NerdWallet's Smart Money Podcast - What the Heck Is Crypto, Anyway?

Episode Date: August 8, 2022

You’ve heard of crypto, but do you really know what it is? Do you think you could explain it to a family member who is totally clueless about this newfangled digital money?  In this episode, NerdWallet crypto writer Andy Rosen attempts to explain crypto to his aunt and uncle, including what drives its valuation, how the underlying technology works and what to consider before investing in any digital currency.  To send the Nerds your money questions, call or text the Nerd hotline at 901-730-6373 or email [e-mail]. Like what you hear? Please leave us a review and tell a friend.

Welcome to the NerdWallet Smart Money podcast, where we usually answer your personal finance questions and help you feel a little smarter about what you do with your money. I'm Sean Piles. This episode, I am joined by NerdWallet investing writer Andy Rosen, who is going to attempt something that some might say is impossible, explaining crypto to a complete crypto noob. Welcome back to Smart Money, Andy. Thanks for having me. So Andy, last time we talked, you answered a couple of kids' money questions. Now you're going to be explaining cryptocurrency to people who don't really understand it at all. Can you

explain what's going on here? Okay, so I've been writing about cryptocurrency for NerdWallet for about a year now, and I started to wonder, am I really any good at this? I wanted to test my ability to make the topic accessible to readers. Could I explain it in a way that would hold someone's interest who wasn't already interested in it? And hopefully help them truly understand what is going on behind the scenes. Exactly. And I think this is important, not just for my job, because if cryptocurrency is going anywhere, it's going to mean that a lot of people who aren't interested in it now have become interested in it and have started using it. And for that to happen, it's going to take some understanding beyond people who just know that it was something that got really popular, really valuable last year. And is this even an issue that could hold the interest of a regular person? Right. Well, and as it grows in relevance, so do the related scams. And so it's very important that consumers of all ages and varieties inform themselves on what's going on with crypto and how it is beneficial or not to their personal finances. Absolutely. So I was trying to think of how to test myself. And I knew I had to find someone who was A, willing to listen to me talk about this. And B, they were going to give it to me straight to tell me whether I was taking any shortcuts or confusing people more. So I knew for a fact that my wife has been sick of hearing me talk about this since I got this job.

Yeah. And she's out. So my parents, I think, would probably tell me I was doing a good job no matter what I did. They're wonderful people. So it really is. But I needed someone who was really willing to give me the cold truth. So I thought of my aunt Drew and my uncle Jim. Now, Drew is my mom's sister, and Jim is her husband. And we've been really close for years. I grew up just a few blocks away from them. We were always at each other's houses. But I really know that they're not going to hesitate to tell me to shut up or that I'm

making no sense or just start making fun of me. And so they agreed to do this, which I thought was super generous. And so I picked up my daughter, grabbed a pizza, and I headed over to their house in Haverhill, Massachusetts, where I grew up. And we had a conversation. Okay, cool. So you are going to try to explain cryptocurrency to them, and they will give it to you straight as to whether they understand it at all, and whether you're just rambling on about something that no one cares about. Exactly. Also, a quick disclaimer that I own a few of the cryptocurrencies mentioned in this

conversation, but it doesn't influence the way I talk about them. And a reminder that I'm not a financial advisor or an investment advisor, and this is not personalized financial advice. It's just for educational purposes. Okay, cool. Well, have a lot of fun. I can't wait to hear how this conversation turns out. Thanks. All right. Can you two both introduce yourself? Hi, my name is Jim and I am Andy's favorite uncle. Hi, my name is Drew and I'm Andy's aunt. I'm looking forward to the conversation tonight. So, you know, like a little tiny bit about cryptocurrency, right? One of your sons owns some of it. He's told you what? Nothing basically about it? Well, one time he tried to explain it to me

and I thought, what? And so I kind of fell off the wagon on his teaching it to me. And what about you, Jimmy? I only know the name. I know it's traded. That's about all I know. I don't really get the concept,

so I'm looking forward to you explaining it to me in a way that I can understand it. So is there anything you guys are curious about, like you want to know about cryptocurrency or that you've heard something about it and you didn't get? Everything. Everything? All right. So what do you think it's a form of some sort of tender. It's actually something that's being traded that's not actually tied to a company or something like that. That's what I think it is. What about you, Drew? I just literally think it's just out there. I try to understand what it is and what it's tied to.

