What is cryptocurrency?

January 23rd, 2018

What is cryptocurrency?

If you’ve kept up with the news regularly for the past few months, then you’ve probably run across headlines about something called bitcoin. Seeing the word for the first time, I remember wondering, What is a bitcoin? and Should I care? In search of a helpful explanation for a new concept, I did what many parents of millennials regularly do — I asked my 20- and 24-year-old children to enlighten me. They, of course, were already familiar with, and have several opinions about, this emerging form of currency.

First, I learned that bitcoin is only one form of what is called “cryptocurrency.” Bitcoin was the first cryptocurrency, created in 2009, but hundreds of others have developed in the years since. Cryptocurrency is often referred to as a digital or virtual currency and is basically an exchange of digital information, an article entitled “What Is Cryptocurrency?” on CCN.com explains.

Like any currency, or for that matter any good or service, it holds value because there’s demand for it. In this way, cryptocurrencies are like the U.S. dollar because they’re used as a medium for exchange. Unlike the U.S. dollar, the creation and transfer of cryptocurrencies are controlled by sophisticated cryptography rather than central government authorities. These cryptographic algorithms, essentially advanced computer code that provides security and privacy, make cryptocurrencies difficult to counterfeit.

This can all be a bit confusing, so let’s focus specifically on bitcoin since it’s currently the most popular brand of digital currency. Bitcoin isn’t connected to any bank or government. The “coins” are created by users who lend their computer power to verify other users’ transactions using a new computing process called a “blockchain.” These users are called “miners.” Essentially, instead of using expensive drilling equipment to pull scarce resources like gold or silver out of a physical mountain, these miners use their time, specialized software and computer servers as their tools. In exchange for lending their computer power and expertise, they receive bitcoins. Like anything else of value, anyone can buy or sell bitcoins using traditional money on exchanges. However, in recent times their value has fluctuated greatly. For instance, as of this writing, one bitcoin would cost approximately $11,000. However, between 2009 and early 2017, the exchange rate for bitcoin mostly stayed below $1,000 for one bitcoin. (Bitcoin.com provides charts.) The 2017 dramatic increase in the exchange rate led to greater attention from the media, investors, and consumers worldwide.

How does bitcoin work?

Bitcoin can be used to buy goods or services electronically, and unused coins are stored in a digital wallet. There are a number of companies that offer wallet software, and their websites include steps to walk you through the setup process. Once that process is complete, you’re given a public key and a private key that will be required of you to make transactions. These keys are specialized code (imagine a really long password) that applies only to your wallet. Once you’re set up, you can store your digital wallet on your computer or smartphone and spend your bitcoins any place that accepts them. Consumers are personally responsible for keeping their information safe, and there’s no bank or centralized authority to help with transaction problems or lost passcodes.

While I have strong doubts that cryptocurrencies will replace traditional payment methods anytime soon, more than 11,000 bitcoin-friendly businesses and ATMs have emerged across the United States and Canada since 2008, according to reporting by WDIV ClickOnDetroit. This raises the obvious question: What is the attraction of cryptocurrencies like bitcoin?

First, transactions can be made without leaving any trace of personal information, thus making transactions virtually anonymous while still protecting against identity theft. Second, these transactions can be made anywhere in the world at any time without concern for banking hours or government exchange rates. Many users enjoy using the bitcoin network because there’s no central authority figure, like a bank or a government, writes CoinReport.net. As stated on the Bitcoin.org website, “Bitcoin uses peer-to-peer technology to operate with no central authority or banks; managing transactions and the issuing of bitcoins is carried out collectively by the network. Bitcoin is open-source; its design is public, nobody owns or controls Bitcoin and everyone can take part.” Fees within bitcoin payments are also low or nonexistent, CoinReport.net says.

What are the problems?

There are also a number of disadvantages that come from using bitcoin and other cryptocurrencies. This technology is still in its infancy, and in order for it to gain widespread use, there will need to be more acceptance from consumers as well as widespread education about how cryptocurrencies work. Presently, using bitcoin for purchases is a relatively complicated process compared to traditional payment methods. And while more companies are accepting bitcoin for payment, customer service staff aren’t necessarily knowledgeable about digital currencies and how to help customers who are using this technology.

Additional complications may arise from the volatility in cryptocurrency markets. The price of bitcoin, for instance, fluctuates daily. There are also legal questions to consider. Due to their anonymous nature, cryptocurrencies are attracting those who engage in illegal activities such as drug dealing, tax evasion and money laundering.

Environmentalists are also concerned about bitcoin. According to Digiconomist, each bitcoin transaction uses 275 kilowatt hours of electricity, enough to run some households for a month. Bitcoin mining, the process needed to create more bitcoins, currently requires more electricity than Ireland or Delaware uses in a year, and the amount of electrical consumption is rising rapidly each year, according to an article on the knowledge forum BigThink.com. By 2020, it’s estimated that bitcoin mining will require all of the electricity produced in the world.

How do we seek financial wisdom?

If you were to conduct a search online for “bitcoin investments,” you’d likely find a number of sites telling you why it’s wise to invest in cryptocurrencies and helping to explain how you can make money. When people hear stories about people like Chris Larsen, they take notice. Larsen is the cofounder of Ripple, a digital currency startup and rival to bitcoin. As the largest holder of Ripple tokens, he briefly became one of the world’s richest people, with his worth said to exceed $59 billion.

So are cryptocurrencies here to stay, or is all this hype? According to popular finance blogger Mr. Money Mustache (real name Pete Adeney), it’s probably hype. In his bluntly titled article “Why Bitcoin Is Stupid,” Adeney says, “No, you should not invest in Bitcoin.” He argues that bitcoin isn’t an investment product and compares it unfavorably to the 1999 dotcoms and Beanie Babies bubbles. Speculation, he reminds his readers, isn’t a useful activity. “Investing means buying an asset that actually creates products and services and cashflow for an extended period of time. Like a piece of a profitable business or a rentable piece of real estate. An investment is something that has intrinsic value — that is, it would be worth owning from a financial perspective, even if you could never sell it,” adds Adeney (his emphasis).

Christians find wisdom when dealing with financial matters by looking to Scripture and listening to the Holy Spirit in our lives. In his sermon “The Use of Money,” John Wesley declared “the right use of money” as “an excellent branch of Christian wisdom” and noted that money was a subject to be considered not just by worldly people but by those God has chosen as well. The main point from this classic sermon is often paraphrased this way: Earn all you can, save all you can, give all you can.

In his book dealing with Wesley’s wisdom on money, Earn. Save. Give. Wesley’s Simple Rules for Money, pastor James A. Harnish highlights the importance of wisdom in the Bible. “Wise living may not insure that we will be rich, but it always leads to a healthy, prosperous, abundant life,” writes Harnish. “Biblical wisdom on the use of money is centered in helping faithful people order their financial lives around their commitment to Christ so that they can live well in every area of their lives.” Even if we find our heads spinning from new technologies, currencies, and evolving economies, as followers of Christ we can rest in the special kind of wisdom that comes from a generous God (James 1:5).

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