Shortcuts / 26 May 2021

Cryptocurrency

Cryptocurrency is perhaps our most requested Shortcut to date. In this edition, we’ll help you get a sense of how cryptocurrency became a thing, Bitcoin and its ups and downs, and the big names who are moving and shaking the market. 

Let’s start with the basics – what is cryptocurrency?
Digital money that can be traded and used to purchase goods and services – if accepted by the vendor, of course.

What’s wrong with the good ol’ dollar?
Nothing. But when we look at when and why cryptocurrency was created, it has a lot to do with some people’s lack of trust in the banks. A major event in the rise of cryptocurrencies is the Global Financial Crisis back in 2008 when there was a mortgage meltdown in the US, and the Federal Reserve was bailing out the banks.

Who was behind it?
Satoshi Nakamoto – a name used by an anonymous person or people – proposed a new form of digital money called Bitcoin. No one knows who/what Nakamoto is – what we do know is that they published a paper in 2008 that jump-started it all.

Alright, back to Bitcoin…
Bitcoin was the first cryptocurrency to truly explode. What Nakamoto proposed with Bitcoin was a decentralised system for the currency.

What’s that?
Ok, so when we look at regular currencies, cash is controlled by central banks, which means regulators have levels of control. A decentralised system is not backed or regulated by a central authority such as a government or bank. Instead, Bitcoin runs across a network of computer software called blockchain.

How does that work?
It’s readable by everyone within the network – everyone knows how many Bitcoins there are, and people can buy them with regular money and spend them where Bitcoin is accepted…

And that’s underpinned by software known as blockchain…
This is essentially a network of computers worldwide that keeps track of every Bitcoin transaction ever made. So when users buy or sell Bitcoin, those transactions are recorded on a global database which anyone with internet access can see.

So no one person/institution controls the beast?
And that’s why some people think Bitcoin is more trustworthy than the banks.

So many questions – like who/what issues Bitcoin?
New Bitcoins are generated through a process called mining which is done through computers solving more and more complicated algorithms. Bitcoin also has an agreement of sorts in its code that there’s a finite supply – there will only ever be 21 million Bitcoins produced.

And then what?
Then, when a user wants to send cryptocurrency to another user, they send it to their digital wallet, and the transaction is added to the blockchain so that it is on the record.

So do people use it to buy things?
Yep, and it came to life in 2010 when a handful of retailers started accepting bitcoin. One of the first items ever purchased with crypto was a pizza…

Yum…
Totally.

So there are supply and demand factors at play here…
Yeah, and because that is happening with Bitcoin, people are starting to create more and more cryptocurrencies. There’s dogecoin, a reference to a popular meme and even pot coin, a cryptocurrency for cannabis enthusiasts. Some of them are a joke, but some of them are more serious.

And this demand is what’s triggered the price of Bitcoin to soar this year?
Yup. Investor sentiment and media buzz have had a big influence on the price of cryptocurrencies, as it does in more traditional markets.

And where does Elon Musk fit in?
Well, he’s had a turbulent relationship with cryptocurrencies over the past few months… Earlier this year, the billionaire Tesla founder added the hashtag #bitcoin to his Twitter bio. That helped to briefly push up the price by as much as 20%. Then in February, Tesla announced it had bought US$1.5 billion in Bitcoin and said it might soon accept payments in the currency.

So the price went up, right?
To an all-time high of more than US$64,000 – and that was just a day before the launch of the US’s largest cryptocurrency exchange Coinbase on Wall Street’s Nasdaq stock exchange. Coinbase’s listing was viewed by cryptocurrency fans as another sign of growing mainstream acceptance.

So why did the price fall in recent weeks?
By more than 50% to the $30-40,000 range… Musk had a bit to do with that too. That sell-off was accelerated when he backtracked on his word and suspended plans to let Tesla customers pay for cars in Bitcoin over environmental concerns.

Huh?
Turns out Bitcoin mining uses more energy annually than Argentina…

So Musk moves the markets?
He sure does, and critics say that’s a problem.

What are the other issues?
Chinese financial regulators have cracked down on banks and payment firms, telling them they cannot offer clients any services involving cryptocurrencies.

Will that slow things down?
Supporters believe they could eventually replace government-issued currencies because of the growing popularity of digital payments. And others say that they are fans because it’s protected from manipulation by governments and central banks, offering a more democratic payment system.

Some big names are backing its success too…
Including Twitter/Square CEO Jack Dorsey. In 2018 he said that he believes Bitcoin will become the world’s single currency within 10 years. Note: in February, he partnered with music entrepreneur Jay-Z on a US$23 million Bitcoin development fund to support projects in Africa and India.

And the sceptics?
They say Bitcoin is neither a currency nor an asset, and it’s too volatile.

How is it handled here in Oz?
Cryptocurrency exchanges are almost entirely unregulated, with operators only required to be registered with the financial crime watchdog AUSTRAC for anti-money laundering purposes. Because of that, there are growing calls for greater regulation of crypto trading platforms as more investors, retailers and institutions eye off digital assets.

So, is it something that’s going to become mainstream?
Supporters say yes, and the move towards it could even accelerate as the public becomes more and more aware. But pessimists say the jumpy price fluctuations and uncertainty around regulation, and the number of places investors can use Bitcoin as payment will be limiting.

So another wait and see…
Looks like it.

ONTO OUR RECOMMENDATIONS

Reading: NFTs are the next big thing in this space, so this Forbes article shows some of the strangest ones going around…

Watching: Fun and informative, this Aussie video about how crypto works was shared on Twitter by Elon Musk.

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