Buzzwords 101: Cryptocurrency

Before we get into what cryptocurrency is, it’s important to clarify what cryptocurrency isn’t. Specifically, cryptocurrency is not blockchain. The two are connected at the hip, but you can’t use these terms interchangeably. Simply stated, blockchain is a technology and cryptocurrency is an application built on that technology.

You also can’t use cryptocurrency and Bitcoin interchangeably. Bitcoin is just one – albeit the most dominant one – of dozens of different cryptocurrencies.

The basic definition of cryptocurrency noted above is straightforward enough. What makes it confusing is the fact that cryptocurrency can serve as either money – i.e., a way to pay for something – or an asset – i.e., an investment.

Using any type of currency to pay for something makes sense. But what makes so many people so interested in cryptocurrency as an investment? Let’s use Bitcoin as an example.

In 2011, two years after Bitcoin was invented, one Bitcoin was worth 30 cents. Today, one bitcoin is worth about $19,000 USD. That means that if you had bought 1,000 bitcoins back in 2011 and held them until today, your $300 investment would have ballooned to $19 million

As a community financial institution, why should you care? The short answer is: because your accountholders care. Apps like Coinbase and Venmo and Robinhood have made it ridiculously easy to invest in crypto. Just run an ACH report to see how much money is moving from your institution to these crypto companies. It’s probably more than you think.

In response, some community FIs are partnering with crypto companies to offer their accountholders crypto custodial and brokerage services. This isn’t necessarily a bad idea, but you need to be careful.

Cryptocurrency as an investment is highly volatile. If your accountholder invests at the wrong time and, more importantly, needs to liquidate at the wrong time, their losses could be substantial. And no matter how many disclaimers you’ve bombarded them with, they’ll always remember it as “the time I lost $10,000 investing in crypto through my credit union.” And that’s exactly how they’ll tell it to their friends, too.

Nevertheless, at this juncture, your institution needs a crypto strategy – even if that strategy is to take no action at this time. That’s a defensible position, as long as it’s based on knowledge, not the lack thereof.

That means you need to embark on a crypto journey. It may be a short journey or it may be a long journey. Either way, the first step in your institution’s crypto journey has to be education. You need to learn enough about crypto – including how your accountholders feel about it – to make an educated decision about what step, if any, comes second.

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