Thursday, July 19, 2018

Cryptocurrencies: What Consumers Need to Know

The New Jersey Coalition for Financial Education (NJCFE) recently held a meeting that included a panel presentation about cryptocurrencies. Below are some key points that were presented:

  • Cryptocurrencies are virtual currencies that reside within computers. They are a digital representation of value that is used as a store of value and a medium of exchange. While they cannot physically be held like dollar bills, they can be digitally transferred between people without a middleman (e.g., bank).
  • The security behind cryptocurrencies is the mathematics behind their software. Instead of the “In God, we trust” wording seen on U.S. paper currency, the slogan for cryptocurrencies is “In math, we trust.” Cryptocurrencies are not backed or supported by any government or central bank.
  • There are hundreds of cryptocurrencies in existence with Bitcoin and Ethereum among the most well-known. Transactions between parties are anonymous and they do not need to know each other. Users are identified by unique alpha-numeric addresses and have a “personal wallet.”
  • If people lose their password, or people die without telling other trusted parties their password, their cryptocurrency account will not be able to be accessed and all of its value will be lost.
  • Blockchain is the underlying technology behind cryptocurrencies. It is a permanent publicly distributed ledger that is visible to the entire network. Blockchain is literally “flattening the world” and is expected to grow exponentially and be adopted for use in a wide variety of industry sectors.
  • Cryptocurrencies are best used for purchase transactions and not for storage of value. Their value can be very volatile and is derived by market forces of supply and demand. Governments generally oppose cryptocurrencies because they cannot collect sales tax on purchases made “in the ether.”
  • Environmental concerns have plagued cryptocurrencies. They run on a network of computers using a process called mining that validates and logs transactions. Mining requires computers to run on sometimes non-clean power sources constantly. There have been reported power shortages in some areas where mining is done.
  • Cryptocurrencies are bought and sold on the cash (spot) market and can also be bought through initial coin offerings (ICOs). They are currently the “wild, wild west” and there are many reasons for consumers not to use them. However, we should be aware of them and of blockchain technology.

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