A Brief Introduction to Cryptocurrency

Chances are that if you were to reach into your pocket or purse right now, you’d be able to locate some cash, either in coin or paper form. This is the cash we know and love. Touch it, feel it, roll around in it, buy something nice with it. This is why I struggled at first trying to get my head around this thing called, “cryptocurrency.” Because there is nothing touchy-feely about cryptocurrency. It is pure digital cash. You can’t put it in your pocket, although you can put it in a wallet, but not that wallet in your back pocket or purse. (More on this wallet later), because there is nothing physical about cryptocurrency. Knowing this begs a few questions. For example: What exactly is cryptocurrency? What are its advantages over cash, if any? Why is there such a buzz around it? I’m never going to buy any crypto, so why the hell should I care about it? I think these are all good questions, the kind I have been asking myself. I tend not to think about cryptocurrency much at all, but this has now changed, given the recent election.

You have no doubt heard the news that Trump has now put Elon Musk and Vivek Ramaswami in charge of a new organization called the Department of Governmental Efficiency. Well, in case you missed it, the abbreviation for the Department of Governmental Efficiency is “DOGE,” which also happens to be similar to the name of the cryptocurrency Musk has endorsed, called “Dogecoin.” I had forgotten this little tidbit until my wife reminded me of it. Both Trump and Musk are into cybercurrency, so expect to hear more about it in the near future.

So, follow along with me as I briefly describe cryptocurrency, at least enough to eliminate constant head-scratching when we start hearing more and more about it. And we will. Both Musk and Trump are very bullish on crypto. We need to understand why.

What is Cryptocurrency?

I’m going to skip the particulars about crypto history. You can search for information about this history and find a lot written about it. My purpose here is to just make us all smarter about what the hell crypto is, and I can do that without a deep-dive into its past. That said, the history is interesting and if you have the time and interest, is worth looking into.

Cryptocurrency, as I said, is a completely digital currency. It began in 2008 with the publication of a white paper about Bitcoin. Bitcoin as a product was launched in 2009. Since that time, much has been said and written about it. In the news we hear about people who made millions, even billions investing in cryptocurrency, only to be turned into paupers overnight when the bottom fell out of it. This tells us one thing we need to know right now about crypto – it’s volatile!

Before going too much further, be aware that there are different types of cryptocurrency. I won’t go into these at all in this post, but list them here purely for your information. Some you may have heard about, others not so much:

• Bitcoin (BTC):
  • The largest cryptocurrency by market cap
  • Seen as a store of value and “digital gold”
• Ethereum (ETH):
  • Second-largest cryptocurrency
  • Known for its smart contract capabilities and as a platform for decentralized applications (dApps)
• Binance Coin (BNB):
  • Native token of the Binance ecosystem
  • Used for trading fee discounts and various applications within the Binance network
• Solana (SOL):
  • High-performance blockchain platform
  • Has seen significant growth and adoption in recent years
• XRP:
  • Used for facilitating cross-border transactions
  • Has faced regulatory challenges but remains popular
• Cardano (ADA):
  • Known for its research-driven approach and focus on sustainability
• Toncoin (TON):
  • Originally developed for Telegram’s messaging platform
  • Now managed by the TON foundation
• Dogecoin (DOGE):
  • Started as a meme coin but has gained significant popularity
  • Often used for online tipping and transactions
• Tether (USDT):
  • A popular stablecoin pegged to the US dollar
  • Used for trading and as a stable store of value in the crypto market
• Uniswap (UNI):
  • Token of the largest decentralized exchange (DEX) on Ethereum

Being a digital currency as opposed to the physical currency we all know and love, is not the only difference between a dollar in your pocket and cryptocurrency. One other big difference is that cryptocurrency requires no central bank or regulating authority to manage it! That’s right, no bank involvement!

It is only fitting perhaps, that crypto, being a fully digital currency, is managed 100% digitally as well, via something called cryptography, which is a fancy word for the process of writing and verifying codes. This means that it is all computerized. It just so happens though, that this method of managing crypto is very secure. Be aware that while cryptography provides a good deal of security, there are individual cases known where people’s wallets, crypto exchanges, and accounts were breached. Thus, while blockchain seems uncrackable currently, being vigilant about possible theft is still required. It is believed that breaking into blockchain will require a sophisticated quantum computer, and we’re not there… yet, and probably won’t be for years.

