Cryptocurrency 101 for the Pharmacy Professional
The following is a guest post from Samantha Boartfield, PharmD. Samantha Boartfield is a pharmacist in Phoenix, Arizona, who also writes for women and mother entrepreneurs (Mamapreneurs) on her site at SamanthaBrandon.com.
Disclaimer: This post is intended for general, educational purposes only. This post and the information herein is in no way meant to serve or act as a replacement for professional investment advice. Investing in cryptocurrency may be high risk with high losses and should be done at the sole risk of the investor. The following post contains affiliate links through which YFP may receive compensation.
I used to wave off cryptocurrency, thinking it was an online currency fad exclusive to techies and gamers. It seemed like one giant experiment (and I’m no gambler), but I think you could argue that we’re already in phase III of this currency trial with millions of users already testing the waters. Are we in the 1990s of the internet, and will crypto become a revolutionizing technology that changes our entire financial system? Or is this going to be the digital tulip craze 2.0?
Only time will tell, but before you get caught in the hype, it’s more important to understand the foundations behind cryptocurrency to make that determination for yourself.
Let’s start from the beginning with the history of money.
The Origins of National Currency
It’s hard to understand cryptocurrency without understanding the simple concept of money. Why do we as a society put any value into the U.S. Dollar? After all, it is a piece of paper that doesn’t serve a single human need like food or shelter (a house made of dollar bills certainly doesn’t seem very stable).
It all started in the early days of bartering. You know, I’ll give you five tomatoes in exchange for a kilo of flour. The trouble with that is you can’t grow a large society based on that type of trading system. How many tomatoes would it take to buy a house? What if you still wanted those tomatoes, but the tomato producer needed olive oil instead?
That’s where currency comes into play. It acts as a medium of exchange so that indirect transfer of goods can be made. Instead of trading direct goods, we exchange currency that has a unit of measurement. Fast-forwarding the history of a few millennia (salt, seashells, metal coins, gold, paper notes), we now find ourselves using national currencies.
Fiat Currency
No, I’m not talking about the Italian car driving down the Amalfi coast. Investopedia defines fiat currency as “government-issued currency that is not backed by a physical commodity such as gold or silver, but rather by the government that issued it.” The reason the U.S. Dollar has value (and other countries’ currencies) is because it is backed by the United States government. That’s why if you go to another country and try to spend your dollars, they may not accept it or give you a funny look. Your dollar bills aren’t worth anything in their economy since there’s no guarantee from their government that those specific paper bills will hold any value tomorrow, next week, or even next year!
Since leaving the gold standard, fiat currency has had its benefits, including being traded as a widely accepted legal tender, the relative stability for short-term and long-term investments, and a central authority to help manage the economy.
The Pitfalls of Fiat
Taking a step back, there is one crucial aspect we need to remember about the history of currencies. There has always been a transition to a newer currency because the newer currency met a need that the former did not. Gold trumped silver thanks to its scarcity of resources and its chemical stability. The gold standard gave way to fiat because it couldn’t keep up with the demand.
So what about the pitfalls of fiat money? Although it’s hard to fathom a world not operating on the dollar, I believe if you asked your parents or grandparents if they believed the majority of transactions would be done with a phone or plastic card, they would laugh at you. It would have been unfathomable to not be using physical dollars and coins.
And now we find ourselves asking if fiat currency will give way to cryptocurrency due to the pitfalls we are facing such as:
- Inflation or Hyperinflation: This article couldn’t be timed better as we all have felt the effects of inflation. If you keep printing money, then money loses its value. Milton Friedman said it best, “Inflation is taxation without legislation.” Check out Episode 239 on the YFP Podcast where Tim and Tim talk more about inflation.
- Rise of the “Bubble”: Remember the mortgage crisis in 2007? Central banks weren’t able to prevent it.
This is a good time to transition to what is cryptocurrency, and if it can solve some of these problems we’ve discussed.
Step Aside Printing: It’s All About Mining and Staking.
BlockChain
Let’s first discuss the technology behind cryptocurrency, which is blockchain digital ledger technology. A digital ledger is a way to record transactions using code. When you hear people talk about “the blockchain,” they’re referring to the fact that these digital ledgers are chained together.
In simple terms, this is how it works:
A transaction is made and verified by computers in the network. The transaction is then stamped as a block and added to the end of the chain. Once it’s added to the chain, it cannot be altered or removed.
The best part about this technology is that it doesn’t require a central authority to manage or verify these transactions! So what does that mean for us?
Well, let’s say you wanted to buy your friend a coffee with cryptocurrency. The transaction would go something like this:
You and your friend’s computers would communicate that you want to make a transaction.
Your transaction is verified by the network of computers, and once it’s verified, it gets added as a block to the chain.
Your friend now has his coffee and you have your cryptocurrency. Yay!
Consensus Mechanisms
Now, all blockchains have this foundation, but they may differ slightly. One way they differ is with their consensus mechanisms, which are essentially the way that the network of computers agrees on the validity of a transaction.
The two most common consensus mechanisms are proof-of-work (POW) and proof-of-stake (POS).
Proof-of-Work (PoW)
With PoW, also known as mining, transactions are verified by computer nodes that solve complex mathematical problems. The first node to solve the problem gets to add the next block of transactions to the chain and is rewarded with cryptocurrency for their trouble! This is known as “mining” cryptocurrency.
