Despite cryptocurrency’s growing popularity in recent years, many people are still left wondering how it works.
While other forms of currency are regulated by nations and financial institutions, cryptocurrency is decentralized, meaning that it is immune from government interference, according to Investopedia.
Due to this, many countries have either placed an implicit or absolute ban on its use. El Salvador, on the other hand, has accepted Bitcoin as legal tender, while others have yet to make a firm decision.
“Any decision by the US will be very influential globally,” said John Barkoulas, a finance professor at Georgia Southern University. “To adopt regulation you need to know all important aspects of reality but that reality is in a state of flux currently.”
The data of cryptocurrency “coins” is contained on networks in various locations and stored on a blockchain, which is a virtual ledger that stores information in blocks that cannot be edited, according to Investopedia.
Because the blockchain is copied to multiple different nodes, or devices attached to a network, it is difficult for hackers to manipulate, and data errors can be noticed and corrected quickly.
Similar to sharing a Microsoft Word document with a team, they will not see any edits made after the document is shared. Therefore, if someone sabotaged that document on one computer, it would still be the same on the others.
When someone purchases a form of cryptocurrency, the passwords, or “keys,” to access the funds are stored in wallets, which can be physical or digital, according to Coinbase.
There are risks to both kinds, as physical wallets can be lost or destroyed, and online wallets can be hacked.
The first and most popular cryptocurrency, Bitcoin, was created in 2009 by an anonymous source under the pseudonym Satoshi Nakamoto, according to Business Insider.
Growing from a valueless digital concept, a single Bitcoin is now worth over $40,000, according to Yahoo Finance.
Since 2009, many other cryptocurrency coins have emerged, including Ethereum and Cardano.
Today, the total market value of all cryptocurrencies has reached over $3 trillion, according to Al Jazeera.
Not all cryptocurrency coins are created equal, though, and while success stories such as Bitcoin can seem promising, many other newer coins remain at a very low value.
“Any time you have a lot of supply and lack of demand, something is going to fall,” said Kent Patrick of Bush Wealth Management.
Patrick said that while some coins have gone “to the moon,” others have not been so successful, and said that he would advise people, as with any investment, to not have more than 10% of their net worth in any one form of cryptocurrency.
Barkoulas agreed that those interested in cryptocurrency should only use a small percentage of their funds but said that there are portfolio diversification benefits associated with investing.
While there are legitimate capital risks, as with any speculation, many people have seen significant financial gains from their investment. However, cryptocurrency’s impact does not stop with those who choose to buy in.
Many forms of cryptocurrency are “mined,” which involves a system of computers solving complex equations on a cryptocurrency’s network in order to be rewarded in that coin, the same way a student might be given candy by a teacher for answering a question correctly.
This process consumes a lot of energy, which can be harmful to the environment.
In fact, Eden Hollers, a student at GSU writing on cryptocurrency’s environmental impacts, said she found in her research that Bitcoin’s energy consumption alone is comparable to that of the country of Belgium, and that greenhouse gases emitted from Bitcoin mining may lead to an increase in global temperatures by 2 degrees Celsius.
“Because of the environmental effects of it, I don’t really believe that we need it that much, especially when it comes to NFTs,” said Hollers. “It’s just something to go into that capitalistic nature of society, a new way to gain money.”
While cryptocurrency may seem like an exciting investment, the jury is still out on how it will fit into the global economy and the effect that these digital transactions will have on our environment.
Graphic by Joshua Jones. Data obtained from Bankrate.