Reporter’s Briefing: Explaining Cryptocurrency

by April 3, 2018

Bitcoin may be the most widely known cryptocurrency, but there are more than a thousand others, known as altcoins. (Photo via user Make-someones-day)

Cryptocurrency is a decentralized digital currency that’s not tied to financial agencies, banks, governments, or other regulators. The integrity of transactions is protected by cryptography.

Cryptocurrencies operate on the blockchain, an interconnected set of records, or blocks, which are resistant to hacking or alteration due to strong encryption — each block is verifiable by cryptographic hashes linked to each other in the chain. Because the blockchain is a public transaction database that functions as a distributed ledger, it serves as a transparent register of transactions. The blockchain is what powers cryptocurrencies, in part by enabling a fully decentralized consensus process that resolves disagreements or mismatched data.

Just like you can’t spend that $100 in your bank account over and over again, you can’t spend cryptocurrency more than once. Credit card companies and other mainstream payment networks manage their own centralized records of all transactions.

Bitcoin and other cryptocurrencies detect double-spending attempts through a shared ledger maintained by computers operating on a peer-to-peer network throughout the world. The ledger stops people from spending money that isn’t there.

Bitcoin may be the most widely known cryptocurrency, but there are more than a thousand others, known as altcoins. Many were created to improve upon some aspect of Bitcoin or to offer something slightly different in terms of privacy, safety, or efficiency.

The most popular altcoins change from month to month. Popular altcoins include Ethereal (backed by JP Morgan Chase, Microsoft, and Intel), Ripple (a Google-backed altcoin), Zcash (focused on privacy), Litecoin (created by a former Google engineer), and many more.

There are multiple cryptocurrency indexes, including CRIX: The CRyptocurrency IndeX, which looks at cryptocurrency market characteristics, the CC130 index, which computes the top 30 cryptocurrencies based on market capitalization, the CRYX cryptocurrency index, volatility index, which measures the volatility of the top 50 cryptocurrencies over a three-week period, and the classification standard, which determines the weight of different asset categories.

The popularity of altcoin, as well as the value, tends to fluctuate much like stock prices. As with any market, this simply represents how much people are willing to trade cash dollars for cryptocurrencies and isn’t necessarily indicative of problems with the currency itself.

Cryptocurrency has its drawbacks

Cryptocurrencies can’t be used to “hide” money because the ledger is public. Account numbers and transaction history are publicly visible, though the people associated with the account numbers are not. Although associating an individual with a cryptocurrency transaction might be more difficult than following the money trail in credit card transactions, it would be easier than trying to trace cash dollars because everyone on a cryptocurrency network has a complete copy of every transaction.

Companies like Chainalysis provide products to assess risk and track money launderers in the Bitcoin space. Additionally, the biggest difficulty in trying to use cryptocurrencies pseudonymously has to do with trying to cash out or exchange them for U.S. dollars or other traditional currencies, since most traders do fraud prevention.

Cryptocurrency is stored on computers, mobile phones or tablets using digital cryptocurrency “wallets.” If you ever lost or forgot your banking account password, you would be able to replace it by simply changing it after going through a few steps to verify your identity. But people who have misplaced their lengthy private keys for their cryptocurrencies are out of luck. Because the system is decentralized, there’s no customer service desk to contact for a password reset, nor is there a database storing people’s private keys.

Although there are a handful of retail businesses and a handful of non-profit organizations that accept bitcoin, it’s worth noting that only a small percentage of cryptocurrency is being used to make purchases or donations, while the rest is being stored, making it more likely that account information is misplaced.

There’s also no way to reverse a cryptocurrency transaction, even if a user accidentally sends money to a scammer or has funds stolen from their computer. While cryptocurrencies typically have safeguards to prevent hacking and theft, some are more secure (and ethical) than others. It’s not unheard of for altcoins to respond poorly to security researchers responsibly disclosing security flaws.

Even though the blockchain is resistant to hacking or alteration, that doesn’t mean that cryptocurrency is entirely safe from risk, often due to user error or bad passwords. Bitcoin trading platform GBL shut down in 2013, and subscribers lost as much as $5 million worth of bitcoin. Bitcoin exchange Mt. Gox declared bankruptcy in 2014 after having lost $473 million in bitcoins. Even federal agents laundered bitcoin in the course of investigating online drug marketplace Silk Road.

Cryptocurrency startup founder Josh Garza was ordered to pay $9.1 million to settle a U.S. Securities and Exchange Commission complaint for wire fraud. He had previously acknowledged that his two companies, GAW Miners and ZenMiner, were part of a pyramid scheme; the then-defunct companies were ordered to pay an additional $10 million. More than $60 million worth of bitcoin was stolen after NiceHash, a cryptocurrency mining platform, was compromised. A cryptocurrency called Tether claimed a hacker stole $31 million.

Blockchain has many uses beyond cryptocurrency

Blockchain, the technology underlying Bitcoin and many other cryptocurrencies, is a rapidly-developing technology. A number of industries have begun adopting blockchain tech for other uses, including healthcare, government, enterprise startups.

Legacy financial institutions are working to incorporate blockchain to improve the efficiency of their backend processes. JP Morgan Chase, Visa, Citi, NASDAQ, Microsoft, IBM and other companies have hired blockchain engineers.

The blockchain has been used to timestamp historical archived data, and by financial firms looking to make backend processes more efficient. There is a lot of potential for use cases where an independently verifiable chain of events is important, such as voting machines.

Reporter’s Takeaway

Don’t read too much into volatility. Cryptocurrency has no intrinsic value beyond market sentiment (often driven by media), and there’s no regulatory oversight. Fluctuations in value are to be expected and not necessarily newsworthy.

Beware of vanity metrics. Altcoins presenting their companies as the next big thing need to be treated with the same level of skepticism as other startups. It’s worth doing due diligence and investigating whether their claims pass muster or are just hyped up marketing propaganda.

Keep an eye on other uses of blockchain. Cryptocurrency may not topple governments or lead to economic revolutions, but the blockchain has much more potential to transform the way companies do business.

Make sure to specify that you’re referring to cryptocurrency. Many journalists have strong opinions on whether the term “crypto” can refer to cryptocurrency or just cryptography. If you do choose to abbreviate, it’s best to assure that your readers understand the term. The Bishop Fox cybersecurity style guide states that one should “spell out on first use to clarify your intended meaning.” Some media outlets capitalize “bitcoin” to refer to the network and technology but use a lowercase b when referring to the actual cryptocurrency units, while others use lowercase all around.