Editor’s Note: Just prior to publication, CoinBase, the largest cryptocurrency exchange, eschewed an IPO and simply began trading on Nasdaq. During that same time period Bitcoin, the highly rated cryptocurrency, also suffered a fall in value.
Thanks to the Internet, and our increasingly connected society, it’s a brave new world for collectors and investors.
For example...
A Non Fungible Token (NFT) of an online collage “painting” by the digital artist Beeple sold for more than $60 million at Christie’s in early March.
And, after years of uncertain valuation the cryptocurrency Bitcoin – which sold for a mere 10 cents per “coin” in 2010 – recently soared in worth to more than $50,000 per “coin” in February 2021.
But what exactly is cryptocurrency, and how does it work? And what about those now sought-after NFTs?
To get answers to these questions, Prime reached out to Dr. John Rogers, professor of Economics at American International College in Springfield. Here’s what he shared about the workings of cryptocurrency, and about owning digital “paintings” and other intellectual property.
“I think it’s an important topic; it’s kind of interesting and a bit esoteric,” Rogers told Prime when we reached out for explanations about this new currency model. “What’s going on right now is a lot of experimentation, but in the long run it’s going to affect the whole financial market and how we do business.”
Even if you don’t want to go out and buy Bitcoin – or another cryptocurrency (there are 10 major ones at present) – it’s a good idea to have a basic understanding of what it is, Rogers noted.
In essence, Bitcoin is a decentralized digital currency, which means it does not need a traditional financial institution like a bank to be transferred from person to person or person to vendor.
“These cryptocurrencies got started over 10 years ago at the time of the (2009) financial crisis,” Rogers explained. “People realized banks had mismanaged everything and caused [the collapse]. Many begin questioning why it was so complicated to manage money when ‘all you are doing is a transaction.’”
Rogers said it was during that crisis that a group of anonymous tech experts called Satoshi Nakamoto “came up with this system of peer-to-peer [money] transfers that didn’t require you to go to a bank.
“If I wanted to give you a dollar, I could pull out my wallet, but if I wanted to send you a dollar, I would have had to go through a bank (back then),” Rogers explained. Cryptocurrency short circuited that bank transfer and makes it seamless.
“It works with a digital wallet and what they call a distributed ledger,” Rogers continued, explaining that each person in the cryptocurrency transfer network has a unique code or “key” that allows the network to unlock his “wallet” and deposit the digital currency.
“You don’t need a bank to verify the transaction because the network has a “Miner” – a person who verifies the codes on my wallet and your wallet are accurate,” Rogers explained. It may be seamless, but not very energy-efficient, Rogers continued.
“It takes a lot of computer power (and electricity) to verify these algorithms that the network is doing this correctly,” Rogers said, adding that the “miners” get paid in digital currency for the work of verifying transactions are accurate.
And though businesses like Tesla now sells cars for bitcoin, Chipotle has a promotion offering a prize in bitcoin, JP Morgan lets you invest in bitcoin and financial services like Visa, Mastercard, Venmo and PayPal are now accepting the cryptocurrency for payments, it’s important to understand that, for right now, cryptocurrency is basically an investment, not unlike buying stocks or securities.
“It’s an asset like gold or paintings,” Rogers continued. “You have to put money in to buy a Bitcoin, and everybody is doing it, and the price has gone up.”* The advantage - “If I bought [bitcoin] a year ago at $5,000, and it’s gone to $58,000…some people say it’s going to go to $100,000,” Rogers noted, adding however, currently cryptocurrency is “incredibly unstable” and it’s “questionable how much it can be used in the medium of commerce.”
It should be noted that a shifting roster of countries, which currently incudes Bolivia, Algeria and Saudi Arabia, and is a small form, China (which is rumored to be developing its own “coin”) – consider the use of cryptocurrency illegal.
Blockchain, the backbone
of cryptocurrency
That distributed ledger that’s so important to cryptocurrency transactions operates on a technology called blockchain.
“Blockchain is a decentralized method of storage, it can’t get hacked, it’s a way to protect data,” Rogers said.
According to Investopedia, a blockchain is basically a database – which is a collection of information that is organized like an electronic spreadsheet – stored on a computer system or server. The difference is that, unlike a spreadsheet, which is usually searchable by one person at a time, a database can be searched by multiple users at the same time.
What makes a database a blockchain is that the information is stored together in groups, or secure “blocks” – “It’s like writing it down on a piece of paper and giving it to someone,” Rogers explained – and when a block reaches capacity, it is linked to another block forming a chain of data.
Because the data on bitcoin (and other cryptocurrency) transactions is stored together in a ‘block,” any data that is altered by a hacker would show up immediately when that data is cross-checked against other blocks for accuracy by a “miner.” (www.investopedia.com/terms/b/blockchain.asp)
“I don’t see a great future for cryptocurrency itself, for it to be a great source of value it has to be stable [and] it has had its booms and busts, but I do see the idea of blockchain and the distributed ledger being a powerful way to engage in all kinds of transactions,” Rogers noted.
The Non Fungible Token, Rogers explained, “creates a property right for a digital property” – a digital copyright, so to speak, for digitally created arts.
“Now that things are available on the internet, [the NFT] is a way to protect intellectual property. Think about music, art - now the artist can establish their rights to the property.”
The NFT works digitally like a provenance for a piece of art works in the real world.
“You are establishing a property right on something you couldn’t put a right on before,” Rogers continued. “Somebody is the original owner, that’s why it’s called Non Fungible.
“It doesn't mean that people can’t copy it or reproduce it,” he further explained. “That just makes your property right more valuable.”
For a more complete explanation of how cryptocurrency works, visit https://www.coinbase.com/learn/crypto-basics/what-is-cryptocurrency
* It’s also important to note there is a hard cap of 21 million on the amount of the cryptocurrency Bitcoins that will ever exist, according to information supplied by the website Investopedia (www.investopedia.com/tech/what-happens-bitcoin-after-21-million-mined/)