And there's no, you can't touch it. You can't feel it. You don't know where it came from and actually what the value is. It's just totally like out there. It is pretty out there. So, okay, let me try to give you the basic idea. So essentially, the innovation of cryptocurrency, in my opinion, is that it gives a real concrete way to establish ownership of a digital file in a way that is really hard to do without a bank or a government or something like attaching some information to it. So it basically is a self-sustaining system where you can own something that is independent of any kind of government or middleman. The way it does that is like through a really complicated

cryptographic formula that's not that interesting. And honestly, not that important to like a regular person. But essentially, the big thing is, it's the first time you could own a digital file without having to rely on a company or like someone to keep track of it for you, or maybe take it away. So when you say digital file, what's in the file? Well, it can kind of be anything. The buzzword that actually works for me, it's a digital file. Right. So yeah. Okay. So that's one thing new I know that I can hang my hat on. All right, great. That's a good start. So I guess the next thing I would say is basically how it works is a bunch of people have computers.

Everyone around the world has a computer. They're all connected to the internet. And say you wanted to keep track of how much money you had, for instance, right? The bank keeps track of that for you. The bank holds the ledger. So what cryptocurrency does is that it distributes this ledger, like who owns what. And then every computer on the network has the same copy of who owns what. And so they all check against one another to say like, do we all agree on who owns what? And then they have this really complicated way of coming to consensus if they disagree. But the idea is computers working together on their own can kind of reliably determine ownership of something. How are the computers chosen? If you have Bitcoin and you're running Bitcoin software on your computer, essentially what you're doing if you spend Bitcoin is sending

information to the network and then receiving information back from the network that says, I own this. I want to spend this. I want to send it to someone else. And then receiving information back from the network that says, okay, now we've received your transaction. Everyone has recorded it. And now the ledger shows that you own less Bitcoin. Anyone who wants to sign up can participate in this in some way. How's that for a start? That's good. I mean, I know more than I did 10 minutes ago. So tell me, have you paid attention to the market at all? Like you hear on the news, like it's going up, it's going down.

Like, does that have any... The crypto market? Yeah, yeah. I mean, obviously you're not following on a day-to-day basis, but... No, I check in with my son once in a while and say, how's it going? And that's about as far as I go. And what I mean once in a while, like hardly ever. My financial advisors basically told me to stop looking at the market.

Really? What did they tell you? Just basically just said, stop looking at it. We're in a bear market and we'll ride it out and it'll come back. So just your portfolio in general?

Correct. Just like don't think about it right now. I said, don't think about it. Yeah. We don't have any Bitcoin or we don't have any cryptocurrency at all. So I guess I'm interested in how you guys might think about the value of cryptocurrencies. You know, why do you think it has value? The question I was going to ask you was, how does it change value? How does it go up or down? It's pretty much market-driven, right? So it's kind of tied to the standard of importers? What is it tied to?

