Bitcoin versus a Bank Explained in 2 Minutes.
You’re busy and don’t want to spend a lot of time reading about all the “crypto” gibberish you keep hearing about. I get it. But you also don’t want to be left in the dark as the world moves rapidly forward. I get that too. Got 2 minutes to spare? Good.
Here’s a primer on cryptocurrencies and why they’re worth understanding:
Blockchain versus a Bank. The global banking system relies on established institutions to manage and control the flow of money. You keep your dollars in an account at a bank, and the bank is responsible for keeping your money secure (while figuring out countless ways generate profits from your deposits). Central banks such as the U.S. Federal Reserve or European Central Bank regulate and control their nations’ commercial banks and similar financial institutions, and operate a vast, centralized system. Centralized means that certain authorities are in charge, which is both a good thing and a bad thing. Good in that the public knows (sort of) who is making the decisions, bad in that unsavory people in charge may sometimes exploit the system (ranging from currency manipulation to your bank’s onerous overdraft fees).
Why do people rob banks? Like the bank robber Willie Sutton is credited with saying, “because that’s where the money is.”
Blockchain, on the other hand, is a vast, decentralized system of computers (called nodes) that store electronic digits and data, some of which is used to create digital money called cryptocurrency. Decentralized means that no single authority controls the space, which is both a good thing and bad thing. Good in that nobody can stop it, bad in that unsavory people can use it for illegal activities (including illegal trafficking to money laundering).
What makes cryptocurrency worth understanding, in my opinion, is the fact that it can be exchanged for actual dollars so it is currently a legitimate form of currency (albeit one not yet widely used by the broad public). That the banking system is working to incorporate cryptocurrency into its ecosystem gives me comfort that it will be legitimized further (i.e., if there’s money to be made in something, the banking system will want a piece of it).
Cryptocurrencies come in many different shapes and sizes, such as Bitcoin, Ethereum, and even Dogecoin (which was started as a joke but is now actively traded). Bitcoin is one of the original ones, and is the Kleenex® of the industry in that when some people say they own Bitcoin, the mean cryptocurrencies in general.
Similar to a bank account, a crypto wallet is a password-protected account where you can store your cryptocurrency. A wallet can be stored on a physical device such as a computer hard drive or USB drive (known as a “cold” wallet) or online (a “hot” wallet”). The good news about a crypto wallet is that, handled properly, only you can gain access to it. The bad news is exactly the same, however. Every so often there are news articles about someone who had bought Bitcoin many years ago but forgot about it. With BitCoin skyrocketing somewhere between $25,000 to $75,000 each, the stories usually talk about how that person is desperately trying to recover millions of dollars of unrealized Bitcoin from their now-defunct or discarded computer. And they probably forgot their password too.
The risk with online wallets is if someone obtains your password. If a thief gets access into your wallet they can transfer your coins to their account and you have no (I mean Zero, Zip, Nada) means of recovering your stolen money. The thief can easily move your coins from your wallet to another wallet and then another wallet, obfuscating any trail for recovery. Unlike a centralized banking system, where transactions are linked and recorded and fraudulent transactions can sometimes be reversed (Nigerian princes notwithstanding), blockchain’s decentralized system does not provide those protections.
When you create a crypto wallet, the service provider will generate a 12-word phrase that will be your master password. You are advised to write this phrase down on paper. Never store it on your computer or unsecured online to prevent thieves from finding your password and emptying your wallet. Because paper is, well, paper, some people have gone so far as to stamp their phrases onto metal plates and place them in physical vaults or safety deposit boxes. Whatever clever tactic you devise for yours, keep it safe. Also, store it in a way your next-of-kin can find and decode should your wallet outlast you.
[Side note: You may have been hearing about the “metaverse,” don’t be intimidated by this new word. Basically, over the decades the internet has evolved from science fiction author William Gibson introducing the word “cyberspace” in 1982 to “a series of tubes” to the “Internet-of-Things” to now “metaverse.” At its worst, metaverse is a fancy marketing term to sell you more unneeded crap and make you subscribe to more unneeded streaming crap. At its best, virtual and augmented reality, quantum computing, and other “stuff” will be more accessible to the connected world. Sadly, however, it will probably leave the unconnected world (such as developing countries and impoverished regions) even further behind. (More on this in a future article.)]
Daniel Farber Huang is a corporate finance strategist, cybersecurity professional and author, documentary photographer, and humanitarian advocate. You can see more of Daniel’s broad body of work at www.DanielFarberHuang.com
