It might be helpful to begin by defining what a crypto wallet is. A cryptocurrency wallet is the digital storage locker for cryptocurrency, though many serve additional functions. Non-physical cryptocurrency requires a digital wallet, as well as private keys denoting who the owner of the wallet (and the cryptocurrency within) is. Crypto wallets serve both of these functions.

In order to establish an operational crypto wallet, a person may have to:

• Choose a wallet provider
• Input certain personal information
• Link a funding and deposit source, such as a bank account

Once a user takes these steps, they may be able to purchase and sell cryptocurrency, buy goods and services using crypto, and engage with decentralized finance (DeFi) products like decentralized exchanges and lending services.

Choosing a crypto wallet requires more consideration than you might think.

There are two broad categories of crypto wallets: hot wallets and cold wallets. Hot wallets refer to those that are (generally always) internet-connected. Cold wallets are not directly connected to the internet, but may become so in order to complete transactions. Let’s dive further into the specific types of crypto wallets.

Crypto Wallet Type #1: Paper Wallet

Services such as the Dash paper wallet generator allow users to print their:

• Private keys, or the encrypted signature that makes a wallet specific to an individual
• Random public address, which Coinbase likens to an email address, as it allows other users to know where to send cryptocurrency to

A paper wallet may also contain a scannable QR code for easier transactions, including but not limited to payments and crypto trades. 

Some of the benefits of a paper crypto wallet are:

• That a user can have physical possession of their public and private keys
• That a paper wallet is not immediately hackable
• That a paper wallet is disconnected to the internet, and is therefore not as vulnerable to energy- or internet-related problems as hot wallets are

Paper wallets may be as safe as the user that possesses them. While digital hacks may be averted with a paper wallet, it is vital that the owner of a paper wallet ensure its safekeeping, as losing it could have disastrous consequences.

Crypto Wallet Type #2: Desktop Wallet

Desktop wallets may generally rank behind paper wallets in terms of security (hacking-related security, at least), but ahead of online crypto wallet alternatives. 

The ostensible difference between an online-only crypto wallet and a desktop wallet is the act of downloading the wallet itself. This act results in a user’s private keys being stored on their computer hard drive rather than on an online server. In some cases, this information could be stored both on a desktop and an online server.

Having a wallet saved on one’s desktop could come in handy if:

• An online wallet host is hacked
• An online wallet host crashes

Crypto Wallet Type #3: Online Wallet

Online (or Web) crypto wallets may be the most immediately accessible and low-maintenance way to store and trade tokens. Casual crypto traders and investors may gravitate towards online wallets because:

• A third-party service may do all of the heavy lifting (providing the wallet, keys, and maintaining the server)
• An online wallet may have an easy-to-use interface
• An online wallet may be accessible from any device with an internet connection
• An online wallet may allow trading and crypto wallet services in one platform
  

Crypto Wallet Type #4: Hardware Wallet

Hardware wallets offer the physical, in-your-hand nature of paper wallets, but may offer additional features and significantly more pizzazz. Hardware wallets generally have common features including:

• A screen
• A handheld size
• Buttons or other means of operating the wallet
• The capacity to store a significant amounts and various types of cryptocurrency
• Computer connectability 

Ledger produces hardware wallets that have proven popular among crypto owners who want physical control over their token stores, as has Trezor.

Online wallets, put simply, may be the convenient option. History has shown that they are not the security-first option, however. Always connected to the internet, your online wallet could be the victim of hacking, and if the host becomes corrupted, then your wallet may be compromised just the same. You may also be taking a gamble that the hosts of the online wallet service are ethical.

Hardware wallets store users’ private keys. Unlike paper wallets, hardware wallets may have security features that prevent access to private keys in the case that the wallet falls into the wrong hands. 

One pull factor for hardware wallets is their offline nature. This, like paper wallets, makes them less vulnerable to hacks, third-party malfeasance, and other threats that loom over internet-dependent wallets. Yet, owners of hardware crypto wallets may connect their device to the internet at any time to conduct transactions. 

This gives hardware wallets a sort of hybrid nature that may prove appealing to security-conscious crypto traders.

Crypto Wallet Type #5: Mobile Wallet

Cell phones have become highly sophisticated and ever-present, and many buyers, sellers, and holders of cryptocurrency prefer mobile wallets. Many online wallets offer a mobile version, while some wallets are exclusively designed for mobile use.

Mobile wallets may warrant the same security-related concerns that any hot (internet-connected) wallet does. The funds in your mobile wallet may be only as secure as the host providing it. For that matter, it may be only as secure as your mobile device. Therefore, there is certainly an element of “buyer beware” to anyone who uses a mobile crypto wallet.

However, there are clear benefits of mobile wallets. They include:

• Extreme convenience
• Mobility
• All-in-one platforms that allow banking and trading
• Compatibility with both Android and iOS operating systems
• The ability to pay from a mobile wallet through QR-enabled scanning

In an increasingly mobile-dependent world, mobile crypto wallets offer clear benefits. You may weigh these pros and cons of different crypto wallet types when choosing the right wallet for yourself. Nomics provides a comprehensive rundown of cryptocurrency wallets in their many forms.

