ECON 101

What the Heck is Cryptocurrency? | Kadam Ali Ali Bakhsh

Amidst the confusion that started with COVID-19 came the rise of cryptocurrency. But what is crypto? Cryptocurrency is a decentralized money system, which, unlike paper money that is backed and printed by any one government and is centralized to that government; cryptocurrencies like Bitcoin are decentralized and not produced by any one person or entity. Rather, multiple computers validate and broadcast information to each other in the network. This means that the network that runs a cryptocurrency such as Bitcoin can distribute, prove transactions, and create money. The coin, in the case of Bitcoin, is produced by using computers, and math to prove transactions on the Bitcoin network. This is called mining.

For the regular person looking to invest in new technology, cryptocurrency is similar to investing in corporate stocks, except that the investor owns and holds that crypto. And unlike stocks— where the investor owns shares of a company, crypto investments mean you buy and own crypto. These coins are not shares of a company, but actual money. Crypto can be bought with online wallets designed to be backed up in the cloud or stored offline. 

Bitcoin & Dollar model / Photo Credit: Unsplash.com

Crypto is not backed by any government, but by the communities of each coin, this is seen by market cap divided by the number of wallets. People see the models and goals of a crypto and decide if the market is right for them. It is best to look at institutional investors like Grayscale, and MicroStrategy when buying crypto, because you can be sure they are investing in real opportunities. 

Another way to buy crypto is to use a decentralized exchange through Coinbase, or Crypto.com, which are two of the largest crypto exchanges. Crypto can be utilized in many different ways—such as saving for retirement, facilitating transactions, or simply moving money.

Bitcoin graph exchange / Photo Credit: Unsplash.com

Decentralization is important in the crypto world as it strengthens blockchain protocols. This is the method in which new transactions are recorded and encrypted using the SHA-256 algorithm. Blockchains become stronger the more decentralized they are, as there are multiple computers verifying each block of code being sent and received on the network. This is the technical computing that takes place behind the scenes of Blockchain. All you need to know, however, is that Blockchain makes recording and moving money faster and cheaper.

In the US, the Federal Reserve monitors the value of the dollar. In this case the United States government can be a node—the point at which money is printed, distributed, and verified. This method is similar to the Bitcoin protocol, but Bitcoin cuts out the middlemen—banks and governments. Since there is only one government printing the US dollar, it is centralized. Crypto advocates believe centralized currency is an inefficient way to produce and distribute money because it limits the number of producers to just one entity, giving said entity complete control and governance. A cryptocurrency is basically a decentralized form of the U.S. government producing, verifying, and distributing money. Because Bitcoin itself isn’t owned by any one entity, the investors drive Bitcoin’s entire network. This design allows for money to be held by anyone in the world regardless of age, class, or gender. Just as fiat currency produces interest from bank savings accounts, cryptocurrency can do the same on the open market. 

Research is important in crypto, but is crypto for you? For the individual investor trying to build wealth from the ground up, it is worth researching the tech you want to invest in. There are many options in the crypto world. The risk to reward ratio is low. If you do not sell at a lower price than what you bought the coin for, you do not actually lose any money. This is called HODLing in the crypto community. HODL is one of several memes that developed some of the methods in which crypto can be traded or held.

Bitcoin and gold card / Photo Credit: Unsplash.com

Bitcoins’ goal is to become “digital gold.” In other words the market cap of Bitcoin should reach the market cap of gold—roughly $11 trillion currently. Bitcoin is only $1 trillion so far. 

Bitcoin can be used to send money anywhere with an internet connection, with very little fees. Let’s say an anonymous crypto wallet sent a total of 101,857 bitcoins to two addresses. One received 5,000 bitcoins, and the other received 96,857 bitcoins. The total amount in fiat would equal roughly $993 million — and it would cost just $0.48 in fees. This alone, breaks the barrier to transporting money across borders. With the public addresses of crypto wallets, you can track large whales or wallets with large amounts of cryptocurrency. Bitcoin can be as simple as buying groceries with a Bitcoin card. I recently lost my credit card and emptied out my debit card on bills. I, however, being resourceful, had previously deposited some money into my crypto wallets. When I needed emergency groceries and takeout, I simply transferred some crypto into my Uphold wallet, where I have a digital Mastercard with a regular credit or debit card layout. I can then scan my digital card at any drive-through and order groceries at any Stop & Shop, or Big Y. Uphold wallet also offers a physical crypto card. The goals behind crypto are to allow people to lend, loan, and earn, but also spend.

Recently, the Chinese government began banning crypto mining. They can only ban, not shut down the whole operation. This move could be to slow down the alarming rate at which crypto has grown. This influence is a hindrance to the crypto community, but will never really shut down. Crypto then transcends the government’s authority, and some, especially central banks, see this as a danger to consumers. Consequently, for Crypto to thrive and become mainstream, some government action is inevitable. 

Regulators approved the first Bitcoin futures E.T.F.s on October 18, 2021. But is this a good thing for people? For those in the know, this move is pivotal in increasing the adoption of cryptocurrencies. To the general public that is still confused about what cryptocurrency is, it’s just too risky.

Smart Contract / Photo Credit: Unsplash.com

The point of futures contracts is for investors to gain exposure to the commodity being exchanged without having to hold the asset itself. These futures contracts allow investors to buy bitcoins without owning any beforehand, but that agreed-upon future price of Bitcoin can fluctuate lower or higher than what the contract costs. In the scenario that your commodity price increases, you get that asset at the original contracted price. However, if the price of Bitcoin decreases, then that contract is a loss since you still pay the higher contracted price if you buy. If you don’t buy the asset by the expiration date, you lose whatever you paid for the contract, but not for the asset itself as you never owned any in the first place. It’s complicated stuff for the regular investor. Bitcoin futures are an opportunity for hedge funds and large institutional investors and, eventually, a gateway into traditional investing.

The point of cryptocurrency is to facilitate transactions at the highest speeds possible with the least amount of fees, and to increase value for investors. So when you decide to invest in cryptocurrency, my best advice is HODL!

Kadam Ali Ali Bakhsh is a Staff Writer for the Blue Muse Magazine

Header Photo Credit: Unsplash.com

Blue Muse Magazine is a general interest literary magazine published by the students of the English Department at Central Connecticut State University in New Britain, Connecticut. We publish poetry, fiction, and a gamut of creative nonfiction on anything and everything the blue muse inspires us to write.

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