Crypto Currency: A Primer

Taking some of the cryptic out of the digital currency 

I first wrote about crypto and blockchain in a January 2016 article on Forbes.com. 

Back then, I wrote that interest in bitcoin may have subsided, but interest in the underlying registration process – distributed ledgers or blockchains – had in turn attracted the interest of global banks and exchanges, most notably Nasdaq. 

It was valued at $369 in January 2016. It hit $61,374 in October 2021 and was about $39,000 in late April of this year. So, you can look at my take on bitcoin with some degree of skepticism.

Crypto currency – by definition a “digital currency in which transactions are verified and records maintained by a centralized system using cryptography, rather than by a centralized authority” – is highly volatile and unevenly regulated, so any prospective investor should look at choices of the more than 1,000 coins and also investigate brokers, exchanges, custodians and regulations very carefully. The biggest crypto currencies by market cap are Bitcoin, Ethereum, Tether, BNB and USD Coin.

A Wall Street Journal review of two recent books on crypto asked whether they are “accounts of a world-changing new technology? Or histories of a utopian experiment that turned into a financial bubble? Only time will tell, and readers won’t miss much by waiting a few years for a work that reveals, with the benefit of hindsight, how the story turned out.”

Many people have made a lot of money in this space – some by investing in crypto, others by creating infrastructure for it. The Wall Street Journal’s Jan. 28 Mansion section reported that the latest wave of mega-mansion buyers are crypto millionaires. Brian Anderson, CEO of Coinbase, the largest crypto exchange, bought a Bel Air estate for $133 million, and a $22.5 million Miami penthouse was bought with cryptocurrency.

The Wall Street Journal explained that real estate sellers typically use third-party platforms to transfer cryptocurrency to dollars immediately upon receipt to guard against volatility. That’s also true of the few retailers that take crypto.

The Wall Street Journal also regularly publishes stories about crypto hacks. One of the latest was the popular NFT (non-fungible token) collection Bored Ape Yacht Club, with a loss of $3 million to $14 million, depending on the source. A chart of the six biggest hacks showed thefts ranging from $281 million to $611 million.

In a recent Forbes profile, Ken Griffin, who runs the $47 billion Chicago-based hedge fund Citadel, said his market-maker company, Citadel Securities, will begin offering trading in crypto, but he doesn’t plan to invest in it.

“I haven’t seen the attraction of owning cryptocurrencies as a store of value,” he said. “But you know, there are assets I own that people would make the same arguments about. I’m a collector of American abstract art.”

Similarly, Andy Schmidt, a banking expert at the global consultancy CGI, said he simply didn’t see the need for crypto. As payment systems move to real time and cross border, some of the advantages claimed for crypto disappear.

Matt Levin, a crypto skeptic at Bloomberg, wrote recently that “much of crypto economics consists of some version of ‘if you assume this thing is valuable, then it is valuable.’ That is true in some loose sense of lots of other investments, too, but crypto has really managed it at scale.”

Like abstract art, crypto is largely unregulated in the United States, which lags well behind the United Kingdom, Australia, Hong Kong,  Singapore and others, all of which have a single finance regulator.

By contrast, U.S. regulation is divided among several bodies. At the federal level, we have the Federal Reserve, the Securities and Exchange Commission, the Commodity Futures Trading Commission, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation. And don’t expect comprehensive legislation anytime soon.

Some states have their own regulations for finance as well, ranging from detailed and restrictive in New York, to looser in states that want to attract crypto companies. 

It’s getting easier to buy crypto. Green Bay reportedly has four crypto ATMs, according to a recent search: BudgetCoinz Bitcoin ATM, DigitalMint Bitcoin ATM, CoinFlip Bitcoin and Coin Cloud Bitcoin. Banks including community banks, as well as some brokerages and mutual-fund managers, are accepting crypto assets. Fidelity announced in late April that it would allow bitcoins in 401(k) retirement accounts, up to 20% of the total, although the Department of Labor may have something to say about that.

A couple of hours online should give you an idea of whether this appeals to you and how to get started. Crypto is highly volatile, and as the hacks demonstrate, many sites are not secure. Buying a bit of crypto might be an enjoyable adventure, but it probably shouldn’t be more than 1-2% of your portfolio. 

Meanwhile, crypto firms are hiring specialized lawyers as fast as they can, and the industry is spending lavishly on lobbyists: $5 million on lobbying just the Senate during the first nine months of 2021, according to The Economist.

For some of the latest news on crypto, try these sources to start.

• Financial technology expert Chris Skinner has written several books about digital banking and follows the crypto scene closely and globally. Find him at thefinanswer.com.

• Cryptojournalist Laura Shin has a newsletter on crypto and hosts a podcast, Unchained, at unchainedpodcast.com.• Axios, although primarily a site for political news, has recently started a pretty good crypto newsletter at axios.com.