a lot of math involved). But these days, crypto is almost always about cryptocurrency.
- Cryptocurrency, as defined by Investopedia (great resource if you’re not already familiar with it), is “a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend.”
- Digital Currency, coming back again to Investopedia, is “a form of currency that is available only in digital or electronic form. It is also called digital money, electronic money, electronic currency, or cybercash.” Some organizations in this space insist that there is a difference between digital currency and cryptocurrency, saying the former has national backing in the same way that governments back the euro, the dollar, the peso, and so on. They see the latter as outside any government backing, so you’re on your own if you invest in the cryptocurrency space.
- Bitcoin is one expression of cryptocurrency, and is currently the one with the biggest market share in the crypto space.
- Ethereum is another big name you might hear, and it is a cryptocurrency like Bitcoin, holding quite a bit of the market share itself.
- Blockchain is not a cryptocurrency. It is a technology like a database is a technology, though in this case it is a technology that cryptocurrencies use to support their claim of being uber-secure and highly resistant to fraud.
So now you have some basic terms, and for the sake of this article, I’m going to hold that “cryptocurrency” includes digital currency backed by governments and cryptocurrency backed by anyone else.
Cryptocurrency is definitely a concept that’s making waves in the world, and more than with just the geeky crowd. There are entire countries getting involved in this space and making it a financial reality to be reckoned with. n an individual level, popular financial management companies like Betterment and Personal Capital are offering cryptocurrency options as part of their investment portfolios. Crypto is _everywhere_.
OK, fine, but is it really REAL? I mean, how real can it be if it isn’t a physical asset, and it isn’t backed by gold, silver, or a government’s promise? Well, let me ask you a different question: Why do you believe the piece of paper in your (physical) wallet has value? Probably because when enough people believe in the value of crypto, the perception becomes a reality. When people stop believing in it, you have something like a bank run, and if you get enough of those, you can entirely trash a nation’s (or even a world’s) economy (there’s some interesting research regarding bank runs and the Great Depression, if you’re interested in some ‘light’ reading on economic theory—ha!).
Ironically enough, cryptocurrency started to take off as a popular topic of discussion around 2017, as the first big ‘bubble’ formed and then burst. Bitcoin dropped 65% of its value in 2018 to about $3500 per bitcoin, and everyone was talking about it. Enough people talked about it that they (apparently) got very excited about buying these new, speculative thingies while they were on “sale” due to the crash. Now Bitcoin is back up to being worth about $44,340. It’s an amazing rollercoaster of speculation.
As with all market speculations, you’re going to find people who believe Very Strongly in the thing they are buying. You’re also going to find people who believe Equally Strongly that it’s a scam. And, you know what? They’re both going to be right. Cryptocurrency has value as long as people believe that it does. Enough people currently believe this is the future of the finance industry that they’ve convinced governments to ride the wave, providing further apparent legitimacy to the idea. And, like every market-driven enterprise, the value will go up and down in cycles—it is no more a “sure thing” for investment than gold. (Example: Do a search on “can never go wrong buying gold” and you’ll find as many articles suggesting “never do it” as you will articles about how great of an idea it is to buy gold.) If you’d really like to geek out on the technology behind cryptocurrency and how some people argue that it’s better than humans at determining monetary policy, this article in Wired might be for you.
Finally, just a note, this article is to offer you a quick reference for the key terms you’ll see in articles about the crypto space. It is not financial advice; your acceptance of risk in your investments is all up to you. But as with everything covered by IFM, we hope you’ll find our information helpful in making informed decisions!