Does it mirror the market? Bitcoin and all other cryptocurrencies generally have their value determined by markets, right? So there are decentralized markets where like computer algorithms help you trade with other people. But for the most part, they're just cryptocurrency exchanges. They're run by companies. They make markets and, you know, whatever the market will bear at a moment,

they'll buy and sell it for and they tend to match up pretty closely on the price. So essentially, it's what people are willing to pay. And in that way, it's similar to a stock. But, you know, I think a lot of people struggle with cryptocurrency because cryptocurrency isn't a company right like it doesn't have assets there's no physical being there's nothing you can look at there's nothing you can see the sales are up or you know there's no product development or anything. That's what, it's just a random thought. I guess, yeah. I mean, that is definitely a critique of it. I mean, the counterpoint, and I'm not sure I subscribe to this, but the counterpoint would be lots of early technologies

that are winning adoption and starting to grow. Their value is calculated based on their potential worth, their potential adoption, what could happen with them in the future. You know, for instance, like when Facebook went public, right? People were really excited about how big it could grow. It was the network and what you could do with this network as opposed to what do they own at the moment? What cash on hand do they have? What's the potential? If you own an oil refinery, like there's a different way of calculating the value of what you own. If you own the network that has the potential to grow or potential to do something cooler technology but the thing about

bitcoin is no one you know no one owns it it doesn't have profit see that's the weirdness like i would talk to a couple of my friends today saying we were doing this with you tonight and all of them said well just fill me in me in. Because they, I don't know, maybe it's our generation, or the fact that it doesn't seem real. Literally, you start to have someone explain it to you, and then all of a sudden you go, what? It's like trying to learn how to... It's a concept that's very difficult to understand.

I think so. Because it's so different than buying stock in the stock market. It's a completely different thing. You know, you might look at it more like a commodity, right? It's so different than buying stock in the stock market. It's a completely different thing. You know, you might look at it more like a commodity, right? Like there's a specific thing you can buy. There's so much of it. Its supply is constrained or very available at the moment.

And so like that's going to affect the cost. I think that's the thing. It's like people get so caught up, and I think I have in this conversation, in explaining the technology when really what it is is like it's an idea, right? It's an idea about how value can be stored and created and how a group of users can control a financial product without the help of a bank. Banks do a lot of valuable things and you pay them for that. And the question is like, are we cool with that deal? We have an option of making a different deal. And can people make products on this technology that actually replace centralized services?

If you're following stocks, people, you know, give you advice because something's happening in that company. They're about to, you know to introduce a new electric engine, and so that's going to drive it up. And with these, it always seems arbitrary. It's just a prediction, or it doesn't seem real. And that is like the common thread for most of our friends about it doesn't seem real enough to us. There are cryptocurrencies that are more real than others, right?

There are some that are completely invented as jokes or experiments. But there are others that are tied to specific projects. Like, have you ever heard of Ethereum?. But the point is you can build applications that exchange value and utility on this. And so these ones that you can actually program, these are software. So like, are people going to use this software. Now, Ethereum, the cryptocurrency called Ether that goes with Ethereum, it's got a limited supply at any given time, right? So if you want to use a product made on Ethereum, you need Ether. And so if there's a lot of things that people want to do on the Ethereum network, then people will want that cryptocurrency. And so if you have some, you you know you'll have a better market for it how is it determined the limited supply like how does that you can stop me at any time and you can tell me it's too boring and then you want to stop too but like okay so each of these things has what's called a white paper and it's like instead of a stock prospectus right it's basically a document that the programmers or developers wrote explaining how they're going to distribute it how it will be exchanged the rules for sending it back and forth

and how the supply will be determined and they just make that up well i mean essentially they make it up but if you buy it you're saying i i'm fine 350 or yeah for instance there's a finite supply of bitcoin more can be created to a certain point and then there never will be more. I think that might be the part that is completely bizarre to me. What agency actually monitors this? Is it the FTC? Well, that's a big question. Like, who's your consumer? Like, if you get screwed, who are you going to call? Well, yeah. I mean, who's actually overseeing it? You might have to call the Ghostbusters.

