Unpacking crypto

To many, cryptocurrency is a mysterious entity, a concept many struggle to comprehend. Cryptocurrency is a form of digitized money, which uses computer networks to uphold and manage transactions between owners of digital wallets.

“Cryptocurrency is internet money that allows money to move more quickly without the involvement of the banks or the government,” Hailey Lennon, a corporate attorney specializing in cryptocurrency, said in a video conference.

Cryptocurrency is decentralized, meaning it avoids the use of traditional finance and banking systems, although there can be fees associated with these transactions, Lennon said.

David Yermack, professor of finance at the New York University Stern School of Business, said in a video conference that cryptocurrency transactions are recorded through an online ledger, a record-keeping system of financial transactions, known as the blockchain.

Many cryptocurrencies verify transactions through a process called mining. The process of mining involves miners, people who supply the complex computer systems that solve a code to verify the block of transactions.

Mining is also how many cryptocurrencies add to their supply. Instead of the government regulating the supply of money, many cryptocurrencies use predetermined computer programs to reward miners with coins, systematically adding to the coin supply.

The value of any currency boils down to the trust in a central power to effectively regulate the market, Yermack said.

“The real question for a user is, ‘Do you trust a computer program more than you trust the Board of Governors of the Federal Reserve?’” said Yermack. “Different people will have different answers to that.”

Since the value of most cryptocurrencies is not stable, many people have started buying cryptocurrency as a form of investment.

Lennon buys cryptocurrency weekly, she said. While in the short term the value of a coin can be volatile, she does not think investing in cryptocurrency long term is very risky.

According to Yermack, he recognizes the potential of cryptocurrency but finds the idea of using it as a form of investment to be a speculative and risky decision.

Yermack has never owned cryptocurrency for that reason. Despite its success so far, he is still hesitant.

“Nothing can go up that far, that quickly, forever,” Yermack said.