A Cryptocurrency Primer: What Use Is Bitcoin?

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In the realm of economics, there are plenty of terms that might confuse the layperson, but most of us probably know what the word "money" means. "Cryptocurrency," by contrast, can be baffling. It's money, but not government-backed money? It gets mined almost magically by a process that does nothing else of value? How does that work?

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Given the level of investor interest in cryptocurrencies, for this episode of Motley Fool Answers, Alison Southwick and Robert Brokamp brought in Motley Fool analyst Aaron Bush to give their listeners the lowdown. In this segment, he talks about some legitimate use cases for peer-to-peer currencies and how secure the system around it is.

A full transcript follows the video.

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This video was recorded on Nov. 21, 2017.

Alison Southwick: I get why a decentralized cryptocurrency is fantastic if I'm doing something really illegal online. It's not traceable. If it's online, it's not traceable. This is [part of] the dark web, right?

Aaron Bush: Generally, things are more traceable than you think they are. Even with bitcoin, there was a major fallout with Silk Road, so you're not as anonymous as you think you are, even using bitcoin. But, yes, there are other cryptocurrencies that have tried to make things more anonymous.

Southwick: More anonymous. People who like gold are probably drawn to bitcoin -- the Armageddon aspect -- that if the government is going to fall, at least I've still got my bitcoin.

Bush: Yes.

Southwick: I'm a law-abiding and generally optimistic person. I don't think I should be using bitcoin as a currency, but it is becoming more common. People can use it for goods and services. That's growing.

Bush: I don't think [for us] there are many use cases for bitcoin, beyond what we can do with Mastercard or Visa or anything like that. I will say there may be some value in less-developed countries where currency is more unstable. They can put money into bitcoin as a store of value vs. seeing their money light on fire. I think that is a very good use case. They can also transport it over borders without having to go through a middleman.

So, there are some use cases with it being a transfer of value. In some ways this transcends [and becomes] a threat to governments, but for our case it's probably less so of a use case.

Southwick: I guess with bitcoin you don't have any insurance [which is the wrong word], but if I use my credit card I have fraud protection. We've got the FDIC to protect my money at the bank. The reason for entities like [the FDIC] is to provide me with protection. I realize the blockchain is supposed to provide me with that protection. Is it the same?

Bush: I would say taking down the bitcoin network would be just as difficult as taking down the internet. In that case it is very secure, but more on an individual basis security is very important, and that just boils down to having good security practices and making sure not to do anything dumb.

Aaron Bush owns shares of Mastercard. Alison Southwick owns shares of Visa. The Motley Fool owns shares of and recommends Mastercard and Visa. The Motley Fool has a disclosure policy.