Experts Explain Everything That Ever Confused You About Cryptocurrency
From blockchain to what gives it value to how to get started — this has you covered.
Cryptocurrency, bitcoin, blockchain — you’ve probably been seeing these words a lot lately. It seems like everyone, from your college roomie to your grandma, is suddenly investing in cryptocurrency or buying NFTs. Meanwhile, on March 9, President Joe Biden signed an executive order in which he directed federal agencies to look into strategies for regulating cryptocurrency. But what exactly is crypto, and why is everyone talking about it? Elite Daily spoke to two experts on the topic to answer those questions and more.
Tavonia Evans is the founder of Guapcoin, a cryptocurrency platform designed for small businesses, merchants, and regular individuals to use and spend their money. Vivian Fang is an associate professor of accounting at the University of Minnesota’s Carlson School of Management. Here is what they have to say on what cryptocurrency is, the risks and rewards involved, and what it means for the global economy.
The following interviews have been edited for length and clarity.
To start off, how would you explain cryptocurrency to someone who knows little to nothing about it?
TE: I would describe it as digital money or virtual currency. It's very, very close to the virtual currencies we use in gaming. There are games that actually have virtual currency that have real value in the real world: Second Life’s in-game currency, Linden dollar, is trading in the real world against other currencies. People have created value with those things. If they want them and there is a demand, then it will naturally have value. Typically it's currency that's not distributed by a corporation or a bank or government. It is usually distributed through a blockchain, which is referred to as decentralized.
VF: There are three important facts: Crypto is decentralized, which means it's not supposed to have any government or central authority behind it. That makes cryptocurrencies different from government-issued currencies like U.S. dollars, whose value is backed by their government. It also means there’s no security system, no banks that you can call if your cryptocurrency wallet is hacked and stolen.
It's also digital and intangible, so even though some are named “coins,” you don't have bills or coins in your wallet that you can look at. Cryptocurrencies are decentralized digital currencies that rely on cryptography for security and the blockchain for recording transactions. If I sent you one bitcoin, that's a transaction, and this transaction is data/information, and we rely on the blockchain for recording transactions.
Wait — so what is blockchain?
VF: In simplest terms, a blockchain is just a network of computers that allow multiple parties to share data, and it’s how we keep track of crypto transactions. All you need is a computer to be a participant on the chain. The new data, which records transactions, can be uploaded if the participating computers on the chain agree. Existing data can’t be changed because updates are not decided by a human or government or any other central authority — it’s the computers that have to agree.
How safe is it? The blockchain — at least the Bitcoin version of the blockchain — is built in a way that if you take down 51% of the participating computers, you can collapse the entire blockchain. However, this is incredibly costly.
Why use cryptocurrency, when government-issued currencies exist? What gives cryptocurrency its value?
TE: Cryptocurrency is peer-to-peer, so you're not having all of these middle processors like banks involved, and transactions are faster. If you are using your debit card or your credit card, it's really not instant settlement. They make it look like it, but it's not — that's why people can file chargebacks or have “pending” transactions. What crypto does is provide instant settlement, because it doesn't have to go through any bank or centralized financial institution. Once you send it, that's it, unless they send it back to you. It really is less red tape than moving money, therefore making it more affordable than services like Western Union or MoneyGram. It could actually be cheaper in the long run for you to use crypto to move money to people across the world. That’s one of the things that differentiates it from paper money.
Money’s value is about how you value it, and that can easily be transferred. Creating a cryptocurrency is largely about community too. When you build a community around something, you’re investing in its shared value.
VF: The question is, how do you calculate this value? You can’t apply traditional valuation to cryptocurrencies because they don't generate cash. A lot of these values really depend on who is looking at it and on who is trying to do the valuation.
It’s a very tricky question. The fact cryptocurrency can be exchanged for goods and services — what we call a medium of exchange — is one reason that we consider it as valuable. If you just live a very simple life and credit cards are just fine, you may not have to worry about things like how your money is exchanged for goods or between people. However, what if you want to send money to family living in a different country, who have no access to U.S. credit cards? There are a lot of people, especially in some of the really poor countries, who have no access to a banking system. But even without banking accounts or credit cards, they can still buy or use crypto. For die-hard crypto believers, they value this idea of democratizing financial markets by giving everybody access to the financial systems through cryptocurrencies.
Right now we're witnessing a situation where this might matter. Ukrainians, and Russians too, may lack access to their own financial systems, either because of sanctions or violence. But if you have Internet and you can still access your crypto wallets, that is pretty powerful. What if you escape to Poland and you can’t use your Ukrainian credit cards? If you have this global network you can access, you can still use the money you put in wallets.
