Introduction:

This summer Colorado Credit Union has had two interns working with different departments within our organization. One of our interns, Lorenzo Giovanetti, offered to write a blog for the marketing department. He picked a subject matter that interested him and one he thought others might find helpful. What follows is his thorough explanation about the history and current state of cryptocurrency. Thank you, Lorenzo, for helping educate our members about cryptocurrency.

What is it?

In its simplest sense, cryptocurrency is a digital medium of exchange that maintains value, not through a centralized authority or government, but through the network of traders that use the cryptocurrency across the world. Since transactions do not rely on a third party, they never fail and there is no limit or extra fees. However, have caution when making transactions because cryptocurrency payments are typically not reversible. Many investors treat crypto more as an investment product like a stock or a bond, rather than a medium of exchange, as they are looking to make profit off of the currency’s value appreciating over time. Each cryptocurrency system is different and there are an estimated 18,000 of them, but generally cryptocurrencies rely on a distributed ledger that records transactions in code.

Blockchain, the distributed ledger:

This distributed ledger is called blockchain, and is essentially a shared transaction history. When transactions are made, they are recorded in groups called blocks and then these transaction groups are linked together on a chain, thus the name block chain. This transaction history is encrypted in code and everyone using cryptocurrency has a digital copy of this distributed ledger. When a new transaction takes place, it is logged and every copy of blockchain is instantly updated. To verify the transactions, a proof of work or stake is required to complete the transaction.

Proof of Work and Proof of Stake:

Proof of work and Proof of Stake are the two main methods of verification for blockchain. According to Simon Oxenham, the social media manager at Xcoins.com,

“Proof of work is a method of verifying transactions on a blockchain in which an algorithm provides a mathematical problem that computers race to solve.” – Simon Oxenham

These computers racing are called miners and they solve these mathematical problems that help to verify blocks, or groups of transactions, and adds them to the blockchain ledger. The first computer to solve the problem is awarded with a small amount of cryptocurrency. Many people and companies pursue cryptocurrency mining seeking profits, but the sheer amount of computing power and energy required to mine makes profit margins small. It takes about 10 minutes for transactions using the Proof of Work method to be approved.

Proof of Stake verification methods tend to require much less energy and approve transactions much more quickly. How this method works is that validators stake money behind a block that they want added to a chain, then they vote to approve legitimate transactions. Validators are rewarded for voting by being paid in newly created cryptocurrency over time. Proof of Stake is a newer method and is seeming to become preferred because of its relatively fast verification speed and low energy usage. However, it is frowned upon by some because validators who stake the most money are often chosen over others leading to a less democratic and somewhat centralized system, which is what cryptocurrency aims to replace. Additionally, proof of stake may be more fraud prone as it is much less tested than the proof of work method.

Can I mine cryptocurrency?

While the average consumer at one point could mine cryptocurrency to earn a profit, large corporations and crypto moguls have upgraded and optimized equipment to a point where it is almost impossible to make a profit without absurd amounts of energy and computing power. However, one could possibly earn cryptocurrency by being a validator for the Proof of Stake method, as validators are chosen randomly based off of how much cryptocurrency they stake.

Is cryptocurrency a safe investment?

Cryptocurrency is considered a high risk investment because of its volatile and inconsistent nature. Cryptocurrency comes with a plethora of risks including cyberattacks according to Investopedia, in 2019 $9 million a day was lost to cryptocurrency scams and cyberattacks. Cryptocurrency exchanges are more vulnerable to being hacked and safely storing cryptocurrencies can be somewhat difficult as well. Another risk is the fact that government agencies may view cryptocurrencies as a threat to centralized banking and governing and stricter regulations may be placed on cryptocurrencies in the future. However, the main risk of cryptocurrencies is their extreme volatility. According to Coinbase,

…in November of 2021, Bitcoin was valued at about $67,700 per coin, however it has since plummeted to a value of just around $20,000 per coin as of July 2022…

and Bitcoin is considered to be one of the more stable cryptocurrencies, due to the mass amount of investors involved with it and the way it has blown up comparative to other cryptocurrencies. While cryptocurrency is a high risk investment, if you see cryptocurrencies becoming a major part of society in the future, investing a bit of money in them to diversify your investment portfolio might not be the worst idea. Some investment experts argue that a safer way to invest in crypto, would be to invest in the companies that own cryptocurrency exchanges and cryptocurrency mining operations, rather than putting money into actual cryptocurrencies which still have a ways to go for regulations and global implementation.

For more information, attend our Lunch and Learn event during Member appreciation week on Monday 8/22 from 12-1pm. Financial expert Rand Gambrell will be discussing NFT’s, Blockchain, cryptocurrency, initial coin offerings, and how the dark web influences all of these. Click below to register for the In-Person or Virtual session:

Visit ccu.org/events to register for the Lunch and Learn. In-person and virtual options available.

Sources:

Ashford, K., 2022. What Is Bitcoin And How Does It Work?. [online] Forbes Advisor. Available at:                 <https://www.forbes.com/advisor/investing/cryptocurrency/what-is-bitcoin/> [Accessed 18 July 2022].

Backman, M., 2022. Is Bitcoin a Good Long-Term Investment? | The Motley Fool. [online] The Motley Fool. Available at: https://www.fool.com/investing/2021/07/10/is-bitcoin-a-good-long-term-investment/ [Accessed 18 July 2022].