Crypto: What Is It and What Is the Fuss All About?

Cryptofinance, including cryptocurrency, is the newest hot item in the world of financial “innovation.” President Donald Trump and his family are making billions from their forays into the crypto business. And Congressional Republicans and Democrats alike are bending over backwards to support the crypto industry, passing pro-crypto legislation with self-flattering names such as the GENIUS Act. We therefore need to better understand what crypto finance is, what it isn’t, and most important, what, if anything, it’s good for. In this two-part series, drawn from my book, Busting the Bankers’ Club: Finance for the Rest of Us (University of California Press, 2024) I will do just that.

Crypto here refers to “money-like” assets and other assets as well, akin to bonds and derivatives. The “crypto” in these names refers to “cryptography,” derived from the ancient Greek words kryptos, meaning “hidden or secret,” and graphein, meaning “to write.” Cryptography is a technique for secure communication in the presence of adversarial behavior; more generally, it refers to protocols that prevent third parties or the public from reading private messages. Many will know this term from famous historical episodes of code breaking, such as during World War II when mathematician Alan Turing used cryptography to break the German Enigma (cryptographic) code, helping the Allies defeat the Nazis.

What, you might ask, can cryptography possibly have to do with money? Well, if you want to design a currency that you can transfer electronically around the world, and you don’t want anyone to know about it or be able to trace it, then using cryptographic methods to hide it, and then requiring the person receiving it to have a code-breaking key that would allow them to receive it, would be a good way to start. 

But to be able to send money this way, you have a problem to solve: how to prevent double, triple, or even quadruple dipping.

Take $100 that you would like to send to a company to buy a rare book. What is to prevent you from using that same $100 multiple times to buy multiple rare books? Well, if you wire $100 to the rare books dealer, your bank debits the $100 (and probably some excessive fees) from your bank account, and the book dealer has an account in a bank that adds the $100 to their account. Your $100 vanishes and the $100 appears in their account. The two banks keep track of these transfers and verify that it went from your account to the book dealer’s.

But what if you didn’t want to use banks? Then how do you transfer money from one account to another? Well, you could take a photo of your $100 dollar bill and send it by text or email to the book dealer. They would have the photo and perhaps could use it to buy groceries from someone to whom they would send the digitalized picture. But what would prevent you from using that same photo and emailing it to someone else to buy a new pair of shoes? If there is no way to avoid this double (or more) counting, then money will have no limit or scarcity, and soon people will lose confidence in its value.

So how do you carry out this purely electronic, person to person, decentralized money transfer in a way that avoids the double-dipping problem, keeps the supply of currency limited, and verifies and keeps track of the transfers of assets from one person to another? That is, how do you substitute for the things that banks and other market-making institutions do every day? (And, perhaps most importantly, why would you want to reinvent this particular wheel?)

 A crypto solution to this problem was invented by Satoshi Nakamoto, who, rather appropriately, is anonymous and may not even exist. “Nakamoto” developed an artificial and deliberately difficult cryptographic method to keep cryptocurrency scarce, prevent double-counting (and spending), and verify the transfer of ownership from one person to another, all without relying on financial institutions or the Federal Reserve. They called the cryptographic process “mining” to evoke the difficulty, blood, sweat, and tears of mining gold or silver, even though not much blood, sweat, or tears accompany the writing of computer code that is involved. To try to keep the verification process decentralized and difficult, they use a type of recordkeeping mechanism—a “ledger” (or record) that is kept on a network of computers that could be anywhere in the world. This is called a “distributed ledger;” “block chain” is the type of distributed ledger that is most often used with cryptocurrencies. 

“Mining” verifies a transaction. “Mining” is the contest by which one guesses the number identifying a transaction faster than anyone else. It does what Turing did: figure out the answer to a cryptographic puzzle and be the first one to do it. But it is much more mechanical and easier than what Turing did. The computer—or actually large banks of very specialized computers—simply need to guess the answer over and over again as fast as possible and the faster it can do this, the greater the chance it will be first and win. Whichever “miner” guesses the number first gets paid with the cryptocurrency. At current crypto prices, this can be worth hundreds of thousands of dollars. 

Once a miner guesses the number, the network of computers “verifies” the transaction by placing the transaction on the ledger or blockchain. To prevent counterfeiting and stealing, the transactions and new ownership can’t be undone. The person now has the code to access the cryptocurrency and cash it in, assuming no one steals it in the interim.

This process is certainly less demanding than mining actual gold or silver. But it does generate enormous problems for our planet. The computer mining uses massive amounts of electricity from enormous computer server farms that spew greenhouse gasses into the atmosphere at the same rate of entire countries, such as Iceland.

Compare this distributed ledger with the recordkeeping that your local bank uses if you make payments the old-school way by wire transfer, or electronic banking on the internet. The banking ledger and verification approach doesn’t involve massive numbers of computers or the creation of dangerous amounts of greenhouse gases. 

In short, this attempt to create an alternative currency that is decentralized and operates outside of the government and financial system is a “Rube Goldberg” machine of enormous complexity that utilizes a huge amount of resources—specifically, human, machine, and climate resources.

To make matters worse, as I discuss in part two of this explainer, this crypto machine doesn’t accomplish any of the goals that its advocates have claimed it does. It has, however, made some of them very rich indeed.