Some sort of government agency has to be overseeing it, I would think. The oversight of this stuff is really all over the place. I mean, the SEC has a lot of role in it. The FTC, Consumer Protection, State Attorneys General. I mean, there's all sorts of different ways of looking at it like the sec might say you treated this way too much like a security you're just selling stock in a different form like you can't do that or the ftc or some other consumer protection agency might say hey um you lied and sold something that wasn't true we're gonna sue you i'm gonna buy some bitcoin

i'm gonna get like a prospectus or something. No, you're not. I'm just sort of like going, I'm in. You can read the white paper. The white paper. But honestly, the white paper, I'm not going to lie to you. It's pretty technical. But I mean, honestly, last time I read a stock report, it's not like those are beetroots

either. It's just sort of bizarre because there's a limited number um they don't promise anything but you should get one yeah i mean that's the thing a lot of it is faith and i mean these things haven't necessarily proven themselves at all right but like it has had a staying power like this idea is attractive to people but like you could argue that you know more about the supply of bitcoin than you do about the dollar i don't think many people understand it i would say that there's people that actually buy it that probably have no idea what they're buying they're only buying it because someone

told them to buy it and they don't have any idea what causes it to go up or causes it to go down. They just invested in it because someone told them to. And I find myself to be like at least average or a little better than average intelligence. And it's a difficult concept to understand. I totally agree. I consider you guys intelligent people. Like I said, I've been sitting here trying to explain it. Sometimes I'm like, did I just confuse myself more?

I have a much better idea of what it is and what it means now than I did 20 minutes ago. Really? I can tell you that. Somebody explaining it to me is a lot easier than somebody actually saying, oh, here's an article. Read about it. I mean, somebody has to explain it to you. Yeah, I think so. And I mean, that's another one of the things that, you know, it's like.

But it's not simple. You can't boil it down simply. No, you can't. I plan on buying a little bit of it. That's what I'm planning on doing. Not because of me, though, is it? Just because I feel like I just want to be able to watch it and see how it performs. It is. I mean, if I don't have any money invested in it, I'm not going to watch it.

Why would I? It is. It's really interesting. I mean, there's 19,000 or something different cryptocurrencies. Now, most of them are complete gags. Like, they're not anything but like a lot of really interesting ideas about like what if you could do this but without the middleman cryptocurrency there's no middleman it's like you and the computers right that's the idea it's like

me and you and our computers do the work in between and so what would you say if you were going to decide to do it would you put put $100 in or $1,000? I mean, I'm talking if you're doing very conservative. Like Jim says, I'm going to buy some. What would he put in? I can't really give you advice on that. No, no, no. I don't need advice.

I was thinking like $400 or $500 is what I was going to do. Yeah. At NerdWallet, we generally say that it's risky. You want to make sure you have all your other financial bases taken care of and if you do then you just need to decide how much risk you're willing to tolerate and at what the amount of risk is going to vary based on your attitude toward its long-term value or short-term value and like what your other economic obligations are so like if five hundred dollars is a lot of money to you then you have to make that decision if ten dollars is a lot of

money for you same right but maybe people who are very wealthy like throw thousands of dollars at it just hope for the best you accept more risk the rewards can be higher you can be destroyed yeah i mean guaranteed and you whatever you can afford to lose have you asked your financial advisor about it no i haven't i mean i always i mean what do you think his opinion will be i don't know financial advisors that i've spoken to have a wide range of opinions some think it's too risky and my guy's very well-versed. He likes to talk about stuff. But I doubt he would tell us to do that. But my son is a financial advisor, and I think I might just ask him. Did you ask him?

You know, I've never asked him. Over the weekend, I think I'm going to. Tell me what he says. I mean, I just have to be really careful not to be telling, because we're talking to listeners, too. I mean, I just don't know what people ought to do. I'm not a financial advisor. You have to.

