Here’s what you should know about crypto
14 years ago on Halloween, the idea of bitcoin was hatched, and since then the world of cryptocurrency has taken off, most recently experiencing a meteoric rise and fall over the past year.
To mark the white paper that started it all, Yahoo Finance is kicking off its first episode in a series on crypto that hits the basics of what this emerging technology is and how its assets have blown into finance.
Whether you’re a firm believer like Jack Dorsey and sometimes Elon Musk or a longtime skeptic like Warren Buffett and JPMorgan Chairman and CEO Jamie Dimon who both see crypto as delusional like the 17th century Dutch Tulip craze, it’s important to know how it started, what cryptocurrency is, how it differs from other assets, and of course the technology behind it all – blockchain.
Short for cryptocurrency, “crypto” refers to a group of digital currencies and surrounding assets that are secured through encryption thanks to a network of computers all running the same software.
Think of it another way, a blockchain is a distributed ledger of data and a cryptocurrency serves as its unit of account.
After several iterations, the idea of the “Bitcoin” blockchain and its unit of account “bitcoin” was shared for the first time on the Internet on October 31, 2008 by the anonymous developer(s) called Satoshi Nakamoto.
Nakamoto called the idea “a new electronic cash system that is peer-to-peer, with no trusted third party.” It meant that people could trade bitcoin between each other without a bank. It also meant that people could take part in trade with more anonymity.
The largest and first true cryptocurrency as we know it today, Bitcoin proved to be just the beginning of what has become a fast-moving, busy and often confusing area of finance.
As a means of payment, cryptocurrencies have yet to gain mainstream adoption, although they have been used to pay for luxury goods such as cars, yachts, watches and real estate by the crypto-rich and people living in regions where the local currency faces hyperinflation and access is low on dollars.
Several major brands including AMC, Home Depot, Microsoft, Overstock, Virgin Airlines, Whole Foods and the country of El Salvador all accept bitcoin and other cryptocurrencies for payment.
Visa and Mastercard have also partnered with a number of crypto firms, allowing customers to use cash or crypto from their brokerage accounts through debit and credit cards that offer loyalty benefits such as crypto rewards.
Beyond payments, many cryptocurrencies are not necessarily intended for use as currency.
The second largest cryptocurrency Ether, for example, serves as the unit of account for Ethereum, also a payment network, but better thought of as an ecosystem of applications and programmable contracts under development. Using Ethereum, people can create and trade other digital assets such as non-fungible tokens (NFTs) or trade in decentralized finance (DeFi) – a miniature, and yes, still evolving, blockchain-enabled financial system that in a handful of ways works more efficient than the traditional financial system.
Unlike the U.S. dollar which is backed by the U.S. government (and strong as hell), there are more than 10,000 other cryptocurrencies around the world today, and while it’s arguable for a handful, most have little or no intrinsic value beyond what people are willing to pay for them at any time.
That said, in the coming years this may change. This is no small part of why people invest in cryptocurrencies and, along with their much smaller size by market cap, why cryptocurrencies are most often traded like high-growth technology stocks.
According to Coinmarketcap, the total market capitalization of cryptocurrencies and associated assets is around $1 trillion. That’s about two-thirds the size of Apple ( AAPL ) or equal to the market capitalization of Tesla ( TSLA ) plus Bank of America ( BAC ).
At varying speeds, governments around the world are grappling with how to regulate cryptocurrencies. In the United States, bitcoin is almost unanimously considered a commodity like gold or even soybeans, but for federal tax purposes, the Internal Revenue Service (IRS) classifies all cryptocurrency as property.
Along with the volatile returns, crypto can be complicated and it has also been a boon for fraudsters and digital thieves. Conservative estimates put illegal activity at less than 1% of all crypto activity, according to Chainalysis. But for an asset class that has fallen between $3 trillion and $700 billion over the past year, the estimate for the total amount lost is not paltry.
Hacks, in particular, have climbed to over $2 billion in stolen funds since January.
To paraphrase Warren Buffett, if you want to invest in cryptocurrencies, learn the language, be skeptical, don’t invest in something you can’t understand, price and value are not always the same, and it’s worth remembering that the future is never clear.
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