What’s the deal with cryptocurrency? KSAT Explains

SAN ANTONIO – Editor’s note: The Dec. 7 KSAT Explains livestream features portions of a previously aired episode. You can watch it live at 7 p.m. in the video player above. After Tuesday night’s livestream, you will be able to watch the original version on demand.

You may have heard the word cryptocurrency — or crypto, for short — floating around in the current cultural moment. If not cryptocurrency, maybe Bitcoin, NFTs, Blockchains. Maybe you were introduced to Dogecoin during Elon Musk’s recent Saturday Night Live appearance.

Any short, informal discussion of these concepts — whether a news segment, a conversation with a co-worker or a glowing testimonial on social media — likely left you with more questions than answers. Why would something completely intangible, separate from any government or bank, have any value? What can you buy with cryptocurrency, and why wouldn’t you just use a normal currency? What if the power goes out?

In this episode of KSAT Explains, we’re taking on the basics of cryptocurrency, answering questions around the origins, uses, security and future viability of this technology. But, in the end, it’s up to you to decide whether cryptocurrency is just an Internet fad or the future of finance. (Watch the full episode in the video player above.)

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What is cryptocurrency?

The “crypto” in cryptocurrency comes from cryptography, the art of writing or solving codes. Cryptography has always been a way to secure information, and cryptocurrency uses this principle as the backbone for securing transactions and ensuring authenticity. In fact, each individual unit of cryptocurrency is just an extremely long string of numbers.

The first cryptocurrency — and likely the most well-known — is Bitcoin, created in 2008 by someone under the pseudonym Satoshi Nakamoto, who has become a sort of deity in online communities focused on cryptocurrency. Nakamoto is even getting a statue in Budapest.

The first recorded use of Bitcoin in a purchase was a 2010 exchange of 10,000 coins for two Papa John’s pizzas. Today, that purchase would be worth around $350 million. But, while it’s an eye-catching statistic, why? Where does this value come from?

What gives cryptocurrency value?

Conversations around why Bitcoin, or any other cryptocurrency, has value often quickly devolve into why any currency has value.

“The first and most important factor is acceptance. So for any currency to really work as a currency, it needs to basically be used for something,” said Murtuza Jadliwala, an assistant professor at the University of Texas at San Antonio in the computer science department.

For cash-based systems around the globe known as “fiat currencies,” such as the US dollar, the value is backed by a promise from the government. These currencies are obviously widely used and convenient — they are accepted by a large number of businesses, they are easy to carry around in your wallet and their value is largely stable.

Another monetary system is credit. In the context of the Internet, credit is a convenient way to make transactions online. However, one issue is privacy. Your bank and credit card company can see how you use your money, and security breaches can often leave your credit vulnerable to fraud.

So, a good way to think about cryptocurrency is cash for the Internet — anonymous, secure, easy to use. But, unlike fiat currency, there is no single person who decides the value. It is currently tied entirely to public opinion.

For supporters of the currency, this is actually a positive, as there is no entity to create more money and artificially cause inflation. In fact, there will only ever be a maximum of 21 million Bitcoin in circulation. But, it’s hard to say this actually provides any stability — in fact, in the two weeks before we published this piece, Bitcoin lost more than a quarter of its value.

Another example of this volatility is the recent case of Dogecoin, a cryptocurrency that was explicitly made as a joke by its creator, a so-called “meme” coin. A few tweets from the eccentric entrepreneur Elon Musk, and the value of Dogecoin skyrocketed. Now moving between $0.40 and $0.60, the coin would have given early investors a return of around 14,000%. You would find it difficult to point to any asset throughout history with that kind of growth in such a short time.

By now, you probably have more questions than answers. So far, we’ve mentioned a few crypto buzzwords like blockchain, mining and NFT. But, what are these things? Let’s dive in and take it on one at a time.

What’s a blockchain?

To understand what a blockchain is, it may be easier to begin from the problem it solves. If cryptocurrency is cash for the Internet, there has to be some way to make sure each individual unit is authentic and is actually owned by the person using it.

“At the end of the day, it’s just a ledger,” said Andrue Ferry, a cryptocurrency expert. “So every single time I send Bitcoin, that information, that transaction, that amount gets put into the Bitcoin blockchain.”

Every transaction is permanently recorded on the blockchain using complex algorithms, run by miners who collect a small fee for their services. This makes it nearly impossible to use fake cryptocurrency or have your money stolen. In addition, the technology keeps both parties anonymous, making cryptocurrency preferable to credit for Internet purchases.

The technology has near-endless uses in business and cybersecurity, acting as an all-in-one bank and accountant. While it’s difficult to list all of the possible uses, this article in the Harvard Business Review captures the immense potential this technology has to really harness the power of a virtual economy.

