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Welcome to NerdWallet’s Smart Money podcast, where we answer your real-world money questions.
In this episode, NerdWallet investing writer Andy Rosen attempts to explain what cryptocurrency is to his family.
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There’s no shame in being confused about crypto. A lot of people’s eyes might glaze over when they hear about Bitcoin, its many competitors and how it all works. In this episode, NerdWallet crypto investing writer Andy Rosen tests his ability to explain the ins and outs of crypto to regular people. Andy sits down with his aunt and uncle over pizza to discuss the basic mechanics of crypto, how it’s regulated and how it relates to traditional investments.
There are many types of cryptocurrency, but at its very core, these assets represent different ways of using software to establish ownership of digital files. The main innovation of cryptocurrency’s underlying “blockchain” technology is that it allows participants in a network to keep track of who owns what without the help of a bank. While “currency” is part of its name, cryptocurrency has been treated as an investment product, more like stocks.
There are, however, no easy comparisons to crypto in the investment world. It has remained quite volatile and defied analysts’ predictions of how it would relate to the overall economy. Cryptocurrency is overseen by a patchwork of state and federal agencies and does not always carry the same regulatory assurances that stocks do. While there’s a potential for high reward, crypto is a risk even for those who understand it well.
Start small: Crypto is a new and untested space. If you’re just starting out, it’s OK to start small, so you can get a sense of how it works. Then, consider whether you could handle losing it all.
Embrace uncertainty: Remember that crypto differs from other investments you might be familiar with. It’s not regulated in the same way as stocks, for instance, and its value may react to economic circumstances in unexpected ways.
More about cryptocurrency on NerdWallet:
Writer Andy Rosen owned Bitcoin and Ethereum at the time of publication.
Host Sean Pyles owned Dogecoin at the time of publication.
Sean Pyles: 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 Pyles. 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 newb. Welcome back to Smart Money, Andy.
Andy Rosen: Thanks for having me.
Sean Pyles: 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?
Andy Rosen: OK, 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?
Sean Pyles: And hopefully help them truly understand what is going on behind the scenes.
Andy Rosen: 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 and really valuable last year. And is this even an issue that could hold the interest of a regular person?
Sean Pyles: 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.
Andy Rosen: 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 had been sick of hearing me talk about this since I got this job. 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.
Sean Pyles: Nice of them.
Andy Rosen: 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.
Sean Pyles: OK, 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 are just rambling on about something that no one cares about.
Andy Rosen: 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.
Sean Pyles: OK, cool. Well, have a lot of fun. I can’t wait to hear how this conversation turns out.
Andy Rosen: Alright, can you two both introduce yourself?
Uncle Jim: Hi, my name is Jim, and I am Andy’s favorite uncle.
Aunt Drew: Hi, my name is Drew, and I’m Andy’s aunt. I’m looking forward to the conversation tonight.
Andy Rosen: So you know a little tiny bit about cryptocurrency, right? One of your sons owns some of it. He’s told you, what, nothing basically about it?
Aunt Drew: Well, one time, he tried to explain it to me and I thought, what? And so I fell off the wagon on his teaching it to me.
Andy Rosen: And what about you, Jimmy?
Uncle Jim: 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.
Andy Rosen: 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?
Andy Rosen: Everything? All right, so what do you think it is?
Uncle Jim: I 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.
Andy Rosen: What about you, Drew?
Aunt Drew: I just literally think it’s just out there. I try to understand what it is and what it’s tied to, and 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 out there.
Andy Rosen: It is pretty out there. So, OK, 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 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 through a really complicated cryptographic formula that’s not that interesting and, honestly, not that important to a regular person. But essentially, the big thing is that it’s the first time you could own a digital file without having to rely on a company or someone to keep track of it for you or maybe take it away.
Uncle Jim: So when you say digital file, what’s in the file?
Andy Rosen: Well, it can be anything.
Aunt Drew: The buzzword that actually works for me it’s a digital file.
Aunt Drew: OK, so that’s one thing new I know. That I can hang my hat on.
Andy Rosen: 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. The bank keeps track of that for you. The bank holds the ledger. So what cryptocurrency does is that it distributes this ledger — 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, do we all agree on who owns what? And then they have this really complicated way of coming to a consensus if they disagree. But the idea is that computers, working together on their own, can reliably determine ownership of something.
