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A primer on cryptocurrency
Cryptocurrency vocabulary
Bitcoin Often considered the first peer-to-peer electronic payment system. The Bitcoin network uses a cryptocurrency called bitcoin. Central Bank Digital Currencies (CBDC) A virtual currency backed by a government. Many countries, including the United States, have initiatives to research or develop their own CBDCs. Cryptography The practice of writing and deciphering encoded data. Cryptocurrency gets its name from the term. Decentralization A system without a central point of control and in which users retain custody of their own assets. Bitcoin is based on this system. Digital Currency Money that exists in digital form and is sent electronically over the Internet. This term can refer to money that exists only in digital form such as cryptocurrency, but is also often applied to digitally exchanged traditional money (for example, an online payment or a government-backed virtual currency). Private Key A unique code that proves ownership of a wallet. Wallet or Digital Wallet Contains a private key that allows a user to access cryptocurrency located on a blockchain.
Sources: CoinDesk; Investipedia
Some of the characteristics of Bitcoin, however, are attributes common to all cryptocurrencies:
- Transparency: All cryptocurrency transactions are publicly recorded and visible. At the same time, users maintain anonymity through usernames or pseudonyms.
- Immutability – Once contracts (i.e. transactions) are established, they are considered permanent and cannot be easily changed.
- Blockchain – All cryptocurrencies are tied to a secure, shared database called a blockchain network. A blockchain is also decentralized and immutable; it can be public or private. Blockchains will be discussed later in this article.
For all the technical details, Dr. Simon Mak, director of the Caruth Institute for Entrepreneurship at Southern Methodist University, funded by Linda A. and Kenneth R. Morris, says there’s nothing fancy about cryptocurrency. It is primarily a new way of looking at currency. He offers an analogy to help understand the concept:
The New York Subway sells tokens, and these tokens are used to pay for rides on the New York Subway. This is exactly the purpose of bitcoin and the Bitcoin blockchain. Think of the Bitcoin blockchain as the New York subway system, the Ethereum blockchain as the Boston subway system, and so there are all these different subways – these blockchains – that have been created to try to make them a utility that people can use, but only for their particular network.
Cryptocurrencies as an investment
Bitcoin’s source code designates a limited supply of 21 million digital coins. At the time of publication, more than 19 million coins have been mined experts predict the last bitcoin won’t be mined until around 2140. The source code tells the mining process to slow down over time. In theory, these features increase the value of the currency, depending on demand.
However, Bitcoin and the broader cryptocurrency market (Show 2), is considered highly volatile. The reason for this, Mak says, goes back to the original intent behind Bitcoin.
Figure 2: CRYPTOCURRENCY MARKET CAP, 2016-2022
| $0.30 |
| $4.70 |
| $13.50 |
| $805.90 |
| $318.20 |
| $430 |
| $963.40 |
| $13,850.40 |
| $3,709.40 |
| $7,196.40 |
| $28,949.40 |
| $46,219.50 |
| $20,699.80 |
Source: CoinMarketCap
“If you look at bitcoin in the early days, the price didn’t fluctuate as wildly as it does now because it was just a form of payment. Bitcoin was never created as something that people buy and sell. That’s when the price of cryptocurrencies went crazy,” says Mak.
A Satoshi for your thoughts
Like dollars and cents, cryptocurrencies have smaller denominations, allowing people to buy or send fractions of cryptocurrency. For example, a satoshi is the smallest denomination of bitcoin, equal to just 0.00000001 of a bitcoin.
Sources: Investopedia; CoinDesk
To date, bitcoin’s all-time high value was nearly $69,000 in November 2021. In the first half of 2022, its value dropped more than 50%, following the same trajectory as other cryptocurrencies, according to CoinDesk . It fell below $20,000 in mid-June, a price not seen since December 2020. The recent volatility is partly due to stablecoins, a type of cryptocurrency.
“Stablecoins were a strategy to try to minimize cryptocurrency volatility. And the original strategy was to tie a stablecoin to a US dollar,” says Mak. “The problem has been solved [to be] that in practice a stablecoin was not really backed by a dollar; it was backed for about 50 cents.
Additionally, some stablecoins were backed by other assets, including other cryptocurrencies. Algorithmic stablecoins, in particular, have been implicated in the decline in cryptocurrency values. These stablecoins were supposed to be tied to algorithms that maintain supply and demand between the stablecoin and another cryptocurrency. However, the algorithms failed to keep up with the aggressive selling and a domino effect occurred that impacted the entire cryptocurrency market.
Part of the problem, Ion says, is that stablecoins have not been regulated and it is often unclear how much is pegged. “And as we’ve seen, stablecoins are not as stable as initially thought,” he says.
Safety issues
A Chainalysis 2020 Report, a US blockchain analytics firm, said that around 20% of mined bitcoins are considered lost. And because it is decentralized, once lost, it is gone forever. High-profile stories of lost fortunes include a hard drive thrown into a landfill or a forgotten password.
“If you own a digital asset, it can be accessed via a private key. Ensuring the security of this private key password is very important to keep your funds safe,” says Ion. “If the private key to a digital wallet were lost or compromised, the funds would be lost, or [a] third parties can access it.”
“Blockchain infrastructure, I think, is probably something that gets the most attention from the investment world, beyond cryptocurrency.”
– Anca Ione
Blockchain, the technology behind all cryptocurrencies, is considered very secure because the platform uses cryptographic algorithms and stores information across multiple computers, eliminating the risk of an attack on a single device.
“When you hear about people stealing bitcoin and cryptocurrencies in the media, it’s not because they hacked the blockchain; it’s because they hacked the user account,” Mak says.
Building Blockchain
“Blockchain infrastructure, I think, is probably something that gets the most attention from the investment world, beyond cryptocurrency,” Ion says.
Developers see real-world applications for blockchain networks outside of cryptocurrency, in industries that could benefit from improved information sharing and tracking, such as healthcare and real estate, as well as in industry supply chains . This is attracting a lot of money and interest from venture capitalists, but unlike cryptocurrency, people cannot invest in blockchain as an asset.
In blockchain business ventures, blockchains might be private and available only to specific people. Examples of blockchain technology used in supply chain settings include Walmart and Sam’s Club. Both are using VeChain blockchain technology to implement a food traceability strategy in their stores in China to increase supply chain transparency and help ensure food safety.
Blockchain applications in the supply chain extend to healthcare, where tracking a pharmaceutical product can be important. Furthermore, some experts see blockchain as a secure way to do this archive patient medical records in a place where every doctor – primary care physicians and specialists, out-of-network and in-network – can see a patient’s complete medical history. Still others are examining how blockchain could simplify contract management.
“Everyone is trying to become the standard blockchain for a specific industry. There is a big battle right now. That’s why so much money is invested. If you can be the dominant blockchain in healthcare, for example, the return on investment is virtually unlimited,” says Mak. “They all want to become Google’s search engine for blockchain.”
A revolution?
Cryptocurrency has been called a revolution. At less than 15 years old, the original Bitcoin is still young and it is difficult for anyone to determine its long-term impact. Some imagine this will lead to a cashless world, where all payments will be digital. Blockchain infrastructure, meanwhile, allows entrepreneurs and venture capitalists to explore commercial uses of this emerging technology.
“We try to understand what the future will be like. Everything is still being tested and tested,” says Ion. FN
To learn more about the Texas Treasury Safekeeping Trust Company mentioned in this article, visit TTSTC.org.