What is Cryptocurrency?

March 29, 2021

Life is lived more and more online these days. For better or for worse, the boundaries between digital life in virtual worlds and physical life in the real world is getting thinner and thinner. One evidence of this is found in the rise of cryptocurrency.

Cryptocurrency is digital currency. There are no metallic coins or bills of paper. FINRA, our government regulator, defines it as “a digital representation of a stored value secured through cryptography.”1 Investopedia adds: “Many cryptocurrencies are decentralized networks based on blockchain technology—a distributed ledger enforced by a disparate network of computers.”2

Clear as mud? I thought so. Maybe Katie Haun, a former federal prosecutor of crimes that took place in the crypto space and who now serves on a board of a cryptocurrency exchange, can help. She described the blockchain that cryptocurrencies are based on in her appearance on the Tim Ferris podcast like this:

“…it is a massive ledger that keeps track of who owns what. And instead of some central entity keeping track, it’s instead done by what are called nodes all over the world. And these nodes, in the case of the Bitcoin blockchain, are called miners. 

And the best way to think of them in my mind is, think of miners like the workers who are performing computing work to secure the system that keeps track of this ownership. So it’s this decentralized, not centrally controlled, big huge ledger that keeps track of who owns what.”3

Since cryptocurrencies are not regulated by any governing authority, it is simultaneously endowed with allurement and risk. An unregulated asset that is exchanged beyond nation-state borders may have benefits to democratize currency, but the unregulated nature of it and its impact upon geopolitics also carries a ton of risk. There is a “dark side” to cryptocurrency too. It has been used for nefarious purposes on the dark web. But let’s be honest, so has—wait for it—any kind of money.

There are many kinds of cryptocurrencies and time will tell which one might rise above the others in a lasting way or if they all go to zero, but the one you’ve probably heard of is bitcoin. It gets the most press and currently is valued the highest. It has only been around since 2009 and is shrouded in some mystery being that it was created by an anonymous person or group of people named “Satoshi Nakamoto”. Bitcoin continues to receive increasing attention as Tesla recently bought a bunch of it and plans on accepting it as payment4, and cryptocurrencies in general can be exchanged on PayPal.5

Occasionally we are asked by our clients if they can invest in bitcoin in their accounts that we manage. For now, the answer is, “No.” Since it’s unregulated and highly speculative it is not something that our compliance department approves, and this article itself is purely for informational purposes only and does not represent any kind of investment advice.

But who knows what might develop in the future with cryptocurrency? With life being lived more online and the acceleration of digital technologies, whether its unregulated like bitcoin or Ethereum or a government sanctioned digital asset yet to be created, cryptocurrency may be something that is more widely accepted and held more broadly in investment portfolios. We will have to wait and see.