By J. Ferguson and M. Ferrandi
Posted February 1, 2022
If, like us, you pay close attention to the news, you have probably read a lot about cryptocurrency (“crypto”) recently. A quick search of the Internet provides some crypto-related headlines that are truly eyebrow-raising. They include: “Most Millennial Millionaires Have Half or More of Assets in Crypto: Report,” “This crypto surges 91% in last 24 hours after Elon Musk’s tweet,” “The Man Who Solved Bitcoin’s Most Notorious Heist” and “Unable to Retrieve Money, Cryptocurrency Investors Want Dead Executive Exhumed.”
But what exactly is crypto? And why should we care about it? Having previously been considered too volatile, or too “faddish”, crypto has been recognized by many established companies, financial institutions, and governments as a valid means of exchange (payment). Crypto has also gained increasing acceptance within the professional investment community as an asset to be considered when constructing a diversified portfolio.
Over the next four weeks we will post information outlining how crypto has developed, common crypto terminology, its risks, and potential downsides, as well as real world applications that include “NFTs.”
Before we begin our examination of cryptocurrency, a word of caution. This blog is not intended as an advertisement for crypto. And to be clear, by no means do we believe that cryptocurrencies are suitable for all investors. Our intention in writing this blog is to help you eliminate the noise coming from the media and provide you with a better understanding of what cryptocurrency is and why it matters.
The term “crypto” comes the Greek word “kryptós,” meaning secret or hidden. Complicated “cryptography” is at the heart of the use of digital currencies and their transactions. Digital currencies, by nature, are electronic – there is no physical coin. A feature of these currencies is that they are built as code in systems which are very decentralized. Cryptocurrencies can also be bought and sold on exchanges and their values often fluctuate wildly.
In 2009 Satoshi Nakamoto created “Bitcoin”, the first digital currency. Nakamoto is in fact a pseudonym – they could be an individual or a group of people – and the creator’s identity is unknown. Bitcoin was created in the wake of the 2008 financial crisis, partially as a reaction to the excesses of the financial system. The primary intention was to create an alternative to traditional, bank-controlled transactions, allowing two parties to exchange funds directly and eliminating the involvement of costly middlemen. Today there are thousands of active cryptocurrencies (and thousands more have been created and become worthless over the years). Aside from Bitcoin, you may have heard of Ethereum, Dogecoin or Binance Coin.
In addition to creating Bitcoin, Nakamoto also developed the first “blockchain”, which is the technology that is essentially a public transaction ledger, and the platform used to trade crypto. Key to the ledger, each “block” (record) on the chain is timestamped and contains information about the previous one. Blockchain technology is well encrypted and immune to fraud or manipulation because verification is handled through complex mathematical equations.
In our next blogpost we will review some of the terminology associated with crypto.