Oh, and there’s something more… crypto can’t be counterfeited! If we think back over the news these past few years involving bank problems, fraud, hacks, etc., the differences between money in a bank vs money in crypto can seem very appealing, I think. The great security of crypto is provided through another digital technology called, “blockchain.” More on this below.

I will avoid a deep-dive into the technologies involved with crypto, but there are some things one can learn about without needing a computer science degree. For instance, the typical scenario involved with managing our money has at least three key participants: You, the bank, and your money. In this most common scenario, often referred to as “centralized banking”, the bank is the proverbial middleman, permitting, perhaps even throttling, or in some cases, preventing access to our funds. We are so used to doing things this way, that it’s hard to think of any other way to do it, other than stashing your life savings under your mattress.

But, crypto does it differently. You see, crypto eliminates the middleman! That’s right, no bank is needed! Any financial transaction between you and the person or business etc., that you are exchanging funds with, will involve no one else. This scenario, where there is just you and the other person or business, is called a “peer-to-peer” relationship, and crypto is often referred to as a peer-to-peer asset system. Eliminating central banking authority is appealing to those who worry that traditional systems are untrustworthy or inconvenient. There is more to all of this behind the technology involved, but this is all you need to know at this point.

This peer-to-peer approach to money is a significant difference from our traditional system involving banks. But crypto and our old-fashioned money, the dollar, also share a significant similarity. Both currencies represent what are called, “fiat currencies.” A fiat currency is one that is not backed up by anything tangible, like gold, for instance. By the way, if you have been laboring under the belief that the US money system is backed by gold, you need to slap your face and wake up. That system of money valuation, known as the Bretton System, which pegged the value of a US dollar at $35 gold, disappeared in 1971 thanks to Tricky Dicky.

Nixon nixed that system and ended the convertibility of the US dollar into gold. Nixon did this because of fears of inflation and a potential run on gold, which is somewhat ironic given that his decision led to a period we now call the Great Inflation! This was a period of time that included high inflation, economic stagnation, and a struggling stock market. Inflation eventually peaked at 14.76% in 1980, and the price of gold rose to $875 per ounce.

But the US wasn’t the lone ranger. Today, there is not a single country that backs up its currency with gold and the US remains a 100% fiat currency system.

So now I have to get into something that I always imagine being explained by people in robes, waving their hands in the air mysteriously, because I need to address a question that popped into my head the minute I learned gold no longer backs up our dollar: “Where does the value of our money come from if it doesn’t come from gold?”

The answer is this: The value of our money in the US and any other place that has a fiat currency, is derived from the fact that it is legal tender and because people have faith in its use as money. “Legal tender” means that the money in question must be accepted, by law, if offered in payment for a debt or purchase. The currency in question therefore is valuable not because it is backed by gold, but because it is backed by the government. Thus, the value of cryptocurrency is simply in its usefulness as a medium of exchange, meaning it can be bought, sold, counted, stored as a value, and used as a unit for accounting purposes.

What I just said above is true not only for our dollars, but for our cryptocurrency as well! The thing to remember is that this system of valuation only works as long as people maintain confidence in the currency and the government that is backing it. This is because it is backed up by economic output and the stability of the issuing country. I guess this means be careful who you are buying your cryptocurrency from!

Okay, let’s recap what we’ve learned so far:

• We know that our normal system of banking is called a centralized system, whereas crypto is a peer-to-peer system;
• We know that crypto is digital whereas the dollar is physical;
• We know that both crypto and the dollar are fiat currencies, which means neither is backed by gold and only gain value from the perception of the people using it.

But there is more to learn. Hang in there.

We already know that cryptocurrency is digital money. Let’s face it, it is a kind of “funny money,” if you will. Don’t get me wrong, it’s real money alright, but you can’t stuff it in the belt of some dancer, can you?. However, you can stuff your digital cryptocurrency into a digital wallet! What? Yes, you can get a digital wallet to hold all your crypto! In fact, getting a wallet is the first thing you need to do if you want to get into crypto!

