SYRACUSE, N.Y. (NCC News) — The first cryptocurrency, Bitcoin, hit the market in 2009. Since then, thousands of other cryptocurrencies have appeared alongside it.
But as these crypto coins become more mainstream, with them come several questions regarding what they are, how they have any value and whether or not people can actually use them to buy products.
Bitcoin and other cryptocurrencies are not tangible like cash and credit cards. Cryptos exist entirely on computer networks. Each individual coin is represented by a piece of code and when someone buys and sells their crypto coins, a unique code is created to represent that transaction in the network.
Another name for this network is the Block Chain. Essentially each transaction is a block and when the next transaction occurs, it links on to the block before it. This simplification of the process helps explain why cryptocurrencies, when compared to other information on the Internet, is difficult to hack.
Copies of the block chain are open to the public and exist all over the world. A computer hacker could disturb one copy of the block chain but that would not be enough to take the whole system down, considering thousands of versions exist elsewhere.
When someone purchases their share of Bitcoin or another cryptocurrency, the code they receive in return is unique to them and can be verified by the block chain. Most owners keep their shares in digital wallets, like the app CoinBase, which has made it easy for everyday people to buy, sell and own cryptocurrency.
Unlike cash, cryptocurrencies are not regulated by any governments or banks. “In principle, no one’s in charge because it’s an anonymous distributed network, decentralized ledger where there is no one central authority,” said Syracuse University iSchool professor Lee McKnight.
Crypto doesn’t derive its value from anything tangible, such as the amount of gold in the world (like the American dollar once was). Instead, the value of cryptocurrencies rely on two things.
First is a planned scarcity which prevents the market from flooding with too many coins to buy. For Bitcoin, the creators only made roughly 21 million coins.
Second is the continuation of people wanting and purchasing them. In this way, Bitcoin is similar to the stock market. Both systems rely on people buying shares and others following. The more people who buy into a cryptocurrency, the more value it appears to have. If large numbers of people begin to sell their shares all at once, it may lead to a panic and send the system crashing.
Both systems also have a fair amount of instability.
According to McKnight, volatility of cryptocurrencies will never go away because without a regulating body, the worth of one coin will continue to fluctuate as people get in and out of the system.
This leads to another confusing aspect of cryptocurrencies: can people use them to buy actual, tangible things?
As of right now, the answer is probably not.
Companies like Tesla have started to accept Bitcoin as a method of currency in transactions – but because of the volatility of the cryptocurrency market, a Bitcoin that is worth $50,000 and used to purchase a Tesla vehicle, could only be worth $40,000 the next day. In that case, Tesla would lose $10,000 in their sale.
While McKnight described moves like this on Tesla’s part as “publicity stunts,” he does believe that some day down the line, companies as small as local coffee shops may be able to figure out a way to accept cryptocurrencies while balancing their volatility.
McKnight said that especially during the Covid-19 pandemic, with people stuck at home on their computers, the cryptocurrency world has exploded amongst regular, everyday people. He encouraged college students to explore cryptocurrencies and even invest in some they like but to always exercise caution as well.
“If you have [$50 or $100] lying around to put in, why not, but don’t put any money in that you can’t afford to lose,” McKnight said.
