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What Is Crypto?

August 30, 2022

What Is Crypto?

“What is crypto” seems like a simple question, but it is impossible to give a simple answer. The concept of crypto is relatively new, having only existed in any form at all since 2008, when Satoshi Nakamoto’s now famous white paper that launched Bitcoin onto an unsuspecting world was published. However, over the subsequent few years, it has grown and changed rapidly and crypto is now the basis for an industry that employs many thousands, and that has generated enormous wealth for a lot of people.

Roots of the Word

At its roots, the term “crypto” is an abbreviation of “cryptocurrency” a word used to describe Bitcoin initially due to its use of cryptography in mining. Cryptography involves the solving of puzzles and breaking of codes. That is something that computers are very good at, and bitcoin is mined by having those computers solve increasingly difficult problems. Thus, bitcoin was a currency with its origins in cryptography…a crypto currency.  There are two elements there, though, “crypto” and currency”, and the second part is also important. Bitcoin was designed as a currency, a medium of exchange, something that could be used to purchase goods and services.

Decentralization and Disinflation

To Bitcoin purists, part of the appeal of Bitcoin was that it was a decentralized currency that offered up the possibility of replacing so called fiat currencies, those controlled by governments and central banks, with a currency created and controlled by its users. To them, it also had the advantage of being disinflationary. There was a preset limit to the number of bitcoins that could ever exist and mining them became increasingly difficult over time. That meant that one bitcoin would, assuming some degree of adoption, inevitably become more valuable as the years passed.

As an economy grows, there are more goods and services available. In a traditional economy, that is outstripped by governments and central banks increasing the money supply…basically printing more money. As that happens, the real value of each unit of currency, say each US dollar, decreases. That is why the same house that might have cost your parents around $50,000 dollars when they bought it may now cost $500,000 or more, and a loaf of bread, that cost 25 cents in the 1970s is now $3-5.

Bitcoin is in some ways the opposite of traditional currencies like the U.S. dollar. They lose value as more are printed, pushing the price of goods and services up in dollar terms, while Bitcoin gains in purchasing power over time. If you hold onto one dollar, it will buy significantly less after, say, fifty years. If you hold onto one bitcoin, however, volatility notwithstanding, it will buy more.

Crypto Now and the SmartFi Token

Over time, though, the term “crypto” has come to refer to just about any digital token, some of which are not intended as currencies. Many of the tokens issued now are not cryptographically mined. Their supply and value are instead tied to some real function, and cryptography is used only to protect the blockchain that records transactions. These are known as utility tokens. Here at SmartFi, for example, we have SMTF, a token with a transparent forward pricing mechanism whose release and value are tied to the demand for loans that we offer, not the cryptographic ability of computers. And yet, to most people, SMTF still falls under the umbrella of “crypto”.

Clearly, common usage of the word has now deviated from its roots. It has come to describe any currency or token issued outside the confines of the world’s governments or central banks. Any financial business that exists outside those same confines are referred to as decentralized finance, or defi, companies, and are seen as part of the crypto industry. SmartFi would be regarded by most people as a defi company, although as the white paper says, “SmartFi delivers advantages over both fiat currencies and traditional cryptocurrencies by combining the best components of each.”

Wallets and Exchanges

There are no physical bitcoins, SMTF Tokens or other cryptos; they exist purely as digital entities, entries on a blockchain ledger system. Your own record of what you own is protected by a digital key, a password that gives you access so you can send and receive the currencies. Those keys are long and complex, so can’t be easily replicated. For convenience they are usually stored in a crypto wallet, a secure, online storage account, although you can keep hard written copies of your passwords or store them on an external hard or thumb drive, and copy them when making a transaction.

Crypto currencies and tokens, like any currency, can be bought and sold. They can be exchanged with US dollars, local currencies, or other crypto holdings. Those transactions take place on crypto exchanges which, like a stock or futures exchange, match buyers and sellers and register transactions. The difference, though, is that a crypto trade, once completed, is recorded on a blockchain rather than in a centralized record.

Conclusions

As you can see, “What is crypto?” is nowhere near as straightforward a question as it may seem. To the purists and the pedantic, it refers to currencies whose discovery is dependent on cryptography, but language is not a constant, it evolves at any time and does so rapidly when describing a new concept. The usage of the term “crypto” is still evolving and will probably continue to do so for some time. Still, for now, at least, it is best defined as a currency that exists outside traditional monetary systems and that is recorded on a blockchain, and an industry based on those products.

Author: Martin Tillier
Martin has around forty years of market experience and, in addition to his role as Head of Research at SmartFi, is a daily contributor of market analysis and opinion to Nasdaq.com. He first became interested in crypto 2014, when he started writing regularly on the subject. He is from England but now lives in Connecticut, USA with his wife, his dogs, and his three kids’ college tuition bills. 
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