Crypto is like modern art.
Not many people fully understand it. And when you reveal to people that you actually bought some, you often get the following reactions:
- “Sorry, but I just don't get it.”
- “Why is it so expensive?”
- “Are you sure that was a good investment?”
- “The creator sounds a little nuts”
So, just like the proud owner of a Damien Hirst, you may find yourself having to explain your investment a little bit.
In my experience, whether you're explaining a wall full of polka dots or a recent purchase of Ethereum, there's a fine line between sounding informative and sounding pretentious.
But if you handle the conversation well, you'll get that ever-so-satisfying reply, “Ohhhh” — and perhaps even a convert to the cause.
So, without further ado, here's how I like to explain crypto to my friends, family and fellow investors in less than 30 seconds. I've also included my replies to the most common questions!
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How to Explain Cryptocurrency in Under 30 Seconds
You know how you can't send money to another person online without a third party present (Chase, PayPal, etc.)?
Well, crypto lets you do it.
If I send you crypto right now, it gets logged on a blockchain, which is like a giant read-only Google Doc that the whole world shares. Only complex computers can add to the blockchain, which is how it stays safe! And those computers control inflation by limiting the amount of crypto on the market.
And since no one entity controls the blockchain, many people consider it to be a superior alternative to government-issued currency.
“Ok, So Why Is Crypto So Valuable?”
Simple economics. When demand outstrips supply, values rise.
Remember I said computers control inflation?
Well, crypto has become so popular that it's created the opposite problem. There's not enough Bitcoin to go around so it's becoming way more valuable than paper currency.
More on Bitcoin: Should You Invest in Bitcoin?
“So Is Crypto a Currency or an Investment? It Can’t Really Be Both, Can It?”
Actually, a currency can be an investment. It's called forex.
Many individuals and businesses don't accept Bitcoin because its value bounces around too much.
But there are cryptocurrencies out there that are way more stable than Bitcoin.
These are called stablecoins. The precisely tuned code controlling them ensures their value stays tethered to a real-world currency. That gives people more confidence to convert their dollars into stablecoins.
Coincidentally, one of the most popular stablecoins is actually called Tether (symbol USDT) and its value is anchored to US$1.
“My Nephew Says He’s a Crypto Miner — What the Heck Is That?”
Your nephew has basically turned his computer into an AI accountant for the blockchain.
The blockchain — or crypto ledger — uses thousands of powerful computers around the world to sustain itself. This is like having an army of robot accountants spread across dozens of countries all working together 24/7 to run the crypto “program.”
Nowadays, the “job requirements” for a computer to become an accountant for the blockchain are pretty steep. Basically, they need to be extremely fast.
Normal people like your nephew can still do it with a powerful gaming computer. And corporations do it with rows upon rows of supercomputers.
Because the rewards for mining are steep too.
Remember I said the code behind cryptocurrency controls inflation? When miners dedicate computer power to servicing the blockchain, the blockchain automatically rewards them with a trickle of new crypto.
That's how the new crypto gets added into circulation — by rewarding miners first. So your nephew's power bill may shoot up, but he may be rewarded thousands of dollars' worth of Bitcoin for doing it.
“But Why Is Crypto Banned in China?”
The main purpose of crypto is to let people send money to each other online without third parties (banks, governments, PayPal) interfering in what should be a free market.
But as you can imagine, some governments don't like that.
The Chinese government in particular prefers to keep tabs on the population (to put it mildly). So it hates the idea of money changing hands without their knowledge.
Plus, crypto miners were sucking a lot of power out of rural areas.
So the Chinese Communist Party (CCP) reacted by saying, “That's it; no more crypto!” and replaced it with their own version: the digital yuan.
Want to know what the U.S. is doing with crypto? Check out: Biden's Crypto Executive Order: What's in It?
“I Also Heard That Crypto Is Bad for the Environment. How Is That Possible?”
You heard right. That's the big talking point in the crypto world right now. Not to take a dig at your nephew, but his mining operation is surely using up a lot of electricity. And his roommates have probably noticed a hike in the power bill.
Globally, over a half a percent of the world's energy supply is being used up by crypto miners. As a result, miners are being pushed out of countries that are trying to meet green energy goals and into countries that still rely heavily on coal for electricity, such as Iran and Kosovo. And the problem's getting worse.
In short, the cryptocurrency blockchains require a lot of electricity, and that electricity is coming from coal. In fact, Bitcoin mining alone releases over 114 megatons of CO2 annually — more than entire developed nations.
Related: Get Started With ESG Investing
“Don’t You Feel Guilty That Your Investment Is Contributing to Climate Change?”
Crypto's climate impact is definitely on my mind. That's why I'm grateful that we have crypto options that are 99% more eco-friendly than Bitcoin, which is now 13 years old.
These “modern” cryptos, such as Cardano, use a new method of etching data to the blockchain called proof of stake. Proof of stake uses crypto itself, rather than raw computing power, to validate transactions. From an ecological standpoint, it's like going from a Hummer to a Tesla in terms of energy requirement.
Using crypto to power crypto can be a hard concept to wrap your head around, so here's the key takeaway: The old cryptos cause environmental problems, but the new cryptos are way, way more efficient.
“OK, Last Question: Should I Be Buying Some Crypto? Am I Missing Out on Something?”
Well, definitely don't buy any crypto out of fear that you're going to miss out on some gravy train. FOMO is not an investing strategy.
Plus, you don't need Bitcoin to get rich. For lack of a better idea, just do what Warren Buffet recommends to the average American investor. Put your money in an S&P 500 index fund and let it sit. Earning 10% or so per year adds up quickly.
But if you're serious about adding crypto to your portfolio, do some research so you know what you're buying. And talk to your financial advisor. There may be room in the corner of your portfolio for some high-risk/high-reward investments like crypto.
Just remember that everyone's needs are different. Be careful who you take investing advice from since their risk profile may vary from yours.
Are you crypto-curious? Check out these other guides:
- How to Invest in Cryptocurrency
- Should You Invest in the Metaverse (And How Would You Start?)
- Why I Won't Buy Any More Crypto