Cryptocurrency? Bitcoin? Blockchains? Admit it: Not long ago, you were blissfully ignorant of all these terms. Technically, cryptocurrency has been around since 2009, but it’s only recently kicked into overdrive. Suddenly, the trendiest people can’t seem to get enough of it.

Which brings me to today’s “No Dumb Question” – “What is cryptocurrency?” This will be closely followed in my next video with: “Should I buy some of it myself?”

Spoiler alert! Here’s my grand conclusion, which I’ll explain in my next video: If you do decide to buy into the cryptocurrency craze at this time, know that you’re speculating, not investing. You might get lucky with your gambit and hit a big jackpot. You could just as easily lose it all. Buyer beware!

But first … let’s define what we’re talking about to begin with. And don’t forget, for continued clarity to any of your currently cryptic money matters, connect with me on LinkedIn, or subscribe to my YouTube channel and click on the bell.

Have you caught cryptocurrency fever, or are you at least wondering what the commotion is about? As you read all about it, you may wonder if you’re missing out on an opportunity that everybody else and their aunt has piled into.

Education is the best first step toward making informed choices. So, first, let’s define some terms. And … let’s have a little fun while we’re at it! By way of introducing some of my teammates, they’re going to help me with today’s Q&A session.

Hey, Nancy, what is cryptocurrency?

I’m glad you asked. Cryptocurrency is essentially a kind of money – or currency. Thanks to electronic security – or encryption – it exists in a presumably safe, sound and limited supply. Pair the “encryption” with the “currency,” and you’ve got a new kind of digital asset, or electronic exchange.

Well, sort of new. Cryptocurrency was first coined – no pun intended – in 2009, supposedly by a fellow named Satoshi Nakamoto. His Wikipedia entry reads like a dime-novel thriller, suggesting he may not actually be who he says he is … but whoever he is or they are, Nakamoto is credited with designing and implementing Bitcoin as the first and most familiar cryptocurrency. Ethereum is currently its second-closest competitor, with plenty of others vying for space as well, and more likely to come.

Unlike a dollar bill or a looney or a gold coin, cryptocurrency exists strictly as computer code. You can’t touch it or feel it. You can’t run it through the rinse cycle if you accidentally leave it in your pocket. But increasingly, holders are receiving, saving and spending their cryptocurrency in ways that emulate the things you can do with “regular” money.

So then how is cryptocurrency different from “regular” money? After all, I can securely transact Canadian dollars electronically too.

Excellent question. In comparing cryptocurrency to regulated “fiat” currency – or “regular,” legal tender like the Canadian dollar – there are a few key points to make.

First, since neither fiat nor cryptocurrency are still tied to the value of an underlying commodity like gold or silver, both must have another way to maintain their spending power in the face of inflation. (Psst: See my past video for a review on inflation.)

For legal tender, most countries’ central banks keep their currency’s spending power relatively stable. For cryptocurrency, there is no central bank. Its stability is essentially backed by the strength of its underlying “ledger,” or blockchain, where balances and transactions are verified and then publicly reported. In other words, those blockchains had better be very secure and very verifiable!

There’s also that “limited supply” thing I mentioned earlier. Obviously, if money really did grow on trees, it would cease to have any value. That’s why even our cherished maple leaves won’t buy you much, no matter how much you enjoy seeing them emblazoned on our team’s jerseys.

Again, for our legal tender, the Bank of Canada is in charge of stabilizing its value by limiting supply without strangling demand. While cryptocurrency fans offer explanations for why and how its supply and demand will be managed, I’d say the jury remains out on how effective the systems will be in sustaining this delicate balance over time. I’ll spare you the technical details, but if more and more people decide to get in on the action, the processes will likely demand new, more scalable solutions than what’s currently available. 

Hmmm. Since Canada already has its own, time-tested currency, why would someone want to use cryptocurrency instead?

Well, it can have its appeal. Most notably, if you’re not a big fan of government oversight, the system is essentially driven “by and for the people.” With no central authorities in charge, cryptocurrency transactions are meant to be direct, peer-to-peer exchanges. At least in theory, this is supposed to allow the currency to flow more freely, with less regulation, restriction, taxation, fee extraction, limitations and similar iterations. Moreover, cryptocurrency transactions are anonymous.

If the world were filled with only good, honest people, cryptocurrency and its related infrastructures could represent a better, more “boundary-less” system for more freely doing business with one another, with far fewer of the usual hassles associated with international commerce.

Unfortunately, in real life, you can imagine how this sort of unchecked exchange can also be used for all sorts of mischief – like dodging taxes, laundering money or funding terrorism, to name a few.

Bottom line, time and technology will tell whether or which cryptocurrencies will evolve into widely embraced tools of legitimate commerce … or disappear into the dustbin of interesting ideas that might have been.

One last question. Well, two, really. Why is cryptocurrency so hot now? And, since it is, should I buy some?

Excellent questions! They’re so important, in fact, that I’m going to answer them in my next “No Dumb Questions” post that you can see here.