I live in a part of the United States where people are old-fashioned, stubborn and adamantly opposed to change in their lifestyles and the world around them. It should come as no surprise, then, that I am met with strong resistance and suspicion when I try to explain to them why there has never been a better time to start investing in digital assets like cryptocurrency. This is increasingly frustrating, because the crypto market is growing in value, function and diversity every single day and, if recent events are any indication, stands poised to skyrocket in the near future. So, I decided to take what I have learned in the last two years and put it to use dispelling some of the common misconceptions and confusing aspects of crypto. There's no better place to start than at the beginning, so let's talk about what exactly cryptocurrency is and what it does.
The name "cryptocurrency" is extremely misleading, though not entirely inaccurate. It tends to cause people to look at crypto as if it were just another kind of money, but this is not the case. Allow me to illustrate, rather than boring you to death with bland facts and figures:
You are sitting at a Greyhound station (for those of you outside the US, this is a bus company that operates nationwide) waiting for a bus that is going where you wish to travel. Put another way, Greyhound is a travel network to which you want access. Your bus arrives, you get on and the driver demands your ticket. Now, no matter how much money you have in your pocket, that bus driver isn't going to let you ride without that ticket. In other words, if you want access to Greyhound's travel network, you need something that the network accepts as payment for that access. You now have to go and exchange your money for said ticket at the station. This is the basic function that most crypto serves. If you wish to access the services (the bus) of a given crypto network (the bus company), you must have something (the ticket) which that network accepts as payment and you will have to use an exchange service (the station) to get it.
So, what you have with crypto is a digital asset that can be used within its own network to pay for any service offered by that network. That sounds rather limiting until you consider the vast number of crypto networks in operation and all the things they can do. For example, the same protocol that is used to confirm Bitcoin transactions on the block chain and protect against network fraud is used by email service providers to determine whether an email is spam. That is just one of countless examples I could mention of how crypto networks are used in our everyday digital lives, most of which we don't even realize.
I did say that crypto isn't exactly money, but it does possess the ability to serve many of the same purposes. That said, there are many ways in which cryptocurrency shows itself to be far superior to money as a medium of exchange. I'd like to examine some of those differences with you in detail so that we can better understand the real value of the crypto market. I will be using Bitcoin in most of my examples because it is the digital asset with which most people are at least somewhat familiar.
First and foremost, cryptocurrencies are functionally immune to inflation. Digital assets are created with a fixed maximum circulating supply. Once that maximum value is reached, it becomes impossible for any more of that asset to be "minted." Bitcoin has a max supply of 21 million. Because there is a hard cap on how many Bitcoins will ever exist, the fact that new Bitcoin is being minted all the time actually has the opposite affect. Bitcoin contains a protocol that reinforces its resistance to inflation, called "halving." So, Bitcoin is minted through the "mining" process, which is also how transactions are confirmed on the block chain. When a block is sent through the chain, it is assigned a random string of hexadecimal characters (0-9 and A-F) called a hash. Computer processors connected to the network then compete to confirm the block by bombarding it with hashes as fast as possible. The first of these "miners" to send a hash with a value lower than the one on the block is rewarded with a fixed amount of Bitcoin. The "halving" process, as the name implies, reduces the mining reward per block by 50%, but also increases the "difficulty" of block mining by doubling the length of hashes on all remaining blocks. This process results in Bitcoin being progressively harder to obtain, which makes it more valuable despite the fact that there is progressively more of it.
Next, crypto assets are infinitely more secure than money. Most of us go throughout our days never worrying about the money in our bank accounts because we expect it to remain safely there until we take it out. This is a perfectly reasonable expectation, but not necessarily a realistic one. Sure, bank servers have many security measures in place, but none of them are perfect. Skilled hackers can still break into these networks and drain accounts, although this is extremely uncommon. The real problem with bank account security is identity theft, which is quite common all over the world. With just a few bits of your personal information, a person can easily gain access to nearly any of your online accounts without ever having to know the PIN or password you created. Maybe you know that and have decided to keep your money with you as cash instead of trusting a bank. Well, that means you can be outright robbed. A person can be mugged, a safe cracked, a house burgled. Crypto "wallets" are significantly less vulnerable to actually impenetrable, depending on which kind you use. Software wallets store your assets to an account you have within the application, while hardware "cold" wallets secure your assets on a physical drive. Both of these systems are protected by the "seed phrase" system: a random series of words provided to you when you first set up the wallet. Once you have been given your seed phrase, you can set up secondary measures like PINs and passwords, with the seed phrase as a backup in case you forget one of those other things. Here's the thing, once you confirm that you have copied and stored your seed phrase, it can NEVER be recovered under any circumstances, so don't lose it! The good news is, without that seed phrase, no one can access your wallet unless they know the password or PIN, meaning that an identity thief can't steal your crypto. Good hardware wallets boast the additional benefit of being completely inaccessible unless they are connected to a computer, unlocked by password/PIN and then accessed through a secure, encrypted connection to the wallet manufacturer's website. No Wi-Fi, Bluetooth or RFID connectivity means no one can hack your wallet remotely.
