Cryptocurrency

Tales of the Crypto

What is cryptocurrency?

Cryptocurrency, such as Bitcoin and Ethereum, is digital money that can be sent electronically anywhere in the world.

How cryptocurrency is different from other money

  • It’s not issued or backed by a government.
  • It’s not a mainstream form of accepted currency, so you probably can’t use it to pay for your morning latte.
  • You can’t stuff it under your mattress or fill your wallet with it because it’s only digital.
  • Compared with other forms of money, it’s brand-new. The first cryptocurrency, Bitcoin, was launched in 2009.

The hot new thing in finance

Cryptocurrency is an exciting but controversial part of the world of finance. Some investors have become millionaires almost overnight as the currencies have taken off in value—Ethereum increased in value by 8,634% in 2017, and Bitcoin’s value jumped 1,475%.

But quick riches are just part of the appeal. Some people think cryptocurrency could one day take the place of ordinary money. The advantages of cryptocurrency include:

  • Anonymous transactions
  • Greater security than traditional banking
  • No middlemen when transfering money
  • A currency value that can’t be manipulated by the government

“We have elected to put our money and faith in a mathematical framework that is free of politics and human error.” —Tyler Winklevoss

Top cryptocurrencies

The ten most popular cryptocurrencies as measured by total value are:

1. Bitcoin
2. Ethereum
3. XRP
4. Bitcoin Cash
5. EOS
6. Stellar
7. Litecoin
8. Cardano
9. IOTA
10. Tether

How does it work?

Cryptocurrency is maintained by a computer network scattered across the globe that records each purchase, sale, or trade on a public database called a blockchain. The blockchain is essentially a secure online spreadsheet that shows transactions.

Buying cryptocurrency

For an established currency, such as Bitcoin or Ethereum, investors can either buy existing units of the currency on a digital currency exchange or “mine” for newly created units.

Here’s how mining works:

Step 1: You request to buy a cryptocurrency unit.

Step 2: A computer network receives your request, and a “miner”—someone with a lot of time and computer know-how—solves a complex math puzzle to verify your cryptocurrency purchase.

Step 3: Once your purchase is confirmed, it’s added to the blockchain, or public database. This entry can’t be changed.

Step 4: Your purchase is complete. Miners receive transaction fees and a new cryptocurrency unit for their efforts.

Risks

With the potential for great riches comes the possibility of great losses. The risks of investing in cryptocurrency include:

Hackers: One hacking group used malicious Google Ads to breach digital wallets, stealing more than $50 million in cryptocurrencies in three years.

Scams: Fraudsters may advertise a new cryptocurrency online and then disappear overnight after collecting money from investors.

No protection: Money in a bank is federally protected if the bank goes belly up. There is no such protection if your digital wallet disappears.

Volatility: Cryptocurrency makes the stock market look tame. Expect prices will swing wildly.

“There is a 20% chance that Bitcoin will become a huge, worldwide success.” —Peter Thiel

Don’t lose your crypto

Your cryptocurrency comes with a public and private key. Think of the public key as your email address and the private one as your password. You need both to spend or transfer your cryptocurrency. Otherwise, your crypto remains locked. You can store this information in a digital wallet to help you keep track of your crypto.

In conclusion

Cryptocurrency is digital money run by a worldwide computer network that records each transaction in a secure public ledger called the blockchain. Enthusiasts like that cryptocurrencies are secure and aren’t regulated by the government. Skeptics say that the currencies are highly speculative, and could end up worthless.

Fun facts

  • More than 1,600 types of cryptocurrency existed as of 2018, with a total combined value of more than $300 billion.
  • Cryptocurrencies are starting to go mainstream: In 2018 Goldman Sachs announced it would be opening a Bitcoin trading desk.
  • Newly minted crypto millionaires have something else in common: They love Magic: The Gathering.
  • Prices of the highest-value Magic cards have jumped tenfold in recent years due to interest from cryptocurrency investors.
  • Ethereum investors have been spending millions on CryptoKitties, a blockchain-based game in which users breed and trade digital cats.

Key takeaways

  • Cryptocurrency is digital money that can be securely sent anywhere in the world.
  • Investors can buy cryptocurrency on exchanges or through a process called “mining.”
  • The advantages of cryptocurrency include anonymous transactions, a lack of middlemen, increased security, and a lack of government control.
  • 
The risks include fraud, hacking, a lack of government backing, and extreme volatility.

References

  1. http://www.fatf-gafi.org/media/fatf/documents/reports/Virtual-currency-key-definitions-and-potential-aml-cft-risks.pdf
  2. https://www.nytimes.com/2016/05/06/business/dealbook/australian-ends-attempt-to-prove-he-founded-bitcoin.html
  3. https://www.ftc.gov/news-events/press-releases/2018/03/ftc-shuts-down-promoters-deceptive-cryptocurrency-schemes
  4. https://blog.talosintelligence.com/2018/02/coinhoarder.html
  5. https://www.nytimes.com/2017/10/01/technology/what-is-bitcoin-price.html
  6. https://www.consumer.ftc.gov/blog/2014/09/bitcoin-breakdown
  7. https://www.ftc.gov/news-events/blogs/business-blog/2018/02/know-risks-investing-cryptocurrencies
  8. https://www.consumer.ftc.gov/blog/2015/06/paying-bitcoins
  9. https://www.cnbc.com/2017/06/20/bitcoin-millionaire-erik-finman-says-going-to-college-isnt-worth-it.html
  10. https://static1.squarespace.com/static/5a19eca6c027d8615635f801/t/5a73697bc8302551711523ca/1517513088503/The+State+of+the+Token+Market+Final2.pdf
  11. https://www.pcmag.com/feature/358046/23-weird-gimmicky-straight-up-silly-cryptocurrencies/24
  12. https://bitcoin.org/en/press#quotes
  13. https://coinmarketcap.com/all/views/all/
  14. https://www.popsci.com/crypto-bitcoin-millionaires-collectibles#page-2
  15. https://www.nytimes.com/2018/05/02/technology/bitcoin-goldman-sachs.html
  16. https://www.nytimes.com/2017/12/28/style/cryptokitties-want-a-blockchain-snuggle.html

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