Yield farming is a way for those who participate in specific cryptocurrency-powered products to use their crypto to earn crypto. By promising users tokens (and interest, in some cases) in exchange for their participation, founders and promoters of decentralized finance products aim to whip up interest in their platforms.

What Is Yield Farming?

Understanding yield farming may require you to grasp what “yield” means within the context of finance. Per Investopedia, yields are “earnings generated and realized on an investment over a particular period of time”. Yields may generally come in two specific forms:

• Interest earned on an investment
• Guaranteed dividends paid in return for your investment

Yields can apply to several classes of financial assets, including but not limited to stocks and bonds. Yields can be fixed or may fluctuate with different variables, such as the value of the security being invested in. These same tenets may apply to yields issued in cryptocurrency rather than dollars, but there are also some noteworthy differences between traditional yields and crypto yields.Yield farming is a term particular to cryptocurrency, and DeFi specifically. Simply put, to farm yields is to invest your cryptocurrency in a specific DeFi platform or product in exchange for rewards, which may come as interest and/or dividends. 

Some of the most prominent projects to date for yield farming, such as Compound, involve both lenders and borrowers of cryptocurrency receiving Compound tokens (COMP) as their yield. This practice may also be referred to as liquidity mining, because those who invest their crypto in platforms while earning a yield are providing liquidity to administrators of that platform. In this sense, their role is similar to a lender who exchanges cash for:

• The guarantee of future repayment, plus:
• Interest payments

While the investor farming a yield certainly benefits from the arrangement, they may not be the only ones reaping a reward.

Who Benefits From Yield Farming?

It is clear why someone might invest their cryptocurrency in a platform or product that offers them a yield. If they were not planning to liquidate their crypto shares in the near-term, then why not earn some extra (guaranteed) coin on their stake by farming for yields? Here’s how it goes:

An investor lends their money to the platform, they receive tokens for their investment, they are ultimately repaid their principle investment, and may earn interest on top of it. It’s the classic lender’s benefit, along with some extra token. That extra token is a key distinction between traditional lending and yield farming with DeFi platforms. If the value of the token provided as a dividend skyrockets, then a DeFi lender-investor may experience returns far beyond what they could get in traditional, non-crypto markets.

Heck, if the token being used as a dividend accumulates value quickly enough, it may even be possible to make money farming yields as a borrower. Say someone borrows cryptocurrency and receives tokens as a reward for engaging in the lending platform. So long as the value of that token increases at a rate greater than the cost of borrowing, they may ultimately earn a profitable yield despite paying interest on their loan. There is always risk in borrowing, and one would have to be very confident in the rate of a token’s appreciation to bank on making money by borrowing crypto. Still, this scenario is not out of the realm of possibility, and the rapid increase in value of Compound’s COMP token just months ago serves as real-world evidence.

The last party that may benefit from yield farming is the governors of a specific platform or token. Whether governors refers to a centralized collective or participant-investors in a decentralized platform, the interaction that yield farming incentivizes is generally positive for stakeholders.. As investors flock to a platform offering worthwhile yields, the platform itself and any connected token becomes more valuable due to greater popularity. As the token accumulates value, the yields (tokens) provided by participation in the linked platform become more attractive, more farmers flock to reap those yields, and so the cycle of growth goes…

What Is the Current State of Yield Farming?

Like many specific genres of decentralized finance, yield farming has seen significant growth in participation over recent years, and in the past few months especially. With Compound paving the most viable blueprint for yield farming to date, subsequent projects have garnered similar popularity. Balancer Labs’ BAL token was issued shortly after COMP token’s debut, becoming the second governance token that would facilitate yield farming in the DeFi space, according to NASDAQ. It went on to debut with a single-day 235% spike in value, once again illustrating the fervor for yield farming, and by extension the tokens and platforms that allow for yield farming.

As more and more investors sink their crypto capital into platforms offering yields in return for liquidity, the sustainability of the practice appears real. Unless regulators crash the party, the attractiveness of yield farming may persist. 

How Do Regulators View Yield Farming?

You’d have to be a regulator to answer this question. Generally speaking, there is some worry that regulators will eventually want to have a say in how the DeFi sector is run, including how punitive measures are doled out to fraudsters. Yield farming may not be immune to this development if and when it occurs. Whenever the term “risk” becomes associated, fairly or not, with a financial sector, you can bet that at some point regulators will act. Whatever you think of their motives, this generally tends to be the case.

Like any investment, yield farming carries risk, with questions about the token issuers’ legitimacy being one of those risks. However, it is not yet possible to know for certain how regulation will affect yield farming. For now, yield farmers seem to be of the opinion that they may as well be getting it (yields) while the getting is good.

That’s part of it, but there’s more to the story.

So what is decentralized lending, how does it differ from traditional lending, and what is the outlook for this relatively nascent category of financial products?

What Is Decentralized Lending?

The mechanisms of decentralized lending are fundamentally very similar to traditional lending:

• One person lends assets, doing so in exchange for interest payments (and in some cases, additional rewards)
• Another person borrows assets, paying interest payments for the right to instant funding 

Rather than dollars, however, decentralized lending relies on cryptocurrency as the medium of exchange. Various platforms exist by which users can engage in lending-related transactions (more on that later).

Smart contracts are the mechanisms which facilitate decentralized lending. These contracts are self-executing protocols which may have several functions (distributing interest payments, enacting variable interest rates, and implementing other terms of a loan, for example). 

