If you hadn’t heard about cryptocurrency before, you probably have now. At the beginning of November 2022, one of the most up-and-coming crypto exchanges, FTX, declared bankruptcy without any warning, and the whole world has taken note. So what exactly is cryptocurrency, and why does it matter – not only for techies but also the general public? In this fifth and final article in our Fintech & Culture series, we’ll be answering those questions as well as discussing how crypto and fintech intersect in culture today.

EXPLAINING CRYPTO

Cryptocurrency is in many ways the opposite of traditional currencies, like the US Dollar or the Euro. First of all, cryptocurrencies only exist digitally – they have no physical form like the bills or coins of traditional money. Second, cryptocurrencies are decentralized, meaning they aren’t owned or distributed by any specific government or financial institution, and they’re exchanged peer-to-peer instead of through a regulating entity. Third, cryptocurrencies are limited, meaning only a certain amount of each one exists at any moment of time, and regulating entities cannot create more of it later.

Cryptocurrencies are possible because of a technology called blockchain, which essentially is a distributed electronic database. Instead of data being stored in one location like a hard drive or a cloud, in blockchain it’s spread out among a network of computers that have opted into the network. The data is stored electronically in a group, or “block,” instead of a table like in traditional databases. Each block has a specific amount of data it can hold, and when one block is filled, it’s time-stamped with a permanent marker and then the data continues to the next block in the network. The blocks are connected to each other in a specific order, or “chain,” because each block holds identifying information from the previous and subsequent block in addition to its actual data. This makes the data virtually unchangeable – it can’t be altered, rearranged, or deleted without all the other blocks in the chain also being changed. And because all this data is stored across a network instead of in one location, all the information held in a specific blockchain is accessible by all the members of the network, who remain anonymous through the use of pseudonyms/unique usernames. This process of storing data through blockchain makes cryptocurrencies possible.

Blockchain technology can be used to store all sorts of different types of data, but cryptocurrencies mainly revolve around the data of transactions. But how does a block of data become a unit of value like traditional currencies? To understand this, we need to briefly look back at how the value of traditional currencies have evolved over time.

When coins and paper money were first introduced, they were representative of something else of value – mainly gold and other precious metals or desirable resources. The value of each coin or bill in a currency represented a specific amount of the other desirable resource. An example of this is the gold standard, which was an agreed-upon system for assigning a value of a fixed quantity of gold to the units of currencies in the market. When it was in effect, the gold standard valued gold above all other resources. But as gold has become less desirable over time, money has shifted to represent other valuable resources instead.

In order for any currency to work, it must fulfill six separate requirements: to be durable, portable, divisible, uniform, accepted, and scarce. With these characteristics in mind, then currency doesn’t necessarily have to be what we think of it from a historic perspective. If, for example, units of data can be durable, portable, divisible, uniform, accepted, and scarce, then they can become units of currency – cryptocurrency.

Bitcoin was the first ever cryptocurrency, created in 2009. In 2011, other cryptocurrencies started to enter the market, and in the following years countless more crypto systems have emerged. As the ideas behind crypto have become more accepted by mainstream culture, their values have increased to make them competitive with traditional currencies. Today there are over 9,000 different cryptocurrencies available (in contrast to the approximate 180 traditional currencies being exchanged worldwide), many of which are increasingly accepted as a form of payment for regular, day-to-day purchases. While Bitcoin remains one of the most well-known and stable cryptocurrencies, other crypto exchanges with their own currencies include SoFi, Gemini, Bitstamp, Kraken, Coinbase, Binance, Robinhood, and Etherium.

CRYPTO AND FINTECH

Similar to what we discussed in previous articles in this series, the term “fintech” broadly refers to the use of new technologies in order to compete with the traditional systems and methods of finance and financial services. Fintech revolves around four main categories: AI, blockchain, cloud computing, and big data (known as the ABCDs  of fintech). Since cryptocurrency depends on blockchain, it’s inherently part of fintech.

People have polarizing opinions about cryptocurrencies – some believe they’re the future and that traditional currencies will soon cease to exist, and others hold strongly to the idea that they’re a fad, unstable, and won’t last. Only time will tell as to which perspective is correct, but in the meantime let’s look at some of the implications of crypto and how they have begun to transform not only mainstream culture but also global economies.

