If you spend any time on the internet, you’ll likely hear that crypto is either a bad-for-the-environment, male MLM (multi-level marketing) for unethical crypto bros just looking to get rich off of stupid ape pictures and a haven for criminals trying to launder money; or, it is a super safe appreciable, inflation-protected asset that will make you money, give you freedom, and protect you from the fascist elites who are destroying the dollar.
While these descriptions are certainly extremes, there is an element of truth in both opinions.(And if you don’t understand any of that, stick with me because I explain more below.)
Yes, crypto does have a “bro-y” culture and has tons of people ”investing” because they think they’re going to get rich (whether it is really investing or just gambling is a question I’ll discuss below). Celebrities are spending lots of money on digital pictures of “bored” apes. Bitcoin mining requires an immense amount of energy. Crypto is being used for illegal and unethical purposes.
On the other hand, crypto and the blockchain could represent the future of money and provide value in increased security, digital accuracy, decentralized structure, and individual control. And many, but certainly not all, financial advisors are now recommending that a small portion of your portfolio be invested in crypto because of both its potential for gain and its ability to balance risk.
So what should we think about crypto?
It’s impossible to predict the future of crypto, particularly as a way to make money. Some people have certainly made money from owning it, but you’re out of luck if you bought Bitcoin in November and need to sell it now. Even Melania Trump has experienced a decline in value when she attempted to auction off a hat and only took bids in crypto.
Many of the claimed benefits of crypto have yet to be established as truth, such as the claims that it provides protection from inflation, provides stable value, is protected from hackers, or is safe from the influence and policies of national governments (see here and here).
But underneath all of the speculation and crazy claims is a solid system that has real world application. It would be a mistake to totally pass off blockchain technology as a total scam for gambling crypto bros.
If you’ve looked at the news around crypto and come away with this sense, then it’s time to dig deeper and understand what is behind the hype. To do that, you’ll need to understand some of the terms.
Crypto Terms You Need to Know
Blockchain
Underneath all cryptocurrencies is the blockchain technology. It’s the infrastructure on which Bitcoin, Ethereum and others are built. Think of it sort of like how the internet provided a basis for all sorts of online applications.
At its core, blockchain is a method of digital recordkeeping that attempts to provide increased accuracy and security. Current record keeping methods are messy, prone to mistakes, and easily lost or changed. If you’ve ever had to find an old record or have had your name spelled wrong on something, you’ve experienced the challenges of our current system.
Blockchain technology aims to fix these problems. Information stored on the blockchain is harder to change and is therefore (theoretically) more secure. Each piece of information is verified before being recorded. It’s almost like getting every single record or document notarized.
To understand more about how it works, check out this video.
Cryptocurrency
A cryptocurrency is a digital-only currency that uses blockchain technology to record transactions. In terms of how it is used, it is not that different from a foreign currency. You can change U.S. Dollars into Bitcoin just like how you would change them into Euros. They are all just different methods of exchange.
Bitcoin
Bitcoin was the first cryptocurrency (the first anything, in fact) to actually use blockchain technology. The idea was to create a currency that would be decentralized—not managed by or chained to any national government and does not require banks or the banking system.
Bitcoin and other cryptocurrencies get “mined,” but not in the way that we usually think of as mining where something of value is dug out of the ground. Instead, Bitcoin is created through the process of solving complex mathematical equations that verify Bitcoin transactions on the blockchain. (Yes, that sounds crazy and unless you’re really into learning how blockchain works, it’s probably better to just move on.)
Ethereum
Ethereum is actually a blockchain network, not a currency. Think of it sort of like a programming language that you can use to build other applications and keep digital records. Ether is name of the cryptocurrency that is used as the method of exchange for things in the Ethereum network.
NFTs
NFTs are non-fungible tokens built with the Ethereum blockchain. A fungible token is like a coin, where one coin is the same as the next coin and it doesn’t matter which one you have. Non-fungible means that each token is unique. And of course it is all digital.
You may have heard of the Bored Ape Yacht Club and celebrities paying millions for digital pictures of bored apes. In this way, the NFTs are functioning as collectible pieces of digital art. You buy one with the hope that it will gain value because it is one-of-a-kind.
But NFTs have a much wider range of uses, many of which haven’t even been developed yet. For example, they have a lot of potential for helping musicians get paid for their work.
Implications of Blockchain and Crypto
A lot of this still sounds crazy, particularly since the media focuses on the more strange and outlandish stories. However, it is not something that should be ignored. Bitcoin and other cryptocurrencies may or may not become a primary medium of exchange and may or may not be a good investment. But it is providing some value to the world and the underlying blockchain technology is here to stay.
Here are a few real world examples to help you make sense of it all:
Money for the Unbanked or Underbanked
Think about how all money currently flows through banks. You generally keep your money in a bank and banks are involved in every single (non-cash) transaction you make. All you need is a smartphone and an internet connection to send or receive money.
Many people who don’t have access to banks or who live in countries where their assets could be seized like the fact that Bitcoin and other cryptocurrencies can’t be taken or made to disappear.
Faster and Cheaper Money Transfers
You know how it takes several days to transfer money from one bank to another? For example, if you want to transfer $1000 from your checking account to your Roth IRA, it takes 2-3 days before the transfer is complete. Bitcoin and other cryptocurrencies bypass the bank to bank transfer system.
In addition, cryptocurrencies can eliminate expensive wire transfer fees for people sending money back to their families in other countries and make it much faster.
Smart Contracts
Records recorded on the blockchain eliminate the need for multiple people to “touch” a transaction by making it automatic. Smart contracts are revolutionizing everything from financial records, to copyrights, to supply chain systems, to international trade.
In general, contracts on the blockchain improve efficiency, increase accuracy, and keep records more secure.
The Future of Crypto
No one knows exactly what crypto will look like in the future, but I think it’s safe to say that the underlying blockchain technology has significant value in how we manage money and do business. If you haven’t already, it’s worth it to start paying attention and learning more.