These contracts are unbiased, incapable on their own of nefarious motives or bad faith tactics, and allow all participants in a lending transaction to see precisely where they stand at any given time. In other words, they’re not banks.

What Are the Perks of Decentralized Lending?

Investment in decentralized lending platforms has absolutely skyrocketed in 2020, but why?

Widespread mistrust of traditional financial institutions may play a large part in bullishness towards DeFi lending. CNBC explains how millennials in particular have shown a wariness towards traditional banks, citing The Great Recession among the reasons for skepticism. 

With banks required to keep 0% of customer deposits on hand, per the Fed, it seems that willingness to try non-traditional financial products is rampant. Consider the proposed benefits of decentralized lending:

• Rather than having a financial institution with a spotty track record involved in your financial transaction, DeFi lending allows a smart contract to execute the transaction
• For lenders, interest rates on certain DeFi lending platforms may far outpace returns for other centralized investment alternatives
• Rather than a large, faceless bank reaping the rewards of lending, DeFi lending offers a peer-to-peer experience
• Lower barriers to securing a loan than are present in traditional lending processes (if you have the necessary crypto collateral, you may generally be able to secure the loan you seek)

From an investor standpoint, borrowing cryptocurrency may prevent having to sell existing stakes in crypto, which may come with fees and opportunity cost. Based on the massive infusion of capital in DeFi lending platforms in the past few months alone, it is clear that the perks of decentralized lending have legitimate appeal.

What Is the Current State of Decentralized Lending?

DeFi Pulse’s DeFi List shines a light on 12 separate decentralized lending platforms. The amount of digital assets tied up in decentralized lending platforms is substantial, with leading platforms Compound, Maker, and Aave collectively accounting for significantly more than $3 billion in digital assets on their own. DeFi Pulse keeps a running account of the entire DeFi lending industry’s “locked” assets. 

$3 billion and change is noteworthy, and becomes even more eye-catching when considering that DeFi lending markets have seen a massive infusion of capital in 2020. Still, decentralized products for lending and borrowing appear modest when compared with traditional lending. Outstanding consumer debt issued through centralized sources is more than $13 trillion.

The sizable asset gulf between DeFi lending platforms and traditional lending institutions is informative, but says little about the long-term viability of DeFi lending. The headstart that established financial institutions have on decentralized alternatives (2016 spawned the earliest DeFi lending platforms) must be considered when making comparisons.

DeFi lending platforms must be evaluated on their own merits, rather than in comparison to centralized alternatives. Through this lens, decentralized lending is a product that investors are very bullish on.

Some have observed DeFi lending’s transition from “niche” to “mainstream” (injecting billions in capital in a matter of months will have that effect). The de facto marriage between the Ethereum blockchain and DeFi lending products serves as something of a blueprint, and at this point DeFi lending is well established as a force in the projected financial markets of the near and distant future.

How Do Regulators View Decentralized Lending?

If there is one potential threat to DeFi lending, it is the same concern that clouds the crypto sector more broadly: regulation. 

Publications such as Reuters have thrown around terms like “freewheeling” to describe the state of crypto lending. These sorts of terms, generally speaking, are the sort that tend to catch the eye of regulators. 

With its massive and growing popularity to the tune of billions of dollars invested, there is no doubt that conversations about DeFi lending have already been had in the offices of the Securities and Exchange Commission (SEC). But one unanswered question remains: how, exactly, will the SEC treat DeFi lending platforms?

There is some fear that these platforms will receive treatment similar to that of Initial Coin Offerings (ICOs). In 2018, ICOs became tied to unsavory phrases like “securities fraud” and “conspiracy” when the SEC took legal action against multiple crypto firms. CNBC’s take on the SEC’s message: “new digital financial products must follow traditional securities rules”.

If this proves to be the case with DeFi lending platforms, then there may come a time when regulators begin to enforce the “traditional securities rules” to which decentralized lending products may or may not be subject.

What Is Quantitative Easing?

 Quantitative easing is a policy by which those in control of a money supply increase the amount of currency in circulation. There are various motivations behind such policies (more on that later), and bodies such as the Federal Reserve may use several specific tools to implement quantitative easing.

One lever the Fed can pull to engage quantitative easing is the purchase of securities. These include:

• Government bonds
• Corporate bonds
• Equity, which includes exchange-traded funds (ETFs) and could soon include stocks, according to Forbes
• Assets such as mortgage-backed securities

Purchasing a security essentially makes one a creditor to the entity that issues the security. The Fed, or another central bank-like body in another nation, can issue cash to financial institutions in exchange for such securities, and in doing so provide more liquidity into the marketplace. In doing so, it is expected that banks will lend that cash and stimulate economic activity.

In addition to directly providing cash to the open markets, an institution that implements quantitative easing may also reduce interest rates or lower reserve requirements. Lower interest rates may generally stimulate lending, as the cost of borrowing is decreased. Reducing reserve requirements lessens the amount that banks must keep on hand, which means they have more money to lend.

Banks generally lend whenever they are able to, as this is their primary way of earning money on customer deposits and loans they have received from the Federal Reserve. The Federal Reserve may even lend money directly to banks in the name of quantitative easing. In the school of QE, such lending is the primary catalyst for economic activity during times of sluggishness or stagnation.