BENEFITS OF CRYPTOCURRENCIES

EFFICIENCY

Like we discussed in the previous article in this series, one of the major complaints people have about traditional financial institutions is how slow they are. Creating accounts, transferring or sending money, applying for a loan, etc. are tedious processes involving multiple steps that take a long time. Even after the customer has done all the required actions, there is often still a waiting period before the thing you want to have happen actually happens.

All the financial processes named above are much faster if they involve cryptocurrencies. Instead of a wire transfer taking at least 24 hours, or transactions taking 2-3 days to be processed, these activities can happen almost instantaneously with cryptocurrencies. Because they’re built around a decentralized database, transactions and transfers can be confirmed within minutes, and the money is sent on its way.

The decentralized nature of cryptocurrencies also makes transactions less expensive, since the consumer isn’t paying someone at a bank to make the desired process happen or to verify what’s going on. With crypto, transactions are confirmed by the other members of the network instead of bank personnel, and that doesn’t cost anything.

SECURITY

Blockchain technology is actually quite secure because of the nature of how it works – all transactions must be confirmed through the verification of the network users. If any part of the data of a transaction in one block is tampered with, it changes the entire chain of data, and everyone in the network knows. The larger the chain is, the more secure it becomes since more people are now involved in the verification processes and can hold transactions accountable. The whole thing is documented publicly in the network, so it’s easy to see if/where something has gone wrong.

Despite the public nature of cryptocurrency exchanges, people’s identities are kept private the whole time. When someone signs up to join a crypto exchange, they choose a unique username that’s used for all their transactions. Unless you tell someone that name, no one knows who is who under their pseudonyms. So members of a crypto network know what transactions are occurring because they’re part of the process of confirming them, but they don’t know between whom the transactions are happening.

On a slightly different note, like we stated above, cryptocurrencies are finite, which actually protects them from inflation. When a cryptocurrency is created, it has a cap on how much of it will exist – ever. So people can’t simply make more of a cryptocurrency to help deal with supply/demand or excess spending. Once it’s gone, it’s gone.

ACCESSIBILITY

Cryptocurrencies are most popular in parts of the world where traditional currencies are more unstable. For example, people in Africa, Asia, or South America own or use crypto at a much higher rate than people in North America, Europe, or Australia. Why? Well countries in Africa, Asia, and South America tend to experience more economic and political instability in general, and poverty is much more prevalent. Both of those realities make traditional currencies vulnerable and less relevant. So people benefit more from cryptocurrencies in those places.

Because crypto isn’t owned by a traditional regulating body, it doesn’t have to follow the same protocols. Essentially anyone can open a crypto account, even if they don’t use a traditional bank, and that allows them access to financial services and products they wouldn’t be privy to with traditional banks. All a person needs to start using cryptocurrencies is a smartphone or computer and access to the internet.

CRYPTO IN MAINSTREAM CULTURE

One source describes crypto as “a social phenomenon first and an investment instrument later.” Many people are jumping into the scene simply because of social pressure and fear of missing out. This means that even though crypto has not been accepted worldwide (at least yet), it still has infiltrated popular culture in countless ways. Start paying attention and you’ll see it for yourself: there are many, many crypto references in mainstream media today, including popular TV shows and movies. It’s influencing art and design, music, gaming, and even literature. It’s also been endorsed by countless celebrities and public figures, bringing it to the forefront of marketing and promotional content. Some banks are even now letting you add crypto to your 401k or other retirement savings accounts.

Recent data suggests that Americans are more willing to invest in cryptocurrencies than ever before. In the 2022 Bank of America Study of Wealthy Americans, we see a much greater openness among younger investors (ages 21-42) to buy into crypto than older populations. As much as 15% of their portfolios were dedicated to digital assets, compared to only 2% of the portfolios of investors over the age of 42. This shows a generational shift toward accepting and having faith in the continued value of cryptocurrencies for the long run.

There’s a caution here, though: just because crypto is suddenly popular doesn’t automatically make it worthwhile. Many people have jumped on board without really understanding crypto or what the risks are in a financial sector that has yet to be regulated (as we’ve seen in the aftermath of the recent collapse of FTX). Many people who are in-the-know have actually questioned the intersection of crypto and cultures because the results aren’t always good.

What we do know at this point is, since its creation, crypto has introduced a new way of thinking about money and has opened up new financial opportunities for people across the world. It’s no longer an abstract or niche topic; it’s showing up almost everywhere we look. And although some continue to be hesitant and skeptical, it seems like it’s here to stay.

If you’re interested in reading the other posts in this Fintech & Culture series, you can access them here.