What my thing was like, what would be a conservative thing? But you're right. My conservative is somebody else's extravagance or vice versa. Somebody else's disposable income. You can only, it's like going to Foxwoods. Right. I mean, exactly. You know, every, everything in life is a risk and you just have to determine what risk you're willing to tolerate and what you think the reward will be. And some of that is

going to be your opinion. But in the end, like, yeah, the cautious thing to do is, is to figure out what money you're willing to put at risk. And if it's none, then don't invest in it. And if you have some and you're interested and think it would be a fun activity or really believe in this, or just want to like dabble in a new area like that's well i think it would help you learn more about it i mean i think that if you have some skin in the game i think that you would i think you're paying more attention to even if it's three or four or five hundred bucks i mean you know what seriously like drew said you're gonna lose that in foxwood and and ten hands of blackjack so and and people have But I just think that if I put a little money in there

just to get a kind of feel as for what it's going to do, watch how it performs, I think it'll help me get a firmer grip on the whole thing. But there's a realistic scenario. I don't think a lot of cryptocurrency enthusiasts would agree with my saying this, but people could decide this is not going to work. I don't want it.

It's over. It's not. It's worth nothing. Like things go down to zero. What would you do if it disappeared? You know, that's the thing you have to think about. Well, that's a life lesson. Like I said, you can play 10 hands of blackjack at a $50 table and lose all 10 and you lost 500 bucks.

Yeah, but casinos have Foxwoods. We keep using as a reference. Casinos have free drinks though. I mean, it's, uh, that is true. That's, but I think you learn, like Jim said, you literally learn anything you don't know by actually exposing yourself to experience in it. So probably skin in the game is yeah value so my next question is um when i do this how do i buy it go to nerd wallet go to i mean go to nerd wallet that's one place you can find that information we don't sell it no but you we don't yeah that's not we have an objective ranking criteria we We go over fees.

We go over ease of use, various other things. You know, how easy it is to exchange one crypto for another, things like that. And you can look overall like how we do it. But the things that are the easiest to use are generally going to have either the highest cost or the lowest amount of options for like, you know, moving it around. And the things that are a little more difficult to use, you know, are, will have lower fees. So the question is like, how much handholding do you need? That's one big question. Most of the biggest ones are reviewed on our site and you can take a look and it's just like, okay, well this one has higher fees, but it's really easy to use. The

selection is good. And if you only want to buy Bitcoin and you only want to hold it, like there's tons of options. Like if it's just like, I want to hold it like there's tons of options like if it's just like i want to hold bitcoin keep it here i'm not going to touch it i'm not going to move it around i'm not going to trade it for anything else like you have so many options but if you're like i want to buy a bunch of different kinds and check them out and use the applications that run on them and you know trade them for one another like those you know that can get costly if you don't know what you're doing those that you might want a more advanced product for that. So anyway, I can say I'm going to send you guys a link on your website. Yeah.

I mean, awesome. But you don't even for you. I'll just send you the link. I love it. Yeah. So I think we've we've covered most of it, guys. Am I getting better at this? Like, do you think?

Yes. OK, I think you did a good job. And i think you explained a lot of unknowns to me however there is still that little mystical part of it um that i think maybe it might be generational or the fact that i don't really pay that much attention to what's going on in the stock market but i do believe that you know having skin in the game and following i think following and learning that way is and also with your information using your knowledge and you know getting a little bit of it and actually experiencing it i i think that's a good combination all right well if it doesn't do well you can't be mad i didn't tell you to buy that all, you did not tell us to buy anything.

But if we happen to do well, there could be some benefit to it. We could take you somewhere, Grace. All right, all right, all right. Guys, thank you so much. This was really fun. And thanks for having us over. All right. Thank you, Andy.

And that's all we have for this episode. If you want your money questions answered on a future episode, turn to the nerds and call or text us your questions at 901-730-6373. That's 901-730-NERD. You can also email us at podcast at nerdwallet.com. Also visit nerdwallet.com slash podcast for more information on this episode. Remember to subscribe, rate, and review us wherever you're getting this podcast. And here's our brief disclaimer, thoughtfully crafted by NerdWallet's legal team. Your questions are answered by knowledgeable and talented finance writers, but we are not financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances. And with that said,

until next time, turn to the nerds.