Part 1: What is Cryptocurrency?

On the day I’m writing this I can safely say that I know a lot more about cryptocurrency today than I did a year ago.  I can also confidently say that my journey to understanding cryptocurrencies has just begun.   

I’m hoping that I can drag you along with me on my journey.  Why?  Because I think that cryptocurrency might have a profound impact on our relationship with money in the very near future.  More, we could be at a tipping point where the entire concept of value is redefined. 

I know that’s a big claim, but it’s already happening.  And like most other impactful technological leaps, it’s like a slow winding river that’s headed for a cliff—slowly, then suddenly.   

The first few parts of this series are meant to educate, to bring you up to speed with my interpretation of cryptocurrencies.  Much of this is my opinion, and does not represent the views of Quaker Wealth Management, nor should it be construed as investment advice.   

We’ll start off with the (seemingly) simplest of questions: What is Cryptocurrency? 

Cryptocurrency, in it’s broadest sense, is a decentralized, digital token that uses cryptography to regulate the security, creation, and distribution of said token.  Huh?!  Let’s break each part of that definition down into easier-to-understand parts. 

  • Cryptocurrency is DIGITAL 

It exists only on the internet.  Even though you may have seen pictures of Bitcoin, Dogecoin, or others floating around, there is nothing physical about the currency—you cannot touch or hold cryptocurrency. 

  • Cryptocurrency is DECENTRALIZED 

This means that no one person, company, or nation controls the currency and the decision making process that goes along with it.  Exchanging cryptocurrency is a peer-to-peer action regulated by the decentralized network itself.  In turn, this gives the power to the masses versus the few—this is the point!  It does not need a central bank or government. 

  • Cryptocurrency uses CRYPTOGRAPHY 

Transaction are scattered throughout the decentralized network who confirm the transaction using a cryptograph, or code.  When there are enough parties that confirm the transaction, it goes through.  This all happens very quickly, and the purpose is to reduce fraudulent transactions.  The folks that confirm the transactions are also called “miners” and are typically compensated by receiving a payment in the form of that cryptocurrency. 

What was the first Cryptocurrency? 

Bitcoin of course!  The idea was first outlined in 2008 by some using the pseudonym Satoshi Nakamoto in a white paper entitled, “A Peer-to-Peer Electronic Cash System.”  The Bitcoin network launched in 2009.  Nowadays, there are hundreds of cryptocurrencies (more on that later). 

So, what’s the point? 

Well, originally is was meant to be a type of digital money with the hope of solving some real problems: autonomy of transactions, international purchases, use by individuals living in countries with unstable governments, and cheaper and faster transactions to name a few. 

But, the use case has evolved over time.  While the intention initially was for cryptocurrency to behave like other currencies, it has now expanded to solve other problems—smart contracts, bottlenecking, etc.  

What really interests me, though, is that the idea of cryptocurrency has been reframed as a store of value, sort of like gold.  Most cryptocurrencies have a finite supply.  So, as the U.S. and other countries print money to solve their (very real) problems, many believe that this will lead to the inevitability of inflation.  Like gold (better, maybe?), cryptocurrency may provide a hedge against inflation, and because it’s supply is fixed, I believe, it has a better supply-demand proposition than other commodities (remember, gold is being constantly mined). 

And because there has been this commodity-based mental shift in cryptocurrency, they are now traded like other assets. 

Stay tuned on Part 2 where I talk about when wall street has slowly come around to the idea of cryptocurrency and who the big players are.  Slowly…. then suddenly. 

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