Aunt Drew: How are the computers chosen?
Andy Rosen: 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, “OK, 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?
Aunt Drew: That’s good. I mean, I know more than I did 10 minutes ago.
Andy Rosen: So tell me, have you paid attention to the market at all? You hear on the news it’s going up, it’s going down?
Aunt Drew: The crypto market?
Andy Rosen: Yeah. Yeah. I mean, obviously, you’re not following it on a day-to-day basis.
Aunt Drew: 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, hardly ever.
Uncle Jim: My financial advisors basically told me to stop looking at the market.
Andy Rosen: Really? What did they tell you?
Uncle Jim: Just basically just said, “Stop looking at it. We’re in a bear market and let’s just … we’ll ride it out and it’ll come back.”
Andy Rosen: So just your portfolio, in general.
Andy Rosen: Just don’t think about it.
Aunt Drew: We don’t have anything …
Uncle Jim: So don’t think about it.
Uncle Jim: We don’t have any Bitcoin or we don’t have cryptocurrency at all.
Andy Rosen: So I guess I’m interested in how you guys might think about the value of cryptocurrencies. Why do you think it has value?
Uncle Jim: The question I was going to ask you was, how does it change value? How does it go up or down?
Andy Rosen: It’s pretty much market-driven.
Uncle Jim: So it’s kind of tied to Standard & Poor’s? What is it tied to? Does it mirror the market?
Andy Rosen: Bitcoin and all other cryptocurrencies generally have their value determined by markets. So there are decentralized markets where computer algorithms help you trade with other people. But for the most part, there are just cryptocurrency exchanges. They’re run by companies. They make markets and whatever the market will bear at the 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. In that way, it’s similar to a stock, but I think a lot of people struggle with cryptocurrency because cryptocurrency isn’t the company. It doesn’t have assets.
Aunt Drew: There’s nothing you can look at. There’s nothing you can see — the sales are up or there’s no product development or anything. It’s just a random thought.
Andy Rosen: 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? For instance, when Facebook went public, 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 did they own at the moment? What cash on hand did they have?
Uncle Jim: What’s the potential?
Andy Rosen: If you own an oil refinery, there’s a different way of calculating the value of what you own. If you own a network that has the potential to grow or a potential to do something cool or technology. But the thing about Bitcoin is that no one owns it. It doesn’t have profit.
Aunt Drew: See, that’s the weirdness. 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.” 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, then all of a sudden you go, what? It’s like trying to learn.
Uncle Jim: It’s a concept that’s very difficult to understand.
Uncle Jim: Because it’s so different than buying stock in the stock market. It’s a completely different thing.
Andy Rosen: You might look at it more like a commodity. There’s a specific thing you can buy. There’s so much of it. Supply is constrained or very available at the moment, and so that’s going to affect the cost. I think that’s the thing is, people get so caught up, and I think I have in this conversation, in explaining the technology when really what it is, is it’s an idea. 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, are we cool with that deal? We have the option of making a different deal. And can people make products with this technology that actually replaces centralized services?
Aunt Drew: If you’re following stocks, people give you advice because something’s happening in that company. They’re about 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 doesn’t seem real. And that is the common thread for most of our friends; it doesn’t seem real enough to us.
Andy Rosen: There are cryptocurrencies that are more real than others. There are some that are completely invented as jokes or experiments, but there are others that are tied to specific projects. Have you ever heard of Ethereum? What it can do is you can write programs that interact with the underlying technology, which is called a blockchain. So you could write a computer program and it’s like, we’re going to play a game, and if I win the game, some of my money goes to you. And if I lose the game, some of your money goes to me. Now that’s gambling; you might not want to do that.
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 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. So if you want to use a product made on Ethereum, you need Ether. And so, if there are 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’ll have a better market for it.
Aunt Drew: How is it determined? The limited supply?
Andy Rosen: You can stop me at any time. And you can tell me it’s too boring and that you want to stop too. But, OK, so each of these things has what’s called a white paper. And it’s instead of a stock prospectus. 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.
Aunt Drew: And they just make that up?