Proof-of-Stake (PoS)
With PoS, instead of being rewarded for solving math problems, nodes are chosen randomly to verify transactions and add blocks based on how much cryptocurrency they have “staked” or put down as collateral. This system is said to be more energy-efficient than POW because there is no need for every single computer to solve the same mathematical problems as they race to be the fastest.
Which consensus mechanism is better? They both have their pros and cons.
The big thing to know is that PoW requires a lot of energy because you have thousands of computers working on the same problem. This is what makes PoS mechanisms more appealing.
Now, what exactly is Cryptocurrency?
Cryptocurrency is digital or virtual currency that uses blockchain technology. Each cryptocurrency will use a slightly different form of blockchain. A defining feature of cryptocurrencies is that they are not issued by any central authority like fiat currencies – which means they are decentralized! Cryptocurrencies are sent directly from person to person over the internet without going through a financial institution.
The Basics
We need to spend a moment discussing how to buy, sell, or trade crypto.
Where to Buy, Sell, and Trade
Cryptocurrency exchanges are websites where you can buy, sell, or trade cryptocurrencies. You’ll need to create an account on the exchange and then deposit funds into that account to buy crypto. Some popular exchanges are Coinbase, Binance, and Kraken.
How to Store
You can definitely keep your coins on your cryptocurrency exchange. For example, if you bought some Bitcoin through Coinbase, you don’t need to do anything else.
But seeing as the main focus of crypto is to be one hundred percent decentralized, many users want to secure their own coins. This is where you can place them in a software wallet like MetaMask or MathWallet, which has its own password called a “seed phrase.” This seed phrase is similar to a PIN for a debit card.
How to Secure
If you have invested a lot of money into crypto, you don’t want to leave it up to hackers to steal it. Unlike a bank account, there’s no one to get you your money back if it’s stolen. That’s where “cold” wallets come in. Trezor or Ledger are the most popular, and you can think of these as a USB drive that stores your coins offline.
How to Keep Track
Once you’ve started to invest in cryptocurrency, it’s important to know how much money you’ve invested, which is easily done through a cryptocurrency portfolio tracker.
Don’t forget that regulations have now been passed to help you easily report any income you’ve made from crypto gains. You’ll probably want to check out crypto tax reporting software as well.
Types of Crypto
Today, there are nearly a thousand different types of cryptocurrencies out there. Let’s break them down.
Bitcoin
Bitcoin is the original cryptocurrency, and it was created in 2009 by Satoshi Nakamoto. Bitcoin is a decentralized cryptocurrency that uses PoW consensus mechanism to verify transactions.
Altcoin
Altcoin is short for “alternative coins,” AKA any coin that is not bitcoin. You can sell and buy altcoins similarly to Bitcoin. Here are the most common Altcoins:
- Ether: Ether is used on the Ethereum network and is very popular as it’s the crypto of choice for buying and selling NFTs. It was a PoW, but will fully transition to PoS by the end of 2022.
- Dogecoin: Dogecoin was created as a joke, but it quickly grew in popularity. Dogecoin is a decentralized, peer-to-peer digital currency that allows you to send money online.
- Solana: Solana is another proof-of-stake consensus coin and promises to be more scalable than other blockchains.
Stablecoin
A stablecoin is a cryptocurrency that is pegged to an asset with a stable value, such as gold or the U.S. dollar. The purpose of a stablecoin is to avoid the volatility that is common among other cryptocurrencies.
The most popular stablecoins are:
- Tether (USDT): Tether is pegged to the U.S. dollar and it’s one of the most popular.
- USDC: USDC is another USD-backed stablecoin, and it’s available on many different cryptocurrency exchanges.
- DAI: DAI is a decentralized stable coin that aims to stay as close to the U.S. dollar as possible.
The Good and the Bad
Hopefully, by now, you understand why money plays a vital role in society, and our large-scale economies could not operate without it. You can understand that the tool we use as a medium for exchange also evolves as technology changes. So the question remains, could cryptocurrency play a parallel role with fiat money or could it be something that replaces it altogether?
The Crypto Advantage
Crypto has many unique advantages that can solve some of the problems we have with fiat currency.
- Lower inflation risk: In a fiat currency, the government can print out more money. Not Bitcoin. Only 21 million can be mined and that’s it.
- Money without borders: You can transfer Bitcoin or any other cryptocurrency to anyone in the world without paying any fees, and it will arrive in minutes.
- Fraud prevention: Another advantage of cryptocurrency is that it can help prevent fraud. With traditional methods of payment, it is easy for someone to commit fraud by using a stolen credit card or bank account.
The Hurdles
What could stop cryptocurrency from being adopted worldwide? Well, quite a few things, as there are tons of concerns that we have seen arise.
- Ease of Use: There’s quite a learning curve when it comes to buying and selling crypto, so I don’t see it becoming more mainstream until this process is streamlined and people have an easier way of understanding crypto.
- Volatility: The value of cryptocurrencies can rise and fall quite quickly, making them a huge concern for investments. Stablecoin may help with this in the future.
- Government regulation: Government regulation will have a huge hand in dictating the future crypto. We have seen what happened with China when they banned cryptocurrency exchanges. This caused the value of bitcoin to drop by over 50%, but I don’t see the U.S. banning cryptocurrency. Recently, the U.S. has already given some guidance on how to report it, and now there’s crypto taxing software to help you.
- Company adoption: We will need to see the market begin to accept cryptocurrency as a form of payment.
Crypto Crystal Ball
In the end, only time will tell what the future holds for cryptocurrencies. Maybe we’ll become the crypto century, or maybe not. That’s for you to evaluate.
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