The topic of cryptocurrency is discussed by pundits on the news, influencers on social media, and people trying to make small talk. You would think with how much cryptocurrency gets mentioned we would all be experts by now. But it feels like when you try to ask someone what cryptocurrency is or why they own it – they can’t seem to give you a straight answer. The conversation either becomes technical with new jargon you haven’t heard of before or half-baked responses with generic buzzwords. Whichever kind of crypto “expert” you ask though, their conclusion ends up being cryptocurrency is “the future.”
While cryptocurrencies are an innovation that society is starting to embrace, it’s still a nuanced topic with concepts that are not given enough attention. For cryptocurrency to go mainstream one day and be recognized as more than a speculative investment, it’s essential that we are all on the same page about the basics of what it is.
What is cryptocurrency?
Cryptocurrency, often called “crypto,” is meant to be a medium of exchange just like the dollar. Crypto is digital currency that is decentralized and based on cryptography. Let’s expand on two concepts introduced in this definition of crypto: decentralized and cryptography.
A cryptocurrency isn’t issued by a central authority like a government or bank, the way the dollar and other legal tender are. Instead, cryptocurrencies are decentralized. They are created, exchanged, and overseen by a distributed peer-to-peer network. A peer-to-peer network means that everyone on the network is equal. There is no middleman, and everyone gets access to the crypto’s ledger.
Cryptography refers to the mathematical technique used to secure each unit of cryptocurrency to ensure it can’t be copied. It is a method of encryption and decryption to secure communication to make sure any validated record cannot be reversed or changed.
These are the crucial elements of what makes a cryptocurrency different than the dollar, but what’s the appeal? What advantages does cryptocurrency have over the dollar?
The technology behind cryptocurrency is complex but these are some of the reasons that it is popular:
- There are usually no restrictions on the amount of funds you can transfer.
- The market is open 24/7.
- In some scenarios it can be cheaper to use cryptocurrencies to transfer money versus traditional banks.
Banks have been trying to compete with the disruption of crypto but are still lagging in some areas. Nonetheless, even with the popularity of crypto, how many bank customers in the U.S. are using cryptocurrency as a medium of exchange consistently? Intuition would tell you not a lot of people and you would be right. The US dollar is not volatile in value like most cryptocurrencies are but that’s not the case for all legal tender in the world. It’s important to recognize that cryptocurrency is a global asset that can be utilized anywhere with an internet connection.
Who owns cryptocurrency?
Although it can appear that the only people who own cryptocurrency are folks trying to make a quick buck, in emerging markets crypto is being used practically in a broader sense. Around one-third of the people in Nigeria own cryptocurrency as a means of exchange, according to one global consumer survey.1 Nigerians often use their phones to send money to each other or to pay for goods and services. Recently, businesses have been adding crypto plugins to their phone payment options, adding another way in which Nigerians can use cryptocurrency in their everyday lives.
Even though the crypto economy is still not as prevalent in the U.S., blue chip companies are trying to implement an infrastructure to accept payments in cryptocurrencies. Household names like Microsoft, Whole Foods Market, and Home Depot are slowly starting to participate in the crypto economy.
Can I buy crypto … should I buy crypto?
Investing in cryptocurrency has become easier over the years with the development of major crypto exchanges. However, there are thousands of cryptocurrencies available, each having its own risks and considerations. Before deciding whether you should buy crypto, it is important to do your own independent research.
1 Buchholz, Katharina, and Felix Richter. “Infographic: How Common Is Crypto?” Statista Infographics, 17 Mar. 2021, https://www.statista.com/chart/18345/crypto-currency-adoption/.
Balaj Singh, CFA, CAIA, is a Research Analyst on West Capital Management’s Research Team and supports West Capital Management’s Investment Committee. Singh is responsible for investment due diligence on managers and strategies, portfolio construction, and performance reporting. Prior to joining West Capital Management, Singh was a Senior Stock Operations Associate at Broadridge Financial Solutions, Inc. and a Client Service Analyst at Hamilton Lane Advisors. Singh graduated from Rutgers University with a Bachelor of Science in Finance and Accounting with a Minor in Economics. Singh has earned the CFA Designation and the CAIA Designation.