Getting Started with Crypto

Let me walk you through the process…

1. Download or Purchase a Wallet:
   • Go to Google Play and get yourself a cryptocurrency wallet. There are several types of wallets (software, hardware, and web-based). Some wallets allow for multiple types of cryptocurrencies, others are specific to one or another type e.g., Bitcoin or Ethereum.
2. Setup Your Wallet.Your wallet will come with an address.
   • This address is important and you will use it to send or receive cryptocurrencies. You can start receiving cryptocurrencies when you share your address with whichever business you are dealing with. You can also send crypto to someone by entering their address and the amount you wish to send. Think of Paypal. Like that. One difference though, is that unlike Paypal, there is no identifying information at all associated with your address! Just the amounts in question. However, if you want, you can choose to share your identity publicly. But that is by conscious choice, it won’t happen otherwise. This will be made more clear when I discuss blockchain below.Please note, however, that the authorities have ways to track certain wallet activities. In some cases, a sophisticated analysis can make it possible to trace an address back to an individual. In other words, crypto makes it very hard to track people, but not impossible.
   • If you think I’m kidding about the address, here is an example of a crypto wallet address: “1A1zP1eP5QGefi2DMPTfTL5SLmv7DivfNa.” Yep, pretty cryptic!
3. Secure Your Wallet.
   • You will be asked to create a password and a recovery phrase for your wallet. This is critical!! Forget your password if you want to, but if you forget this phrase, no one, not God or anyone, can ever get your wallet open again, not even you. Rumors say that there are wallets out there in cyberland containing millions and billions of dollars that are now untouchable due to lost passwords and phrases!
   • Place additional security as desired on your wallet e.g., two-phased security, etc.
4. Start Using Your Wallet.
   • Bingo! You can now begin receiving and sending cryptocurrencies.
5. Purchase a cryptocurrency.
   • You will go to an exchange to buy a crypto coin. These are online marketplaces that match buyers and sellers, where people can buy, sell, and trade various cryptocurrencies, similar to how a stock exchange works.Exchanges like Coinbase, Binance, Kraken, and Gemini allow users to create accounts, deposit funds (usually via bank transfer or credit card), and purchase cryptocurrencies. Most major exchanges offer many types of cryptocurrencies, including Bitcoin, Ethereum, and others.
   • When you go to buy your first cryptocurrency from an exchange, you may be in for a surprise. For example, you don’t have to buy an entire crypto coin. Most exchanges allow you to buy a fraction of a coin (often down to 0.00000001 of a Bitcoin, called a “Satoshi”), making it more accessible. There is an entire internet mythology built around “Satoshi,” by the way. This is believed by many to be the name of the man who created Bitcoin. He remains a mystery to this day.
   • You can purchase crypto in any amount you choose, from a few dollars’ worth to whatever you feel comfortable with. Many use well-known exchanges like Coinbase, Binance, or Kraken, which guide you through setting up an account, funding it, and making purchases.Are there “fees” involved? Most likely. Exchanges charge transaction fees for buying, selling, and trading. These fees can vary significantly depending on the exchange and the type of transaction.
   • Typically, you’ll connect a bank account or card to your crypto exchange account, and then you’re ready to go. Just remember that the market is highly volatile, so it’s wise to start small and learn as you go.

What is Blockchain?

It’s only fair, I suppose, that we track our digital crypto funny money that is stored in our digital crypto wallet using a digital crypto record book, right? Because that’s what blockchain is – a digital record book of cryptocurrency transactions.

And this leads us to another difference between crypto and everyday dollars stored in a bank. Normally, you have a bank record of your money and all your transactions, written in your checkbook and its registry. Typically, your checkbook registry is personal and not something you would paper the neighborhood with. But not so with crypto. When you make a transaction with cryptocurrency, there is a record made in the digital blockchain owned by the company you are making the transaction with and – get this — literally everyone else in the blockchain is notified that your transaction is being made! Whoa! Say what? Yep, the world (contained in that blockchain) is notified about your transaction. But not to worry, as I said above, the only information being shared is the transaction information, nothing about who is involved in the transaction!

What does this look like? I’m glad you asked.

