What is Cryptocurrency?

Well, what is currency?

Currency or money is, in its most simple form, a medium of exchange. Money was created so we don’t have to bring our pigs or cows to the market in order to buy shoes. Ah…the good old days. Many objects have acted as money throughout the ages including gold, silver, nickel, stones, and cigarettes (yes cigarettes). 

A cryptocurrency then is a digital or virtual currency that is secured by cryptography (aka the blockchain) which makes it impossible to counterfeit or double spend.  

And much like the dubious start of the internet many of the early adopters of cryptocurrencies have been those who would like their financial transactions to evade government eyes. So terrorists, money launderers, drug smugglers, tax evaders etc. of course, were drawn to cryptocurrency early. But from its dark beginnings, cryptocurrency has taken on more of a mainstream attitude. Large companies such as PayPal and Tesla as well as accounting firms such as KPMG have included their cryptocurrencies on their balance sheets and as a method of transacting with them. 

The idea behind Bitcoin for example was to build a digital currency whose total amount available is finite and far removed from any centralized government control. This in its essence is its appeal. Many governments, including ours (Owe Canada), have taken to printing money like it grows on trees. The problem with this is that it devalues that same money, making everything else more expensive. We are seeing this in today’s rampant price increases. Yes, there are other issues with prices today including supply disruptions caused by the government’s response to Covid. But printing money with reckless abandon is not a good way to manage a country’s finances. This is why I laugh every time I read that the government is thinking of creating their own digital currency. They still don’t get it! 

Coinciding with the creation of digital currencies was the creation of the block chain. This is a system in which data is stacked. This stacking of data does not allow for the duplication of cryptocurrencies. This stacking is also known as mining. In order to incentivize people to mine crypto data they are rewarded with the cryptocurrencies they are mining such as Bitcoin and Ethereum (another type of cryptocurrency). 

There are many ways to own digital currencies. You can own these directly, through an Exchange Traded Fund or through a company that mines digital currencies. We do consider digital currencies high risk at the current time. As Bitcoin and Ethereum progress to more mainstream uses this may change.  

Crypto currencies are not without their risks. The intrinsic value of cryptocurrency is essentially zero (but so is the Canadian dollar if you think about it…backed entirely by faith). Governments may impose stringent regulation to prevent further proliferation of digital money. But much like Covid, the cat’s out of the bag, it’s likely that government will have to learn to live with it. 

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