How would someone start using cryptocurrency?
VF: For the average person, there are basically three uses. First one is just spending: Since more companies, like PayPal, are accepting mainstream cryptocurrencies, like bitcoin, you can spend cryptocurrencies just like the way you spend government-issued currencies.
Second would be investment if you have the risk tolerance, because it’s volatile. For people who have a very long investment horizon — we're talking about 20 years — then you can potentially allocate a small portion of your portfolio toward cryptocurrencies.
And some really aggressive retail traders treat cryptocurrency like meme stock, a stock that has gone viral on social media — they hope just to buy low and sell high and for quick profits. For the average person, these are basically the functions of cryptocurrencies.
Are there different types of cryptocurrency? If so, what are they and how are they different from one another?
TE: Decentralized cryptocurrencies, like Bitcoin, Dogecoin, and Ethereum — these are exchangeable and they can be spent. They have a value that's consistent across the world, across markets. Then, you also have something called stable coins, virtual currencies that are mapped to government-issued currencies. Their value is a lot less volatile, because of the underlying currency that's backing it — if stable coins are backed by U.S. dollars, their value is going to be roughly around the same value as a dollar.
You also have what's called security coins or tokens, which are similar to stocks. They represent an investment into something, whether it's a product, commodity, company, etc. People typically expect to receive some type of return or profit when they invest in security tokens. These are a lot less common because it's a heavily regulated space.
Lastly, utility coins, which are used for a specific purpose. Those are like your gaming coins, tied to a platform that will allow you to be able to do something. Almost like at Chuck E. Cheese, you’ve got to buy those coins in order to be able to play the games.
Where do NFTs come in? What is an NFT, and why would you want to buy one?
TE: NFTs are different from crypto in that they are nonfungible, which is to say not directly exchangeable. That's actually why they call it NFT: nonfungible tokens. When you're purchasing an NFT, you're purchasing an individual thing that's mapped to something of value to someone, and there’s not something you can directly trade that's equal to it. Think of it as a certificate of ownership on something that has a particular value, and that value can go up or it can go down. One of the reasons people are excited by them is because they give creators an opportunity to capitalize on their own work and not have to go through a middleman to sell. When you purchase an NFT, you’re an individual collector, or you’re joining a collector club of other individuals.
VF: NFTs are tokenized digital work: It could be a video file, a tweet, or anything. You can consider them digital collectibles, and this is a collector's game in the digital world. Last year, the artist Beeple sold a piece of his digital work at Christie’s for $69 million. It's very interesting, but it's also highly volatile and highly subjective.
TE: Anything that has a specific value — or someone thinks of as value — they can mint as an NFT and transfer that value over to other people. NFTs will eventually probably be used for things like real estate ownership.
Can you walk me through how someone might get started investing in cryptocurrency?
TE: No. 1, get a wallet. You can get a wallet for free on Android and hold different cryptos within one wallet. Also, investigate some of the projects that are out there, join the communities, see what's going on. Find something that you can feel really good about because you may wind up sticking with it for a long time.
There is no criteria to start. That's the wonderful thing about it. You can install the wallet and earn crypto or get crypto from Airdrops — typically a promotional move by crypto start-ups to promote new virtual currencies. If you're a real savvy person, you can just monitor every new crypto that's coming out and Airdrop and participate and collect those cryptos.
But know that this is a Wild West and there is nobody guarding or protecting you. You have to be responsible because there's always someone trying to get your crypto, even if you don't have a lot. You have to be very careful and guard your keys and usage and be savvy about the tons of crypto scams on social media. This is a very, very scammy space. There's not going to be a customer service number that you're going to be able to call if you lose your crypto. You're trading in the nanny system of money for a freer system of money, but that also means that you have to be more responsible.
What are the potential downsides of using cryptocurrency?
TE: The downside is that you are responsible for it. The safety nets present in government-issued currency are not there. There’s also the problem of translating it over to your local currency. Even when I'm dealing with bitcoin, even though we have calculators and wallets that do transfers, it's still a little bit confusing to translate how much crypto is versus our local currency.
VF: Another downside is volatility; if you're looking at putting your money into cryptocurrencies, you have to be aware of the risk. Cryptocurrencies also still heavily rely on electricity to mine: It just burns a lot of electricity. This problem — the negative environmental impact of mining cryptocurrencies — is a life-death situation for this industry. Quite a few mining companies out there are investing heavily in renewable energy.