Bitcoin turns 14: Here's what to know about crypto
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Fourteen years ago on Halloween, the idea of bitcoin was hatched and since then, the world of cryptocurrency has taken off, most recently experiencing a meteoric rise and fall in the last year.
To mark the white paper that started it all, Yahoo Finance is kicking off its first episode in a series on crypto that hits the basics of what this newer technology is and how its assets have swept into finance.
Whether you’re a staunch believer like Jack Dorsey and sometimes Elon Musk or longtime skeptic such as Warren Buffett and JPMorgan Chairman and CEO Jamie Dimon who both view crypto as delusional as the 17th century Dutch Tulip craze, it's important to know how it started, what cryptocurrency is, how it diffs from other assets, and of course, the technology behind it all — blockchain.
Short for cryptocurrency, “crypto” refers to a group of digital currencies and surrounding assets that are secured through encryption thanks to a network of computers all running the same software.
Thought another way, a blockchain is a distributed ledger for data and a cryptocurrency acts as its unit of account.
Following several iterations, the idea for “Bitcoin” the blockchain and its unit of account “bitcoin” was shared for the first time on the internet on October 31, 2008, by the anonymous developer(s) called Satoshi Nakamoto.
Nakamoto called the idea “a new electronic cash system that’s peer-to-peer, with no trusted third party.” That meant people could transact bitcoin between each other without a bank. It also meant people could take part in commerce with more anonymity.
The largest and first true cryptocurrency as we know it today, Bitcoin proved to be just the beginning of what’s become a fast-moving, buzzy, and often perplexing area of finance.
As a means of payment, cryptocurrencies haven’t yet picked up mainstream adoption though they have been used to pay for luxury goods such as cars, yachts, watches, and real estate by the crypto rich and people living in regions where the local currency faces hyperinflation and there's low access to dollars.
Several major brands including AMC, Home Depot, Microsoft, Overstock, Virgin Airlines, Whole Foods, and the country of El Salvador all accept bitcoin and other cryptocurrencies for payment.
Visa and Mastercard have also partnered with a number of crypto firms, allowing customers to spend cash or crypto from their brokerage accounts through debit and credit cards that offer loyalty perks such as rewards in crypto.
Beyond payments, many cryptocurrencies aren’t necessarily intended for use as currencies.
The second largest cryptocurrency Ether, for example, acts as the unit of account for Ethereum, also a payments network but better thought of as an ecosystem of applications and programmable contracts in development. Using Ethereum, people can create and transact other digital assets such as non-fungible tokens (NFTs) or trade in decentralized finance (DeFi) — a miniature, and yes, still in development blockchain-enabled financial system that in a handful of ways performs more efficiently than the traditional financial system.
Unlike the U.S. dollar which is backed by the U.S. government (and strong as hell), there are more than 10,000 other cryptocurrencies around the world today and while it can be debated for a handful, most carry little to no intrinsic value beyond what people are willing to pay for them at any given moment.
That said, in the years to come this could change. This is no small part of the reason why people invest in cryptocurrencies and, along with their much smaller size by market capitalization, why cryptocurrencies most often trade like high-growth technology stocks.
According to Coinmarketcap, the total market capitalization for cryptocurrencies and connected assets is around $1 trillion. That’s roughly two-thirds the size of Apple (AAPL) or equal to the market capitalizations of Tesla (TSLA) plus Bank of America (BAC).
At different speeds, governments across the world are grappling with how cryptocurrencies should be regulated. In the U.S., bitcoin is almost unanimously considered a commodity like gold or even soybeans, though for federal tax purposes the Internal Revenue Service (IRS) classifies all cryptocurrency as property.
Along with the volatile returns, crypto can be complicated and that’s also been a boon to fraudsters and digital thieves. Conservative estimates place illicit activity as accounting for less than 1% of all crypto activity, according to Chainalysis. But for an asset class that’s teetered between $3 trillion and $700 billion over the past year, the estimate for total amount of funds lost isn’t paltry.
Hacks, in particular, have climbed to over $2 billion in stolen funds since January.
To conjure Warren Buffett, if you want to invest in cryptocurrencies, learn the language, be skeptical, don’t invest in something you can’t understand, price and value aren’t always the same, and it's worth remembering the future is never clear.
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