Who Controls Quantitative Easing?

Those who control a nation’s money supply may generally be the ones to enact quantitative easing. In the United States, this is the Federal Reserve. In certain nations, it may be a central bank, which could be controlled by the political party in power or may be a somewhat independent entity such as the Bank of Japan, Deutsche Bundesbank, or the Bank of England.

The European Central Bank controls the money supply for 19 member nations, and now plays a substantial role in European monetary policy since the widespread adoption of the Euro. Every financial body must decide whether to enact quantitative easing based on the effect it is likely to have on those who use a currency.

What Is the Intent of Quantitative Easing?

The stated intent of quantitative easing is to stimulate economic activity through increased access to lending, specifically in times where economic activity has slowed or has shown warning signs of slowing. The logic is that more money in the hands of the public—business owners, investors, consumers—will lead to growth and spending.

This may generally be the case. Those with money to spend in worthwhile ways, or simply to burn, may tend to do so. And when this is the case, the goal of quantitative easing is achieved.

Criticisms of Quantitative Easing

The primary critique of quantitative easing is that, while it may stimulate investment, growth, and spending in the short-term, there is a very real long-term cost to such policies, namely inflation.

Fractional reserve banking allows banks to lend out money without removing that money from its asset ledgers.

This has a notable growth effect on a nation’s money supply  from an accounting standpoint. Because quantitative easing both injects cash directly into the money supply and facilitates lending, it tends to have a substantial growth effect.

Any time you grow a money supply, inflation occurs. Generally speaking, having more of something (including dollars) reduces the scarcity of that thing, so long as demand does not increase in concert with supply. Consequently, each individual unit of that thing will become less valuable. This is the core principle of inflation, and illustrates why increasing the supply of currency diminishes the value of each individual unit of money.

Because quantitative easing increases the money supply by its very principle, the most valid criticism of QE is that it trades short-term stimulus for long-term devaluation of the currency—a trade off that many argue is not worth it. After all, there is no guarantee that the stimulus will even work in the short term, while there is a guarantee that QE will contribute to inflation nonetheless.

The University of Pennsylvania’s Wharton School explains that specific QE-related policies in recent history have had ill effects in addition to inflation. For example, the Fed’s stimulus policies following the 2008 financial crisis ultimately reduced direct business investment by banks,  making the quantitative easing of 2008 a failure.

Quantitative easing can be like injecting steroids into the normal course of inflation, with no guaranteed benefit to counteract this downside.

The Case For Scarcity Through Cryptocurrency

The purchasing power of the dollar has plummeted during the past century-plus, and the continued pumping of fiat money into supply (the primary mechanism of quantitative easing) has accelerated this decline. The guarantee of scarcity once provided by the Gold Standard is a distant memory.

Those who seek a return to truly scarce stores of value may consider cryptocurrency, and may already have invested in the likes of Bitcoin. Unlike the dollar or Euro, cryptocurrency is fixed, with the supply of Bitcoin set at 21 million. Though there has been debate over whether to eventually increase the supply of Bitcoin and other cryptos, the type of exponential growth that has ravaged the dollar’s value is unlikely.

Scarcity is a central tenet of cryptocurrency’s value, a fact which is not lost on those who benefit from it.

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What Is Monetary Policy?

Monetary policy refers to actions that governing bodies do (or do not) take to manipulate a money supply, as The Balance explains. The importance of the money supply cannot be overstated, as its relative size plays a role in whether inflation or deflation could take hold of an economy.

Commonly-accepted thought states that those in charge of monetary policy—in the United States, it is the Federal Reserve Board of Governors and Federal Open Market Committee—manipulate the money supply with specific goals in mind. It expands the supply to stimulate economic activity, and reduces the supply when the economy shows signs of overheating, which could lead to undesirable levels of inflation.

Who Creates Monetary Policy?

The Federal Reserve wields great power when it comes to America’s financial system, as it is responsible for crafting monetary policy—with this power, it directly controls the nation’s money supply.

The Chairman of the Federal Reserve, currently Jerome Powell, is the public face of the Fed, but two specific leadership groups—the Federal Open Market Committee and Fed Board of Governors—make the power moves. These groups collectively decide how to manipulate the discount rate (the interest rate to banks borrowing from the Fed), bank reserve requirements, and other tools such as the sale and purchase of bonds.

Though you may read that the Federal Reserve enacts the goals of Congress, the mandates are vague: grow the economy, prevent massive unemployment, etc. By the Fed’s own definition, it is an “independent government agency but also one that is ultimately accountable to the public and the Congress”.

In other words, the Fed and the Fed alone decides how to set monetary policy in America.

In other nations, monetary policy may be set by some organization similar to the Federal Reserve, such as a nation’s central bank. In Europe, the European Central Bank (ECB) controls monetary policy for member nations, as the Euro’s widespread adoption allows it to do.

And when those subjected to the negative effects of the monetary policy of the Fed or the European Central Bank are unhappy about policy decisions, what can they do?

Absolutely nothing, aside from investing in alternatives to the dollar or Euro.

Did someone say Bitcoin?

