Crypto Corner: What exactly is crypto?

In this first episode of Crypto Corner, a six-part series that dives into cryptocurrency, Yahoo Finance Producer Jo Santangelo speaks with Yahoo Finance Senior Reporters David Hollerith and Jennifer Schonberger to answer burning questions about cryptocurrency.

Video Transcript

JOSEPH SANTANGELO: Bitcoin. Crypto. Blockchain. All terms that have been making headlines for over a decade now. But what does it all mean? Our Yahoo Finance experts are here to break down the basics of this new technology that's sweeping the finance world.

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So to start, just what is crypto in the first place?

JENNIFER SCHONBERGER: Cryptocurrencies are essentially digital cash. It allows anyone anywhere in the world to exchange money without involving a bank or a central bank. It's anonymous. It's secure, and it's instantaneous. So to give you an example, right now in the current banking system that we use, if I owe you $100, and I bank at Bank of America, and you bank at Citibank, well, my $100 has to go from my account at Bank of America through the Federal Reserve to your account at Citigroup before you get paid. But if we're using cryptocurrencies, the payment goes directly from me to you. And it doesn't involve our banks or the Federal Reserve.

DAVID HOLLERITH: A cryptocurrency is essentially a digital asset that's based on a network of computers all working together in a decentralized fashion. And this is most often called a blockchain. It can actually take other forms. But essentially, this structure allows them to exist outside of the control of any other parties so that participants can interact in a peer-to-peer fashion.

JOSEPH SANTANGELO: Wow, sounds impressive. But what exactly is a blockchain?

DAVID HOLLERITH: A blockchain is a distributed database or ledger. You can think of it as sort of like an accounting notebook. But the key to this kind of ledger is that it's held and maintained by a network of computers, all of which are sort of operating out of their own self interest. This database maintains consensus through cryptography that allows all of the participants to sort of establish kind of one central point of truth and maintain it.

JOSEPH SANTANGELO: That's some amazing technology right there. So how long has this existed?

JENNIFER SCHONBERGER: Crypto's actually been around since the 1990s. The first cryptocurrency was called eCash. And it was created actually in 1990. But it wasn't until Bitcoin was created in 2008, 2009 that cryptocurrencies really took hold.

JOSEPH SANTANGELO: Wait a minute. Bitcoin? What's a Bitcoin?

JENNIFER SCHONBERGER: So Bitcoin is the oldest surviving cryptocurrency. It's also the largest cryptocurrency measured by market capitalization. And it's meant to be a store of value and a medium of exchange. So a method of payment. And it dawned back in 2008 when Satoshi Nakamoto put out that now famous white paper saying that they had created a peer-to-peer cashless system. And then the first block was minted in January 2009.

DAVID HOLLERITH: Bitcoin is the cryptocurrency that has the least amount of regulatory scrutiny. The US government, for instance, is pretty clearly recognized it as a commodity. That being said, Bitcoin is the most decentralized cryptocurrency as we know it, which means that it's sort of the farthest out of control by any central party.

JOSEPH SANTANGELO: So if this is the first cryptocurrency-- are there others?

JENNIFER SCHONBERGER: Ethereum is the second largest cryptocurrency measured by market capitalization. And it's actually meant to be more than a medium of exchange. It is a different blockchain than Bitcoin. And it's actually meant for many projects to be developed on. And that's exactly what we see. In fact, those NFTs that you hear about, those buzzy digital collectibles-- many of those are hosted on the Ethereum blockchain.

DAVID HOLLERITH: Ethereum's aim is to become the world's super computer. And essentially you can think of it as a network for transactions. Ethereum uses its native cryptocurrency Ether to power transactions across the network. It also holds the majority of the crypto sectors' decentralized finance applications as well as NFTs.

JOSEPH SANTANGELO: OK, you got me. I'm interested. How can I get my hands on some of this crypto?

JENNIFER SCHONBERGER: So the most direct way to purchase crypto would be through a crypto exchange, like Coinbase, which is the largest US crypto exchange, or Binance, which is the world's largest crypto exchange. And essentially, just like you would go to exchange your dollars for euros, you would create an account at one of these exchanges and put in a certain amount of US dollars and then exchange that for crypto, whether it's Bitcoin, Ethereum, Solana, whatever token it is that you would want.

An alternative way to gain exposure to crypto would be to invest in Bitcoin futures through exchange traded funds. That's a little bit of an easier lift because you can buy those ETFs through traditional brokerages, like a Charles Schwab or Fidelity. However, there, you're not getting exposure to the underlying actual asset of Bitcoin. You're betting on the future price of it. So those prices are not exactly going to move in tandem. But it's certainly easy to do it that way. And then the third way I want to mention is you could actually buy stock of a company that is levered to some sort of crypto business. So for instance, you could buy stock of Coinbase, the largest US crypto exchange.

JOSEPH SANTANGELO: Once I get some crypto, what can I even spend it on?

JENNIFER SCHONBERGER: Crypto is gradually coming into the fray where people are being able to directly spend their crypto on items. A handful of retailers, including Starbucks, Whole Foods, overstock.com are offering the ability to purchase directly in crypto. You can also enter some of these loyalty programs. So for instance, a crypto company Bakkt has partnered with Mastercard to offer people the ability to earn crypto on their purchases. The main way we're really seeing crypto being spent right now is by the ultra wealthy who've amassed a tidy profit on their crypto investments. And we're seeing them by major luxury items, like sports cars, watches, yachts, and real estate.

JOSEPH SANTANGELO: This all sounds phenomenal, almost too good to be true. Can crypto be dangerous?

DAVID HOLLERITH: I would say it depends on who you ask. There's a lot of scams in the crypto sector, and then a lot of true believers who have profited from owning cryptocurrencies. So it's pretty much a mixed bag. But to sort of say that cryptocurrency in general is dangerous becomes a little bit like saying that money in general is dangerous.

JENNIFER SCHONBERGER: I wouldn't say crypto is dangerous, but it's certainly volatile and speculative. This is a digital asset that has no intrinsic value. It's not like a stock that trades on profits, earnings, and cash flows. It's based on whatever the next person is willing to pay for it. So it is also an emerging asset class. And it's largely unregulated, which means that they're not as many investors in the space, which contributes to the instability and the wild swings and volatility. So I always warn investors, go into this with your eyes wide open. Only put in what you're willing to lose.

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