What is Cryptocurrency?
Cryptocurrency is a digital, encrypted, and decentralized form of currency. Many attorneys do not understand what cryptocurrency is. Nor do lawyers understand where bitcoin comes from or how to spend it.
- Digital means that the currency only exists in a purely electronic form. Cryptocurrency is not physical, such as a dollar bill or quarter.
- Encrypted means that the cryptocurrency is protected by a mathematical model that scrambles the data so that only the person who has the password can use it.
- Decentralized means that no one organization or government controls cryptocurrency but instead the decision making is distributed to a vast network of computers that all trust each other. This means that all computers running the network run a copy of the exact same data to form a ledger called a blockchain. If one ledger is altered or corrupted the rest of the network will reject the change. The blockchain is a record of all transactions that is shared, immutable, and can be used to track all transactions (though you won’t necessarily know who made them).
Don’t We Already Use Digital Money?
Yes, we all have been using digital money for decades. The money in your bank account is digital money and is used just like cash. Banks do not store physical cash for you. The one thing banks can do is give you cold hard cash. When you make a withdrawal, the bank will convert your digital money to physical bills. Allowing digital money allows you to cash checks, direct deposit your paycheck, pay your utility bills, make transactions with credit cards (purchase goods and services on credit), and transfer money around the world.
Digital money stored in your bank account is safe to store (and protected by the FDIC), prevents theft, and eases many of your day-to-day transactions. Cryptocurrencies can be lost if you lose your password, lost if you lose the physical key (think hard drive) that the data is stored on, and can be hacked (stolen). Cryptocurrency is also volatile, has uncertain regulatory oversight, is unregulated, and limited acceptance. Unlike the dollar in your pocket, cryptocurrency is not backed by any government.
Where Does Cryptocurrency Come From?
New units of a cryptocurrency are “mined” as they release into the world. Your computer mines cryptocurrency by validating transactions. As the cryptocurrency network grows it becomes more complicated requiring more processing power to mine a unit of the cryptocurrency.
How Can I Buy Cryptocurrency?
There are typically two ways to purchase cryptocurrency, either through a traditional broker or cryptocurrency exchange. Traditional brokers are financial institutions that normally buy and sell assets such as stocks, ETFs, and bonds. Cryptocurrency exchanges are typically websites that allow you to purchase different types of cryptocurrencies for a fee.
How Do I Store My Cryptocurrency?
The two different ways to store your cryptocurrency are cold and hot wallets. A hot wallet is a way to store your cryptocurrency using online software which is password protected. A cold wallet is a hardware such as hard drive or USB stick where you electronically store your cryptocurrency with a password.
How Can I Spend My Cryptocurrency?
Buying things with cryptocurrencies for the most part is not possible. While some companies do allow you to make purchases with cryptocurrencies, the vast majority do not. For day-to-day transactions, the cost associated with a transaction, or the fees are too high. Think of the fees like the fees that a merchant pays the with credit card company often 2.5% plus $.30, but with crypto, the fees are often much more.
Attorney Credits, a nationwide provider of CLE offers CLE courses on Cryptocurrency available for credit in many states.