How the Fed Uses Monetary Policy to Affect the Economy

When it wants to expand the supply of money, a governing body can simply print more money (after making a compelling case for the “necessity” of such printing to the token peanut gallery, of course). Though excessive printing of money is generally considered an unsound practice that directly causes inflation, this has not stopped the Fed nor others in charge of monetary policy from doing so.

In addition to printing money (usually under the guise of economic stimulation or saving an “essential” institution from bankruptcy), those who oversee the money supply may take other measures to affect the money supply. They may buy bonds on the open marketplace in exchange for cash, lower the amount of money that banks must keep in their reserves to incentivize lending, and lower interest rates so that banks will borrow money from the Fed and re-lend that money to Average Joe.

The goal of each of these approaches is clear: flood money into the marketplace to grease the wheels of economic activity.

Contrarily, the Fed (or another body in charge of monetary policy) can sell bonds, increase reserve requirements, and increase interest rates to contract the money supply. It may do so when it senses that excessive inflation has taken hold or is imminent.

Some say that this whipsawing of intervention by the Fed only increases the peaks and valleys of booms and busts, and generally results in one consistent outcome: lowering the value of the dollar.

Cryptocurrencies As a Hedge Against Bad Monetary Policy

A Gallup poll shows widespread mistrust of the Federal Reserve by Americans. A historical accounting would suggest that mistrust is fair, as specific recessions and depressions can be linked on some level to the Fed’s monetary policies.

And when the ill effects of financial busts occur, you may find the Fed asking Congress for approval to fire up the money printers for this bank or that foreign government, further degrading the purchasing power of the dollar in the process.

Add in that the Federal Reserve is involved in the lending of money to other (economically failing) nations, and that Americans have no say in the matter, and it’s fair to see why you might consider some alternative to the dollar as a store of your hard-earned income.

Unlike the supply of dollars, Euros, and other currencies not tied to a scarce resource, cryptocurrencies are limited by nature. Unlike fiat paper currencies, they cannot be created at will. There is no governing body with unilateral power to manipulate the supply of Bitcoin as the Fed does with the dollar, or to lend mass swathes of cryptocurrency in a manner that will inevitably devalue each individual coin.

Proponents see cryptos’ independence from direct, legalized manipulation—as well as its inherent scarcity—as a welcome alternative to whatever a nation’s central bank is doing. It is no surprise that cryptocurrencies have become a popular hedge in the age of endless money supply growth, mounting debts, and general uncertainty about the global financial house of cards.

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Hopefully, this specific topic will keep you interest-ed.

What Is Interest?

The way to begin explaining interest rates is to first define interest. Interest is the amount that you are charged for borrowing money, or conversely the amount that you receive from lending money.

You may be subject to interest charges if:

• You have student loans
• You have a credit card (or 15)
• You have a mortgage
• You have a business loan
• You have a personal loan

You may also be the beneficiary of interest. You may collect interest on:

• A personal loan that you have made to a friend, family member, or colleague
• Savings that you have in a bank, as you are considered to be lending the bank the amount of your deposit
• Any bonds that you own
• Investments in money market accounts
• Funds in your retirement account(s)

From the perspective of the investor or lender, interest is good. You may view it less favorably if someone is earning interest off of your borrowed money. Either way, interest is woven into the fabric of the economy as we know it.

What Do Interest Rates Mean?

Interest rates are the percentage that you will be charged (generally on an annual basis) for borrowed money. Alternatively, it is the rate that you will be paid for lending money.

Wait, can’t I make interest simply from putting my money in the bank?

Yes, you can, but you are technically lending that money to the bank. Banks have the freedom to loan your deposit (and other customers’ deposits — you’re not being picked on) and earn interest for themselves through a process known as fractional reserve banking. This means that you are essentially lending your bank money so that they can lend it themselves, and you get interest for doing them the favor.

When discussing the rate of interest that you will receive as an investor or have to pay to a lender, you must be aware of how interest is calculated.

There are two primary ways of calculating interest:

1. Simple interest
2. Compound interest

When you are charged (or receive) simple interest, you pay interest on the amount of money that you initially borrowed or lent. So, if you lend $10,000 at a rate of 10% per month, you should receive $1,000 per month until the loan is paid off.

When you are charged compound interest, the rate of interest that you pay may vary from one pay period to the next, with the cost of added interest factored into your monthly (or yearly) payment. So, if you borrowed $10,000 at a 10% monthly rate, then your initial interest payment will be 10% of $10,000, or $1,000. If you do not make your interest payment, the cost of your loan will now become $11,000.

With compound interest, you will now be charged 10% of $11,000 (rather than 10% of the principal, $10,000) as interest for the following month. This means your interest payment will go up from $1,000 to $1,100. If you were paying simple interest, your interest payment would be $1,000 throughout the life of the loan.

Increase the sums being loaned or borrowed, and even the interest rate, and you have significant ramifications in terms of money being collected by a creditor or being charged to the borrower.

Interest Rates: Friend or Foe?

You may have a love or hate relationship with interest rates depending on your status as a borrower or lender, or the timing of certain investments that you have made.

If you are a net borrower, you may generally loathe interest, and compounding interest in particular. This may be especially true for those with one or more high-interest credit cards that they can never seem to pay down, student loans that seem to grow rather than shrink (despite graduation being far in your rearview mirror), or other types of high-interest debt.