1. You’ve got your crypto wallet now and want to make a transaction with it. So you enter the name of the entity you want to exchange crypto with and a cryptocurrency amount.
2. The wallet then generates a message that is encrypted with the addresses of the parties involved, the amount of cryptocurrency to be transferred, and a timestamp.
3. This message is then broadcast to the entire network of computers that comprise the blockchain.
   1. In other words, the transaction doesn’t get processed immediately. It has to jump through some hoops first. For one thing, your transaction goes into something called the “Mempool, where it is combined with other transactions that are occurring. This pool is shared across all the computers in the blockchain where the numbers are validated repeatedly, ensuring that they are in fact, valid numbers, and when this happens the transaction is finally written into a block on the blockchain. At this point, the transaction is considered, “confirmed.”
   1. Note that all of this happens by the wallet, behind the scenes, and you will not be aware of it. Also note, that depending on the cryptocurrency involved, multiple confirmations may be required before any cryptocurrency can be exchanged.
4. After confirmation, your wallet is updated to reflect the exchange of cryptocurrency.

Seems straightforward, doesn’t it? And it is. To put it in a nutshell: Blockchain is like a digital ledger or record book where every transaction is documented and visible to all blockchain (network) participants. Once recorded, these transactions can’t be altered, creating a permanent, transparent history of exchanges.

Why Go Crypto?

I’ll preface this section by saying that I currently don’t own any crypto, but I will admit to looking for a crypto ETF. In other words, I don’t really have a horse in this race. If crypto appeals to you, go for it. If not, don’t. Your choice!

Having said that, let’s take a look at some of the reasons people DO go crypto…

Why Do Most People Go Crypto?

While trying to avoid playing a drugstore psychologist, I’ll say this – there are, of course, a variety of reasons why people do the things they do, from personal motivations to larger factors that have to do with society and the economy – and investing in cryptocurrency is no different.

Here are a few of those reasons:

• Decentralization, Autonomy, Freedom
  • As you might guess, now that you’ve learned how crypto works, it should not surprise you that it is popular with the Libertarian crowd. To these folks and people of a similar spirit, cryptocurrency represents freedom from central authority.
  • Traditional currencies are highly regulated, but not crypto, at least not yet, and so far they operate independently. This appeals to those who want to reduce their reliance on financial institutions. Others are more attracted to the idea of decentralized power structures that cryptocurrency presents. Think Elon Musk.
• Innovation and Technological Appeal
  • The “propellor heads” out there get their hats spinning with thoughts of crypto and blockchain as groundbreaking technologies that will change the world. And they already have changed our world. Blockchain, for instance, has spread its wings and is being used in non-finance applications like supply chain management, secure voting, and even medical records storage. For innovators, crypto is irresistible. Again, think Elon Musk.
• Privacy and Anonymity
  • Contrary to any internet rumors out there, crypto is not fully anonymous. However, what crypto does offer is pseudonymity. What this means is that crypto allows you to adopt a pseudonym, or digital identity, separate from one’s real-world identity. All the reasons one might want to do this in any other venue apply to crypto as well e.g., privacy, and security.
• Investment Opportunity
  • If you have seen the news about crypto over the past few years you know that cryptocurrency offers opportunities to make what can only be called, massive profits. But you will also have seen that crypto investments can lead to massive financial losses. It is truly a high-risk, high-reward investment gamble. No doubt, this is how Elon Musk views crypto. But then, he can afford it. The temptation of rapid appreciation is hard to resist. Bitcoin went from only being worth a few pennies to being worth tens of thousands of dollars per coin in a short while. I can see the attraction. Currently, Musk is betting that Dogecoin (mentioned above) might become the “people’s currency,” due to its low value per coin, which makes it attractive to people who aren’t rich, and its meme appeal, because people are morons, I guess.
• Banking for the “Unbanked”
  • One stated lofty goal of cryptocurrency is to provide banking services to people who, for one reason or another, have no access to traditional banking. People in some parts of the world just don’t have access and this lack of banking infrastructure makes it very difficult to participate in the global economy. But, all you need to do crypto is a smartphone and an internet connection! Suddenly, financially underserved regions of the world have the access they need. Nice.
• Anti-Establishment Appeal (“Stick it to the man!”)
  • Crypto has a strong appeal for those with anti-establishment roots. It makes sense, right? As I said above, crypto was born when Bitcoin first became available in 2008. This was during the financial crisis, by the way. Early adopters came from all walks of life represented by the psychologies described by the bullet points above.
• Disruption of Traditional Financial Systems
  • Similar to artificial intelligence, crypto has the potential to be very disruptive, to significantly alter life as we know it, or at least transform it for traditional finance institutions. Crypto firms like Ethereum are beginning to create decentralized applications (dApps) that could significantly alter the way we borrow, lend, or trade assets. This potential would be attractive to someone like Elon Musk, who has taken a similar approach to other industries like energy, transportation, and space.

