Cryptocurrency might be the next generation of money, some say. Just like artificial intelligence and self-driving cars, it’s a part of the quickly accelerating smart technology revolution.
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Cryptocurrency is a digital currency that operates on a distributed database. It provides users a quick way to directly transfer money, taking out the middleman — so no more waiting for a check to be cashed or a credit card payment to be finalized.
About 97 percent of the dollars in circulation now are not paper cash, says David Pelleg, a finance professor at Kent State University. So most of us take part in digital economies, and cryptocurrency, especially the most known, Bitcoin, may be worth looking into. It was launched in 2009, and it’s becoming more prevalent and continuing to develop.
“The world is changing very fast from a technology perspective,” says Pelleg, who teaches the Bitcoin and Blockchain Tech course at Kent State. “It’s safe to say digital life is only going to increase. And Bitcoin is a component of all of this modernization.”
Pelleg chats about what cryptocurrency is and how you can get in on this new frontier.
What is it and why use it?
A digital currency, cryptocurrency is handled on a distributed database, and that technology is known as a blockchain. There are different kinds of cryptocurrencies, such as Ethereum and Bitcoin. Through Bitcoin’s blockchain, each user has a digital wallet, which holds bitcoins, and a balance, which reflects how much you have. In Bitcoin, one bitcoin is equivalent to about $57,000 U.S. dollars as of press time in mid-October, and it can be broken into Satoshi units down to one-millionth of a bitcoin. A bitcoin’s value can fluctuate. Within the last year, it has been as low as about $11,000 and as high as over $64,000, according to CoinDesk.
Bitcoin has 21 million minable bitcoins, and more cannot be created. As of press time, about 18.77 million have been mined or brought into circulation. Once coins are in circulation, users can transfer them directly to one another, without the need for a third party. You must use a personal private key, or a password, to complete each transaction.
The major difference between cryptocurrency and what you do now is that even if you’re using non-paper money, like a debit or credit card, you’re still using a third party — a bank or other financial institution. And if you’re transferring money to someone through your phone, using something like Venmo, a popular mobile payment app, that process adds another third party in. Eliminating third parties gives you more control over your money and limits the risks surrounding banks and other financial institutions.
Since cryptocurrency eliminates overarching institutions, the transfer process is immediate. This is meant to add convenience and take away uncertainty. Consider the difference between immediacy and the process of paying someone with a check. When you write someone a check, there is uncertainty over when the person will cash it and whether they actually received the money. There is no waiting time with cryptocurrency. Each transaction is recorded permanently in the blockchain, so there is no uncertainty over whether someone sent money. Transactions can’t be reversed because they are immutable, so that eliminates the risk of transactions being taken back by a sender.
The integration of cryptocurrency could possibly make transactions less expensive with improved technology. Pelleg gives the example of buying a cup of coffee with your credit card. The credit card company takes a 3 percent cut, so if you pay $10, the coffee shop only gets $9.70.
“That cost has to be absorbed by everybody,” he says. “By removing the third party, it potentially makes it cheaper.”
Another benefit is its universality. It is the same everywhere, so you can pay people across the globe without having to worry about conversion fees, which are present in services like Western Unions. Although countries have different laws about cryptocurrency — El Salvador accepts bitcoins as legal tender, while China banned them — people from many countries have it.
“No one can have any control over that transfer,” Pelleg says. “And that transfer is immutable, so once it is done, it can never be undone.”
How do I start?
If you’re interested in joining the world of cryptocurrency, there are a few things to keep in mind.
Bitcoin’s database is incredibly secure. About 51 percent of computers that hold the blockchain would have to be hacked at once to damage it. Despite this, there are still some risks. Although the likelihood of Bitcoin getting hacked is very small, your computer could get hacked, and your private key that you need for transactions could get stolen. There are some ways to protect your private key, such as using external cold storage, which isn’t connected to the internet.
Another way to ease some worries you may have as a beginner is to let a third party, such as Coinbase, manage your bitcoins. To start, make an account and transfer Coinbase some dollars for bitcoins. This is especially beneficial if you’re using cryptocurrency as an individual and want to start with a small amount, but if you’re looking to begin with a big amount, seek out a professional.
“If you just want to buy $100 worth, or $1,000, not a huge amount, then you can go through Coinbase,” Pelleg says. “They can give you the bitcoin to hold in your own wallet, or they can custody it for you.”
What do I use it for?
Right now, cryptocurrency is used in some commerce, but there aren’t many ways to use it in the local economy. It is more often used in virtual economies. It’s not widespread, but cryptocurrency can be used for tipping small amounts digitally. One way to do this is through the web browser Brave, which has a crypto wallet built into it that holds digital currency.
“Someone creates a video or writes a blog or a podcast, or they write a poem. … It’s easy to give somebody a token, rather than to connect to your bank,” Pelleg says.
Since it is gaining traction, many people also use cryptocurrency as an investment. More than 10 percent of Americans invested in cryptocurrency since July 2020, according to a survey published by the University of Chicago. And although it’s a popular investment and an industry that’s developing, Pelleg cautions that it is still a speculative investment because it’s not certain it will become widely used. You should not invest in cryptocurrency with money you can’t afford to lose, he advises.
“A digital currency will succeed, and if it does, it will be Bitcoin — that’s the bet,” Pelleg says. “If you make that bet, you have to be willing to lose 100 percent. If you believe that it’s going to hit, it will be an amazing investment, because it will really go up a lot.”
While it can be risky, cryptocurrency also has lots of momentum, so it’s worth keeping your eye on.
“Bitcoin is a new kind of money that is more tied into our new information economy, which is emerging right now,” Pelleg says. “It’s becoming more and more common.”
[ Assistant Editor Alexandra Sobczak is passionate about inclusivity, correct grammar and pop music. ]