If you are a lender, interest may be the additional revenue stream that you do not have to work for — handing over that initial loan was all you had to do. From Visa’s perspective, your debt is the loan that keeps on giving. But even as a lender or investor, interest rates can leave you miffed.

Imagine you buy a boatload of government or corporate bonds at a 3% interest rate, and the prevailing rate for such bonds goes up to 7% only a year later. You’re making money on interest, sure, but not nearly as much as you could have if you had locked in a rate of 7%.

Remember, at least you’re not the one paying the interest. And even if you are paying interest, keep in mind there’s always someone with more debt that you (hint: it’s your government).

Interest Rates, National Borrowing, and Cryptocurrency

Just like you, your representatives in government borrow money. They just borrow a lot more of it, so much so that the total costs of their debts (interest compounding by the millisecond, of course) is greater than $26 trillion — and that’s just America.

Say you had that level of debt on a personal scale. Your credit score would be virtually nonexistent. And yet, the dollar is based on the “full faith and credit” of a government whose run its would-be credit score through the Earth’s core long ago.

Those who see this framework as unsustainable have turned to cryptocurrency as a fresh slate. No mass-scale borrowing, no fiat currency, no unsustainable interest rates, just a peer-to-peer medium of exchange based on scarcity that once defined the U.S. dollar (but no longer does). If you’re fortunate, your Bitcoin may even compound before your eyes.

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What is inflation?

“Inflation” refers to a straightforward measure: how quickly the price of goods and services increases in a given economy over a specific period of time, per Investopedia. If the cost of a mango at your local grocery store was 20 cents in the year 2000 and is 80 cents today at the same grocery store, then you’re witnessing inflation.

The Balance explains that inflation rates for specific goods and services may be different, but may generally rise or fall together given enough time. Though the cost of an iPhone may steadily rise over a significant period, the price of gas can fall during that same period. Ultimately, however, both goods will cost significantly more in 50 years, just as a car or home was substantially less expensive 50 years ago (in a dollar-for-dollar sense).

The quicker the cost of goods and services rise, the less your dollar can purchase—this, in a nutshell, is inflation. When prices rise at a rate of 50% or more in a month, then hyperinflation has set in, which generally reduces the value of a currency to the point where it has little to no purchasing power except in astronomical amounts.

One must understand the causes of inflation to fully grasp the concept of hyperinflation.

What causes inflation?

Inflation-causing behaviors taken to an extreme generally produce extreme inflation—in other words, hyperinflation.

 At its core, inflation is the result of expanding a money supply. One measure of money’s value is scarcity. When the U.S. dollar was backed by gold, scarcity was virtually guaranteed. Because paper dollars and coins were legally redeemable for gold, the amount of money in circulation was tied to the amount of gold in reserves. Those tasked with redeeming dollars for gold when requested—ostensibly the U.S. government—could not print more money than they would be able to redeem for gold at any given time.

Once a currency is decoupled from a scarce medium of exchange such as gold (America began its rejection of the Gold Standard in 1933, per HISTORY) then a government is free to print money as it pleases. 

Have mounting national debts? Print more money.

Need to bail out banks who blew a fortune lending customer deposits to high-risk borrowers? Print more money, then “lend” it to those banks.

Members of Congress deserve a pay raise? You know what to do: print more money.

Ultimately, the ever-expanding money supply means a constant decline in a currency’s scarcity, which lessens the value (i.e. purchasing power) of your dollars. This is how inflation happens. Take this expansion of the money supply to the extreme and you have hyperinflation.

Piles of German money in a Berlin bank during the post-World War I hyper-inflation. In 1923 an American dollar was worth 800 million German marks.

What are the pros of inflation?

The Federal Reserve notes that the ideal rate of inflation is 2%, or just below that mark. The stated benefits of moderate inflation are to promote economic growth and stave off deflation. The general idea is that deflation is a fate worse than inflation, as it could lead to lower prices, businesses contracting, and the economy moving backwards.

By the Fed’s thinking, inflation should produce higher wages (to keep pace with rising prices), though this may not always be the case. Another pro: as each individual dollar becomes less valuable due to inflation, the real cost of your debt decreases. That dollar in debt that you owe is now worth only 50 cents, the theory goes.

Yet, these supposed benefits are often outweighed by the downsides that occur when extreme inflation takes hold.

What are the cons of inflation?

A column published in Forbes touches on the downsides of inflation, as the author wonders openly whether America could be in for a period of hyperinflation itself. Consider the indicators correlated with extreme inflation, and whether these are characteristics of 2020 America. They include:

• A stressed government budget (The United States national debt is beyond $26 trillion and increasing rapidly by the second)
• Sociopolitical upheaval (no elaboration is necessary)
• A “collapse” of the supply of goods (McKinsey notes that the food supply is among the victims of the pandemic)
• A decline in borrowing and lending (Quartz reported earlier this year a notable decline in business loans)

The signs for extreme inflation are there, and some argue that it is only a matter of time before Americans feel the pain in their wallet directly, even more so than they already have.