How do I get cryptocurrency?

One word you may have heard in connection to cryptocurrency is mining. In this context, the term does not refer to digging into the ground and finding rare metals, though it is similar — an arduous computational process that rewards a miner with cryptocurrency.

“Usually these codes are hexadecimal and they’re like two hundred digits long,” Ferry said. “And you have to figure out each one of those as it goes down the line. And once you figure out a full piece of the code, you get rewarded with the crypto.”

You may be wondering whether you could ever engage with cryptocurrency without years of experience with computer science. And, while that may be necessary to oversee blockchain transactions and mine for it directly, many applications allow you to easily purchase and trade cryptocurrency, such as Coinbase, Venmo, Cashapp, Robinhood and WeBull, just to name a few.

Somebody paid $1 million for that?

One offshoot of this blockchain technology is something called a Non-Fungible Token, or NFT, which you have probably encountered, likely by laughing about someone paying a ludicrous amount of money for a digital asset.

Non-fungible, as is the name, means it can’t be replaced. It is unique. Just as blockchain technology can prove authenticity and ownership of a cryptocurrency, NFTs can do the same thing with a photo, video or really anything. NFTs can be hosted on any blockchain, but the most popular one is Ethereum, the second most valuable cryptocurrency.

NFTs were first used for actual artwork in 2017, although the technology to create “colored coins,” an early predecessor to the NFT, has been around since 2013. But, the NFT craze did not really start until the past year. This digital authenticity is allowing digital artists a new way to monetize their work.

It’s also allowing sports leagues and celebrities to get in on the action. A Tim Duncan highlight sold for $33,000. An NFT of Twitter founder Jack Dorsey’s first tweet sold for just under $3 million. A common question might be, how is this unique? A google search of Dorsey’s first tweet would allow you to have the very same image on your device. However, users are paying for the one-of-a-kind authenticity, which can be proven on the blockchain.

If you find yourself asking why anyone would pay for exclusive ownership of a digital asset, you’re not alone. Nobody really has a clear answer, and it seems it would get old as a party conversation pretty quickly.

Not exactly green

Many steps of the processes related to cryptocurrency consume a lot of energy. Mining cryptocurrency, creating blockchains and recording transactions on the blockchains all take quite a bit of power.

Computers mine for hours to make a single transaction or mine a fraction of Bitcoin or Ethereum. In fact, some fossil fuel plants that had been closed due to lack of use have been re-opened by those seeking a power source to mine cryptocurrency.

Supporters of the technology argue that energy consumption is not unique to cryptocurrency — they point to the energy used in mining for rare metals as well as the less thought of energy consumption by physical banking. Despite a sizable portion of crypto mining using renewable energy, one of the obstacles to large-scale cryptocurrency use is how much energy each transaction uses compared to a credit card or cash transaction.

One of the co-founders of Ethereum recently announced that he is closing in on an update that would cut 99 percent of energy consumption, a move that could make energy concerns related to cryptocurrency transactions less widespread. Improvements such as these put into perspective the new and evolving nature of the technology.

Currency of the future?

At this early stage, it’s probably incorrect to refer to cryptocurrency as a currency. Most people who buy crypto see it as an investment, similar to a stock or a precious metal.

“It’s the same thing as buying silver or gold or stocks or bonds. You’re basically just taking your fiat money, your dollars and putting it into something that hopefully will grow in value,” said Alex Eaton, who has been mining Bitcoin and speaking about cryptocurrency for nearly a decade.

As with the unfortunate Papa John’s buyer, it probably would not be smart to purchase everyday items with something that’s set to increase exponentially. On the other hand, a business may be hesitant to accept the currency if it can lose nearly 30 percent of its value in just a few weeks.

Even more basic, many businesses don’t have the back-end technology to perform the exchanges using blockchain technology. Although some large companies currently accept Bitcoin, such as Coca-Cola vending machines and Whole Foods, the vast majority of businesses don’t feel the need.

“Most small companies and smaller merchants, they don’t want to get into that unless there is a big payoff,” Jadiwala said.

In the short term, without a shift in how businesses interact with it, cryptocurrency will likely remain a highly volatile investment. But proponents of the technology swear by its revolutionary potential. They imagine a future where cryptocurrency replaces fiat currency and blockchain replaces banks, accountants and corporate lawyers.

It’s hard to say whether they’re correct or crazy. But, if you find yourself in a conversation about cryptocurrency, hopefully this episode has given you enough background to understand what’s going on.

Click on the video link below to hear our KSAT Explains crypto jingle: