Still not sure what crypto is? Join the club


New York
CNN Business

Over the past few years, the world of cryptocurrencies has grown from a niche experiment into a vast, trillion-dollar financial sector, complete with its own heroes and villains and warring tribes.

You know it’s buzzy – Matt Damon and Tom Brady promote it during the Super Bowl. And you know it’s controversial because you don’t live under a rock. (See: the FTX train wreck)

But you might find yourself nodding at parties when the conversation turns to the collapse of Sam Bankman-Fried’s empire, or the merits of proof-of-stake versus proof-of-work. (Or better yet, maybe your parties aren’t dominated by insufferable nerds?)

At any rate, it’s 2022, and many people still can’t wrap their heads around cryptocurrencies. If you are one of them, stay. We break down what this industry is and why it’s important, even if you have no intention of investing in it.

The tl;dr version: Cryptocurrencies are a form of digital assets secured by a decentralized network of computers.

Unlike traditional “fiat” currencies, such as the euro or the US dollar, cryptos reject the idea of ​​being controlled by a central bank or government. The original crypto, bitcoin, emerged in 2009, from the ashes of the worst financial crisis in modern history.

The pioneers of the digital currency world are basically saying, to control your government, we want our own currency that cannot be manipulated by any other entity. (It is this anti-establishment origin that makes some of the cryptos honest rather, shall we say, severe when they have a chance to talk about it.)

The term “crypto” refers to the way networks are secured, using cryptographic systems (think: real, detailed encryptions) that make tokens almost impossible to counterfeit. When we talk about “crypto,” we can talk about the virtual tokens themselves, or the entire ecosystem of digital assets.

Another key component to be familiar with is the blockchain. To save us all the time, I’m going to dramatically simplify here: The blockchain is a digital public ledger that records transactions. This is the record keeping system on which most cryptos are built.

“Think of blockchain as a Google spreadsheet,” said Gareth Rhodes, former deputy superintendent of the New York State Department of Financial Services, who is now managing director of research and advisory firm Pacific Street.

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“If Gareth gives Allison $10, and Allison gives someone else the same $10, how do you know that Allison gave the same $10 she received from Gareth to her friend? You need a way to verify that each entry in the Google spreadsheet follows the one before it.

Basically, there is a wide community of auditors out there who are invested in the project (more on them in a minute).

When the transaction is verified by the network it is stored – forever – in an immutable “block.”

Bottom line: Blockchain is the underlying technology of the crypto world. These are the bones. And if you’re going to engage with a crypto evangelist about this, you should know how this is the most important technological change of our time.

And like, sure, people are starting to adopt blockchain systems outside of the crypto world, and they seem to hold promise. Consider medical records – they should be more secure but have historically been messy and awkward to transfer. The global food supply is another area where a blockchain makes it easier for large food producers and distributors like Walmart to track goods from farm to fork, and react more quickly when contaminating substances enter the mix.

But if I’m honest, the hype around blockchain feels disproportionate to the use cases that its proponents have so far outlined.

If you want to go deeper, the tech news site Verge has a helpful article on blockchain here.

It’s as if crypto was invented out of thin air. In some respects, that is true.

The bitcoin network became public in 2009, created by an anonymous developer (or group of developers) using the name Satoshi Nakamoto.

Fast forward to today, after a few booms and busts, and that community is now a huge global network of very expensive, very powerful computers whose sole function is to run algorithms that solve problems in mathematics of the process called mining.

Mining is a tricky concept — no headlamps or pick axes — so Rhodes suggests thinking of it as an “audit.”

“Mining is just a process where people invested in securing and verifying the network verify transactions” on the blockchain/Google spreadsheet, he said.

All computers on the network are basically racing towards a “target hash” – aka a long sequence of numbers – and the first computer to spit out the correct sequence to match the target creates the new block, and is rewarded with bitcoin.

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This is a game that has two functions: verifying transactions and putting new bitcoins into circulation. Another way to think about it is playing Powerball, where you have to match a set of numbers to win, and the more tickets you buy – or in the case of crypto the more hashes your computer can generate. – the better your chances of winning. .

This computer competition happens all the time, with a winner creating a new block in the chain roughly every 10 minutes, 24 hours a day, seven days a week.

The whole process consumes a stupid amount of computing power, which is why you hear people say that bitcoin is an environmental disaster. That might be something to an exaggeration – and proponents are quick to note that traditional finance is not exactly green business – but it is indeed true that mining requires a large amount of power, much of which is derived from fossil fuels.

That is one of the main arguments made by the devotees of the second largest crypto, ether, which uses a different protocol to verify transactions that is less energy intensive.

LOL, not so much. At the time of this writing, the number of things you can buy with crypto is growing, although it is still very small. Other retailers and shopping platforms are warming to bitcoin – Home Depot, Overstock and Shopify, to name a few.

But most retailers won’t accept it. Which kind of undermines the whole “currency” part of the cryptocurrency promise.

Most people who own crypto treat it like an investment (albeit a speculative one).

A combination of FOMO and a bored population staying home during the pandemic helped fuel demand for bitcoin and other tokens, a wave that peaked in late 2021. Since then, prices have -crater. Bitcoin has lost some 75% of its value since its peak in November 2021. Ditto for ether.

If you are thinking of investing, be prepared for wild and unpredictable changes in value. Crypto is not for the faint of heart.

Indeed! And the US regulator in charge of overseeing stock markets agrees.

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Gary Gensler, head of the Securities and Exchange Commission, earlier this year it was announced that the agency would almost double the size of the crypto department and warned that unregistered crypto exchanges could operate “outside the law.” He also promised to work with Congress to create regulations for the industry.

That doesn’t happen overnight. Crypto is the Wild West, and writing the rules for an industry built to do its own thing without government oversight is … complicated. As Matt Levine of Bloomberg said: “If you try to write all the rules from the beginning of a walk, you will make mistakes. And then people will mercilessly take advantage of anything you do wrong.

Ah, good question. The answer is yes. And no.

Are there scams within crypto? 100% There are also many scams within traditional finance (or TradFi, in crypto lingo). In addition to the usual high-risk bets and shady companies with quick names, there are actual crypto Ponzi schemes at play.

But about all crypto scam? Apparently not. There is still much debate about the usefulness of assets like bitcoin and ethereum, and whether their grand vision for the future is one we all want to get on board with.

The potential utility of cryptos can be a difficult concept for Americans to grasp because the US has a very sophisticated financial system, Rhodes told me. “We can put our money in the bank and we don’t have to worry about it.”

But things are not always reliable on other parts of the world. “You have all these scenarios outside of the United States where government control of the financial system gives a lot of power to citizen authorities, and also the mismanagement of some countries’ economies.”

Decentralization puts power, in theory, in the hands of the people.

To be sure, the technology isn’t there – yet. Someone who wants to keep their money in bitcoin because the dictator who runs the economy allows inflation to run, and they can sell it within the crytpo ecosystem. But at some point, in order to use it to buy anything, they will probably have to convert it back to fiat, aka good old legal tender issued by a government.

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