To sum things up, cryptocurrency appeals to different people for different reasons: from investment gains and technological curiosity to privacy and anti-establishment sentiments. But there’s another side to the bitcoin, if you will, one that is darker. While it’s true that crypto offers privacy that can be used positively, it also raises the risk of enabling criminal activities. The pseudonymity provided by crypto is a dual-edged sword that complicates its being adopted by the masses. This dual appeal—freedom on one hand, and a potential avenue for misuse on the other—is part of what makes cryptocurrency so complex and controversial.

So let’s take a look at why criminals may be interested in crypto:

Why Do Criminals Go Crypto?

• Pseudonymity and Privacy
  • Everything I had to say about this above applies here as well. Crypto transactions cannot be connected to personal names and identities. The advantages for the criminally minded are obvious. Of course, this doesn’t always allow the bad guys to hide, so it remains a high-risk endeavor.
• Borderless and Global Transactions
  • Crypto works across borders just fine! Thus, criminals don’t have to jump through traditional financial hoops like SWIFT codes or bank verifications, things which might flag an illegal activity. This feature allows criminals to work without interference from local authorities.
• Mixing Services (digital laundromat)
  • Criminals have devised ways of doing something called mixing or “tumbling” services, which allow them to blend cryptocurrencies from many different sources, thus making it even more difficult to trace the origin of funds. Think money laundering, where dirty money is effectively “cleaned” by mixing it with legitimate funds. Mixing services adds another layer of anonymity by scrambling funds across multiple addresses.
• The Rise of the Privacy Coins!
  • Cryptocurrencies like Monero and Zcash are designed to offer higher levels of privacy and are even more difficult to trace than Bitcoin or Ethereum. These so-called “privacy coins” obscure transaction details, making it even harder for authorities to trace illicit activity.

Given the obvious benefits to be had by criminals who use cryptocurrency, are we now at their mercy? Is nothing to be done (he wails)? Well, don’t despair, at least not yet. We need to remember a few things about cryptocurrency.

For one thing, although cryptocurrency has great privacy features, it is still a permanent record. The blockchain itself on which all transactions are posted remains a public ledger. This means that if, by chance and/or hard work, the authorities are able to link a crypto address to an individual, their entire transaction history will be visible for them to scrutinize! This kind of transparency may make some criminals stick with cash for their crimes, which leaves no trace at all.

Nor can we assume that law enforcement has been sitting on their laurels since 2008. They’ve been busy creating tools for doing sophisticated blockchain analysis and tracing wallet activity across different exchanges. The law is always hot on their trail.

Let’s not forget that as crypto becomes more mainstream, regulations, like KYC (“Know Your Customer”), for example, are being developed and adopted by many different governments, as well as anti-money laundering (AML) policies.

Although criminals take advantage of the privacy afforded them via cryptocurrency, at some point the bad guys are going to want to convert their dirty cryptocurrency into cash or goods. Call this an “exit point. This interaction can result in them being exposed and they could potentially find the police knocking at their door.

Fortunately, there is a lot of international cooperation between governments in these criminal matters. Every government faces the same threats from crypto. Countries are working together to monitor crypto transactions related to terrorism, for example, and other criminal activities. This cooperation has resulted in several high-profile arrests and shutdowns of illegal marketplaces operating with cryptocurrency.

So there you have it. I hope you got something valuable out of this little primer on cryptocurrency. I know I certainly learned a lot about crypto by writing it!