Andy Rosen: Well, I mean, essentially, they make it up, but if you buy it, you’re saying I’m fine.
Aunt Drew: 350 or whatever.
Andy Rosen: 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.
Aunt Drew: I think that might be the part that is completely bizarre to me.
Uncle Jim: What agency actually monitors this? Is it the FTC?
Andy Rosen: Well, that’s a big question. Who’s your consumer? If you get screwed, who are you going to call?
Uncle Jim: Well, yeah. I mean, who’s actually overseeing?
Andy Rosen: You might have to call the Ghostbusters.
Uncle Jim: Some sort of government agency has to be overseeing it, I would think.
Andy Rosen: The oversight of the 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 are all sorts of different ways of looking at it. The SEC might say, “You treated this way too much like a security; you’re just selling stock in a different form. You can’t do that.” Or the FTC or some other consumer protection agency might say, “Hey, you lied and sold something that wasn’t true. We’re going to sue you.”
Aunt Drew: If I’m going to buy some Bitcoin, I’m going to get a prospectus or something?
Andy Rosen: No, you’re not.
Aunt Drew: I’m just going, “I’m in?”
Andy Rosen: You can read the white paper.
Aunt Drew: The white paper.
Andy Rosen: 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 annual report, it’s not like those are beach reads either.
Aunt Drew: It’s just bizarre because there’s a limited number, they don’t promise anything, but you should get one.
Andy Rosen: Yeah. I mean, that’s the thing. A lot of it is faith.
Aunt Drew: And it’s a risk, yeah.
Andy Rosen: And I mean, these things haven’t necessarily proven themselves at all. But it has had a staying power. This idea is attractive to people. You could argue that you know more about the supply of Bitcoin than you do about the dollar.
Uncle Jim: I don’t think many people understand it. I would say that there are 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 at least average or a little better than average intelligence, and it’s a difficult concept to understand.
Andy Rosen: I totally agree. I consider you guys intelligent people, as I said. I’ve been sitting here trying to explain it. Sometimes I’m like, did I just confuse myself more?
Uncle Jim: I have a much better idea of what it is and what it means now than I did 20 minutes ago.
Uncle Jim: I could 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.
Andy Rosen: Yeah, I think so. And I mean, that’s another one of the things that it’s like —
Aunt Drew: But it’s not simple. You can’t boil it down simply.
Andy Rosen: No, you can’t.
Uncle Jim: I plan on buying a little bit of it. That’s what I’m planning on doing.
Andy Rosen: Not because of me, though, is it?
Uncle Jim: Just because I feel like I just want to be able to watch it and see how it performs. I mean, if I don’t have any money invested in it, I’m not going to watch it. Why would I?
Andy Rosen: It is, it’s really interesting. I mean, there are 19,000 or something different cryptocurrencies. Now, most of them are complete gags. They’re not in anything. But a lot of really interesting ideas about, what if you could do this but without the middleman?
Aunt Drew: Cryptocurrency, there’s no middleman. It’s like you and the computers.
Andy Rosen: Right, that’s the idea. It’s like, me and you, and our computers do the work in between.
Aunt Drew: So what would you say, if you were going to decide to do it, would you put $100 in or $1,000? I mean, I’m talking if you’re doing very conservative … As Jim says, I’m going to buy some. What would he put in?
Andy Rosen: I can’t really give you advice on that.
Aunt Drew: No, no, no. I don’t need advice.
Uncle Jim: I was thinking about more like $400 or $500 bucks, is what I was going to do.
Andy Rosen: 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 the amount of risk is going to vary based on …
Aunt Drew: Well, that’s true.
Andy Rosen: … Your attitude toward its long-term value or short-term value and what your other economic obligations are. So if $500 is a lot of money for you, then you have to make that decision. If $10 is a lot of money for you, same. But maybe people who are very wealthy throw thousands of dollars at it and just hope for the best. You accept more risk, the rewards can be higher or you can be destroyed.
Aunt Drew: Just like any investment, guaranteed and whatever you can afford to lose …
Andy Rosen: Have you asked your financial advisor about it?
Uncle Jim: No, I haven’t.
Andy Rosen: I mean, I always …
Uncle Jim: I mean, what do you think his opinion will be?