The downsides of extreme inflation become abundantly clear to those who live it, and generally include:

• A higher cost of goods, often without a corresponding increase in wages to match rising prices
• Less investment and lending amidst massive economic uncertainty
• Less production of goods and services due to less business investment, which further increases prices because of scarcity of in-demand products and services
• Loss of savings because the value of each dollar saved decreases drastically
• Hoarding of goods and assets with tangible value, which further restricts supplies (think: toilet paper and ammunition in the early days of the pandemic)
• Job losses as the effect of lesser investment leads to contraction among individual businesses

Because the U.S. dollar plays a central role in the global economy, hyperinflation in America could spark a chain reaction of global financial uncertainty.

Is Crypto an alternative in times of inflation?

 Some see cryptocurrency as an answer to the volatility of unbacked, non-scarce paper currency. Cryptocurrency is scarce by design, meaning that it is not subject to the dilution caused by expanding the supply of money supply—that is, cryptocurrency is not subject to inflation as we understand it.

For this reason, many are turning to cryptocurrency as a hedge against increasingly volatile fiat currencies including the U.S. dollar.

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The revelation that the dollar is not backed by gold may spark a question: what, if not gold, is the dollar backed by? Posed in other terms: what gives the dollar value, exactly?

What Gives the U.S. Dollar Value

The answer to what gives the U.S. dollar value today is: the “full faith and credit” of the United States government. Investopedia explains that this “faith” and “credit” backing is “an unsecured method of backing debt based on trust and reputation”. The U.S. dollar was not always a faith- or credit-backed currency, but instead a gold-backed currency.

The Congressional Research Service (CRS) notes that the U.S. dollar has been “on a metallic standard of one sort or another” throughout the majority of American history. Understanding the history and logic of installing gold as a source of value for paper dollars underscores why some continue to call for a return to a commodity-backed American (and, in some cases, global) currency.

The American Numismatic Society (ANS) explains that the earliest forms of currency in America all deteriorated in value because they were not backed by gold or another commodity. While fiat paper currencies like the Continental Currency served a purpose for a time, with no real backing of intrinsic value these mediums of exchange ultimately became worthless. 

The Library of Economics and Liberty traces the roots of an American currency backed by a single metal, gold, to 1834 (though some cite 1879 as the official beginnings of the U.S. gold standard). From 1834 until the abolition of the gold standard, paper money was in most cases “not gold, but promise(d) to pay gold”. This is the crux of the gold standard: paper money’s worth was the promise that it could be exchanged at any time for gold, a commodity with intrinsic value. 

The gold standard was formalized with the Gold Standard Act of 1900, and this nationally-recognized gold standard would last until 1933. It was then that president Franklin D. Roosevelt (with the backing of Congress) discontinued creditors’ ability to demand payment for debts in gold, therefore discontinuing the gold standard as Americans knew it.

From a practical perspective, “creditors” included the average American, who was no longer permitted to receive gold from banks in exchange for their paper dollars—FDR forbade banks to make such exchanges, and went a step further when he ordered citizens to turn in to the Fed “all gold coins and gold certificates in denominations of more than $100…for other money”, as History explains.

This death knell for the gold standard was the rebirth of fiat currency in America. As with previous American fiat money, inflation and devaluation of the dollar has become a fact of life. As a consequence, some have put their faith not in the full faith and credit backing the U.S. dollar, but instead in alternative currencies with a more identifiable source of value.

What Gives Bitcoin and Cryptocurrency Value?

The features that give Bitcoin and other cryptocurrencies their value can be explained through juxtaposition with fiat currency’s limitations. 

Some historical causes of fiat currencies’ collapse include:

• The widely-held belief that a currency does not have the value necessary to purchase goods or services, which may be sparked by:
  • Economic stagnation
  • Perception that a currency is artificially overvalued
  • Rapid printing of money
• Loss of faith in government institutions and policymakers by those who provide real value to an economy (business owners, owners of real assets, those who facilitate productivity) 

The value of the U.S. dollar derives not just from American consumers’ continued faith in and reliance on the dollar, but also from other nations’ willingness to accept the dollar as a form of payment and reserve currency.

And therein lies the weakness of the fiat U.S. dollar: the dollar’s value is hyper-dependent on the actions and perceptions of humans. If you haven’t noticed, humans as a whole can be fickle and prone to irrationality, though some would argue it is rational to doubt the real value of the debt-laden U.S. dollar.

Advocates of cryptocurrencies believe that digital currencies are less vulnerable to the whims of policymakers, the Federal Reserve, and consumer attitudes and beliefs. They believe this, in part, because:

• Cryptocurrencies are generally finite and relatively scarce, and cannot be mass-produced as fiat money can be (which is generally cited as a cause for currency devaluation)
• Cryptocurrencies are not subject to certain human-controlled phenomena that, while not technically the printing of new money, can alter money’s value—think fractional reserve banking
• Cryptocurrencies are not subject to the specter of massive, ever-growing debt which looms over the U.S. dollar and many other national currencies
• Cryptocurrencies do not require third-party intervention (think banks) to be sent from one user to another as a real mechanism of value exchange

Critics may point to fluctuations in cryptocurrency prices as an indication that they are intrinsically volatile. However, the limited supply of cryptocurrency insulates it from the complete devaluation that has demolished countless fiat currencies over the course of history. This value floor has led some to liken cryptocurrency to “digital gold”.

A Time for Cryptocurrency

History has proven time and again the extreme volatility of fiat currency, from Colonial times to Weimar Germany and modern Zimbabwe. Despite perceptions to the contrary, the U.S. dollar is not immune to the inherent flaws of all fiat currencies—insurmountable debt and ceaseless deficit spending only raise the stakes of the dollar’s potential collapse.