There is also the crypto market's versatility to consider, which makes it impossible to accomplish a monopoly. New networks and new assets are being released all the time, providing crypto consumers with an ever-widening variety of choices. In a traditional free market, producers compete for business by providing the best good or service at the lowest possible cost and the highest level of convenience. The problem is that it is common practice for several producers to come together, pool their resources and offer their products at prices far too low for smaller producers to beat or even match. Once the majority of the competition has been thus eliminated, that group raises its prices to whatever it wants, knowing that consumers have nowhere else to turn. In the crypto economy, however, anyone can create a new network and/or asset and release it onto the market. There will always be a plethora of alternatives for the crypto consumer to use, should one become too costly or inefficient. If one network gets greedy, people will just stop using it, causing the value to fall to nothing. No one wants that.
The last and, in my opinion, greatest advantage of cryptocurrency over fiat is that the value of a crypto asset (exceptions for stablecoins) is determined exclusively by consumers. I have been asked two questions more often and by more people than I care to count. First, who decides how much a given cryptocurrency is worth? Second, how do you figure out the value of a crypto asset if you're not using money as the standard of measurement? The answer to both of this questions is simple: it's up to you! The value of any crypto is figured the same as the value of any fiat. That is, the value is equal to whatever good or service you can get in exchange for it. A US dollar is only worth what it can purchase, right? Its value has not been backed or guaranteed by anything other than the "good faith of the United States government" since the '70s. If we are measuring value in US dollars, then one dollar is worth exactly one dollar. No one is confused by that concept, but somehow it seems to fall apart in their minds when applied to cryptocurrency. If a dollar is worth a dollar, why can't a Bitcoin be worth a Bitcoin? Cryptocurrencies, when used as money, are just as self-valuing as fiat currencies. The only question one must ask is, "What can I get in exchange for this?" The only time it really makes any sense to place a dollar value on any cryptocurrency is when you are comparing it to the value of another cryptocurrency. Still, in that case, the dollar is only a placeholder used to indicate the relative buying power of either asset and could theoretically be replaced with any tradeable asset. It's the same formula we use worldwide to determine exchange rates between fiat currencies. How do we calculate the value of US dollars compared to British pounds? Well, how much crude oil can you buy with a dollar? What about a pound?
As you can see, there are a lot of similarities between fiat currency and cryptocurrency, but there are also some glaring differences. These differences can cause a lot of confusion and some serious investing mistakes for people who don't recognize them. Fiat is valuable only because one can buy with it. Crypto is valuable not only because it can be traded, but because it actually DOES something on its network, just like gold and silver have uses outside of their monetary worth which increase their trade value. Best of all, there are only two people in the world who can say what your crypto is really worth: you and the person with whom you are trading. The crypto economy epitomizes the concept of free market capitalism by providing consumers with an exchange system over which they have total control. Producers, be they individuals or massive corporations, will always be found wherever there is profit to be made, but they can't control prices or operate unfairly as long as consumers can simply switch to another currency in another market. Let me show you what I mean with another lovely hypothetical:
Wal-Mart decides to buy up a ton of Bitcoin. Once that's done, Wal-Mart announces that it now only accepts Bitcoin as payment. They do this in order to turn a massive profit by creating a huge, worldwide demand for Bitcoin. The result is exactly what Wal-Mart wanted, at least in the short-term: people who shop at Wal-Mart begin buying Bitcoin, but so do people who are not Wal-Mart customers because they are hoping to ride the rising price of Bitcoin all the way to fabulous wealth. There is just one problem: Bitcoin isn't money. There is only so much Bitcoin in circulation and it is impossible to keep up with the new demand, especially when Wal-Mart is holding so much of it already. Before long, it is so difficult to get Bitcoin that people simply stop shopping at Wal-Mart and move on to businesses that accept other forms of payment. Demand for Bitcoin plummets and takes the price with it. Now, Wal-Mart is stuck with a massive amount of worthless Bitcoin, catastrophic stock market performance and no customers, while other businesses and the currencies they accept continue to grow. At this point, Wal-Mart has two choices: accept new forms of payment or drastically lower their prices to match the scarcity of Bitcoin. In both cases, Wal-Mart gets to eat an enormous, possibly fatal financial loss for being greedy.
I hope that helps you understand the point I'm trying to make. Crypto continues to garner more mainstream attention with each passing day. Wall Street fat cats are starting to talk. Businesses have begun integrating the most common crypto assets into their payment methods. Rich suits from all around the world are breaking into the crypto market. For now, this presents us all with a fantastic opportunity to exponentially increase our own wealth. If we're lucky, we may just find ourselves watching the emergence of a truly fair world market governed by the consumer, where the only hope a business has to survive and thrive is to pay a fair wage, charge a fair price and take as many forms of payment as reasonably possible.