Andy Rosen: I don’t know. Financial advisors that I’ve spoken to have a wide range of opinions. Some think it’s too risky.
Uncle Jim: Well, my guy’s very well-versed and he likes to talk about stuff. So, I’ll ask him.
Aunt Drew: But I doubt he would tell us to do that.
Uncle Jim: But my son is a financial advisor, and I think I might just ask.
Andy Rosen: Did you ask him? I’ve never asked him.
Uncle Jim: Over the weekend, I think I’m going to.
Andy Rosen: Tell me what he says. I mean, I just have to be really careful not to be telling … Because we’re talking to the listeners too.
Aunt Drew: No, I hear you.
Andy Rosen: I mean, I just … I don’t know what people ought to do. I’m not a financial advisor.
Aunt Drew: What my thing was, what would be a conservative thing, but you’re right. My conservative is somebody else’s extravagance or vice versa.
Uncle Jim: Yeah, someone else’s disposable income.
Aunt Drew: It’s like going to Foxwoods.
Andy Rosen: Right. I mean, exactly. 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, yeah, the cautious thing to do 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 dabble in a new area, that’s …
Uncle Jim: 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 …
Aunt Drew: I think you’re right about that.
Uncle Jim: … pay more attention to it even if it’s $300 or $400 or $500 bucks. I mean, seriously, as Drew said, you’re going to lose that in Foxwood in 10 hands of blackjack. And people have. But I just think that if I put a little money in there, just to get a 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.
Andy Rosen: 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 worth nothing. Things go down to zero. What would you do if it disappeared? That’s the thing you have to think about.
Aunt Drew: Well, that’s a life lesson and you have to …
Uncle Jim: As I said, you play 10 hands of blackjack at a $50 table and lose all 10 and you lost $500 bucks.
Andy Rosen: Yeah, but casinos have …
Aunt Drew: We don’t even go to Foxwoods. We keep using it as a reference.
Andy Rosen: Casinos have free drinks, though.
Uncle Jim: That’s true. That is true.
Aunt Drew: But I think you learn, like Jim said, you literally learn anything you don’t know by actually exposing yourself to experiencing it. So probably skin in the game is of value.
Uncle Jim: Yeah. So my next question is when I do this, how do I buy it? Go to NerdWallet?
Andy Rosen: I mean, go to NerdWallet. That’s one place you can find out information. We don’t sell it.
Uncle Jim: No, but you can find where to get it.
Andy Rosen: We have an objective ranking criteria, we go over fees, we go over ease of use, various other things. How easy it is to exchange one crypto for another, things like that. And you can look overall at 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 moving it around. And the things that are a little more difficult to use will have lower fees. So the question is, how much hand-holding do you need? That’s one big question. But most of the biggest ones are reviewed on our site and you can take a look and it’s just like, OK, 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, there are tons of options. If it’s just like, I want to hold Bitcoin, keep it here, not going to touch it. I’m not going to move it around; I’m not going to trade it for anything else. 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 trade them for one another, that can get costly if you don’t know what you’re doing. You might want a more advanced product for that. So anyway, I’m going to send you guys a link.
Uncle Jim: So it’s right on your website?
Andy Rosen: Yeah, I mean.
Andy Rosen: But you don’t even … For you, I’ll just send you the link.
Aunt Drew: Wow, what a perk.
Andy Rosen: So I think we’ve covered most of it, guys. Am I getting better at this? What do you think?
Aunt Drew: 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 that I think maybe 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 having skin in the game and following and learning that way is … And also with your information.
Uncle Jim: Using your knowledge and getting a little bit of it and actually experiencing it, I think that’s a good combination.
Andy Rosen: All right. Well, if it doesn’t do well, you can’t be mad at me.
Uncle Jim: I know where to find you. I know where to find you.
Andy Rosen: I didn’t tell you to buy that.
Aunt Drew: You did not tell us to buy anything, but if we happen to do well, there could be some benefit to it.
Aunt Drew: We could take you somewhere nice.
Andy Rosen: All right, all right, all right. Guys, thank you so much. This is really fun and thanks for having us over.
Aunt Drew: All right. Thank you, Andy.
Andy Rosen: 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 [email protected] Also, visit nerdwallet.com/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.