Cryptocurrency Explained: Is It Simply FooL's Gold or Actually the Real Deal?

What Is Cryptocurrency?

It's digital or virtual currency created by encoding strings of data (crypto) into units of currency. The feds define it as "a medium of exchange that operates like a currency in some environments but does not have all the attributes of real currency."⁴

That means that, unlike the U.S. dollar, cryptocurrencies are not issued by the government. They aren't regulated by any central authority, and they don't have a physical form. They are digital, decentralized, and encrypted.

Think of them like virtual tokens or "credits" that you can only use in certain places — and that you can't necessarily cash out when you want to.

Should you invest in cryptocurrency?

That depends. Cryptocurrencies are attractive to folks who like to be on the cutting edge of technology. Certain ones are designed for fast, low-cost, confidential transactions with anyone who has internet access. And their limited supply and freedom from government control gives them hedge-like qualities against inflation and unstable governments. For some, that can make cryptocurrencies a worthwhile option. That doesn't mean it's right for you or that you should rush in, however. If you're considering jumping into cryptocurrency, you need to be aware of its volatility and risks.

Buyer Beware

Cryptocurrencies exist in a "Wild West"–type space. They aren't regulated, and they aren't protected by the FDIC or any government body. That makes them ripe for hackers and scammers, who have stolen at least $11 billion in cryptocurrencies since 2011.⁷ And over half of that has been taken since 2019.⁸

Sophisticated hackers can hijack accounts, fake new currency offerings, and use other schemes to defraud.^9,10 But even simple scams can work with naïve investors or insecure accounts. When they do work, accounts can be drained in minutes, and that cryptocurrency will be lost forever.

What Is Blockchain?

Blockchain is the technology behind cryptocurrency. It's a network that chains chunks of data (blocks) together to create permanent, time-stamped records of every transaction. This database is stored in a decentralized cryptocurrency network, with peers verifying and recording each transaction. The public record of those transactions is called the blockchain.

This setup provides transparency and traceability. In fact, even though cryptocurrency owners can be anonymous, their digital currency is not. Any time it's exchanged, it can be tracked, and every historical transaction for cryptocurrency is on record.

Beyond that, the peer verification in blockchain makes reliable transactions possible without a financial institution as a middleman — and outside of government authority and oversight.

These distinctive features of blockchain may not just change the way some industries do business. Some experts say blockchain has the potential to create new economic and social foundations.¹¹

Jan wants to give Tom one cryptocurrency coin.

The transaction represents a "block" of data.

The block is broadcasted to every computer in the cryptocurrency network.

The peers in the network validate the transaction using mathematical algorithms.

The block is permanently added to the chain, creating an accurate, transparent, and indelible record of the transaction.

The transaction is complete and the coin changes ownership.

Industries Ripe for Blockchain Disruption

Art & Collectibles

Blockchain has paved the way for collectible digital assets. Known as non-fungible tokens (NFTs), these virtual tokens can represent anything from sports cards and clips of games to digital artwork, video game memorabilia, and other rarities. Because each NFT is unique, they aren't interchangeable like other cryptocurrencies. Still, they are a blossoming space where multi-million-dollar transactions are already happening.¹²

Financial Services

Borders and banks don't matter for financial transactions that happen through blockchain technology. That's a game changer in developing countries where billions of people lack access to traditional banks. It also means faster, more transparent, and more efficient money transfers anywhere. Plus, blockchain has the potential to make bank records more secure while creating a real-time ledger and reducing operational costs.¹³

All of that is why some say that blockchain is poised to revolutionize the financial services industry in the same way the internet fundamentally changed media.¹⁴

Health Care

Patient records can be stored more securely, while remaining immediately accessible, through blockchain technology. That alone could save lives in an emergency. Beyond patient data, however, blockchain could solve other big problems in the health care industry, like managing drug supply chains, health care claims, data from research and clinical trials, and much more.¹⁵