The Cryptocurrency Question

The most common financial question that we have been asked over the last six months or so relates to Bitcoin1 (or any number of other cryptocurrencies). Is it real? How is it valued? Should we invest in it? Can it keep going up in price? The answers to these questions are not easily answered, are complex, and are dynamic over time.

To start, Crypto comes from the Greek Kruptos, which means “hidden.” Because of the complexity of the subject matter, we would prefer to hide from making an opinion on cryptocurrencies in general. However, they (and the technology surrounding them) are increasingly relevant in our world and worthy of some further discussion. Since it is difficult to pin down all the salient arguments surrounding blockchain and cryptocurrencies in this forum, what follows is a high-level review.

The Origin Story

The first iteration of what is now called cryptocurrency was developed around 2008, near the height of the financial crisis. The founder(s) of Bitcoin wanted to create a secure digital currency2 that was not controlled by any central bank, government, or hegemon. Because it was not centrally controlled, it would be incorruptible (no QE, no repatriation, etc.). It would act as a currency in that it serves as a means of exchange, store of value, and unit of account.

What Is Blockchain?

Any conversations surrounding cryptocurrencies must start with blockchain. In its simplest definition, blockchain is a digitized and decentralized public database or ledger.

  • “Digitized”: It is not physical or tangible as it all resides in computer code and on computers across the world.
  • “Decentralized public database”: It’s probably easier to imagine the opposite, which is a centralized private database. This is the backbone of pretty much every system that stores information today. Your bank keeps all transactions of its users in a private database that only it can access. Facebook has all of your personal information sitting in its own database, that is also centralized and private. A decentralized public database means that everyone has access to the information and it’s not under the control of one, centralized power.

The Olympics provide a good analogy. Every major country sends television crews and reporters to document the happenings and post medal counts at the end of the day. No one country or television station owns the information, and each is responsible for maintaining a record in its own database. It is not the most efficient route, but it works, and if there are discrepancies, they can cross reference each other’s counts to get the right result. It is public and decentralized.