2020 is, more than any other period in recent history, a time to consider cryptocurrency as a rebirth of the gold standard—a value-backed medium of exchange built for the digital age.

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We found out through a recent study titled Perceptions and Understanding of Money — 2020 that half of Americans may have no clue what the Federal Reserve does. And yet, the policy decisions of the Federal Reserve could have a direct effect on:

• The value of your paychecks
• The amount of money you have once you retire
• Your ability to become and remain employed
• The general state of the American economy, and by extension the global economy

The Federal Reserve has an outsize impact on the state of money in America, and the state of money in America has an outsize impact on the global financial network. You’re a part of it all, and so you may want to understand just a bit about what the Fed does and how its policies may impact your life.

Why the Federal Reserve Matters

It is not possible to explain why the Federal Reserve (commonly known as the Fed) matters without laying a basic groundwork for what the Fed is. The Board of Governors of the Federal Reserve System notes that the Fed is, at its core, the central bank of the United States.

Created in December 1913, the Federal Reserve’s purpose is to “provide the nation with a safer, more flexible, and more stable monetary and financial system”, per the Board. This stated mission means little without more context.

What the Fed Does

There are specific mechanisms that decision makers within the Federal Reserve system use to manipulate monetary policy in the United States. The Chairman of the Federal Reserve (currently Jerome “Jay” Powell) is generally the face of the Fed’s policy decisions.

In terms of influencing monetary policy, the Fed may:

• Adjust the federal funds rate (commonly known as the interest rate)
• Regulate (and thus alter) banking practices
• Make asset purchases on a scale that may influence the American economy

Interest rates are generally the metric by which the Fed’s leaders are judged, as changing the interest rate dictates the relative cost of lending and borrowing, which may heat or chill the American economic furnace.  

In addition to setting monetary policy, the Fed also provides oversight for American financial institutions (with varying degrees of success), conducts payment services like check clearing and digital payment processing, oversees the printing of money, and issues loans to banks. 

The Fed does a lot, but you may be concerned with one matter over all: how the Fed’s decisions impact your life.

How Fed Decisions May Directly Affect You

When the Fed changes the federal funds rate, it effectively alters interest rates for consumers. By doing this, the Fed may directly affect:

• The likelihood that a bank or other financial institution will issue you a loan such as a mortgage
• The terms of any loan that you are approved for
• The rate at which you accrue interest on your savings

As if these direct impacts of the Fed’s policies were not substantial enough, you could be further affected by the greater effect of interest rate changes on the economy. If Federal Reserve policy enacts a material change in economic activity, then it may dictate:

• Whether you are hired for a job
• Whether you are laid off for a job
• Whether you are forced to take a pay cut at your job
• Whether you may secure a promotion or receive a bonus
• How the stock market performs

You know better than anyone how these sort of professional consequences could affect you day to day. The global woes precipitated by the 2008 housing crisis and following recession reminded many of the importance of understanding monetary policy on some level and protecting yourself to whatever extent possible. Understanding and following Fed policy is a start to fiscal literacy.

Losing a job or feeling a sense of anxiety about your job security can take a toll on your health and general quality of life. Conversely, receiving a bonus or promotion can enhance your sense of accomplishment, security, and zest for life. In this sense, the Fed’s potential to impact you is incalculable.

When framed in these terms, it becomes clear that the Federal Reserve has a greater effect than the average person might realize. Seeing the Fed’s decisions through the lense of self interest may prompt you to pay a bit more attention to the next headline involving an interest rate hike or forecast for American economic performance.

Conclusion

You’ll be hard-pressed to get Joe American to attend a seminar, even a webinar, about the importance of the Fed. This is no knock, but is only meant to say it is tough keeping up with the Kardashians and the latest Fed-related news. 

General malaise about economic matters is not unique to America, as financial systems have become entangled webs which can induce migraines upon even surface-level examination. Plus, no news about financial institutions such as the Fed may generally be considered good news. Despite such hurdles, understanding the Fed and financial systems in general has its merits.

For some, the primary benefit of learning about the Fed is to realize the tenuousness of fiat currency and to shift some portion of their assets to more simplistic and scarce value stores such as cryptocurrency, and Bitcoin in particular.

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The average consumer is lacking an understanding of the Federal Reserve in particular, despite it being arguably the most important institution in American economics.

Our study found that 54% of respondents believe the government owns the Federal Reserve network, which is not technically true. 22% of respondents confessed not knowing who owns federal reserve banks, while 16% believe that a state-corporate partnership owns the Federal Reserve System (hyper-realists, perhaps?).

7% of respondents cited corporations as the owners of the Federal Reserve. Assuming that those who believe corporations or a corporate-state partnership own the Fed are not simply exercising a healthy cynicism, it seems clear that most Americans could use some clarity on who, exactly, lords over the Federal Reserve.

The Federal Reserve, Explained

Those who don’t have a clear understanding of who owns the Federal Reserve (the “Fed”) may not have a strong understanding of the Fed itself. The Federal Reserve is comprised of:

• The Federal Reserve Board of Governors
• 12 Federal Reserve banks
• The Federal Open Market Committee (FOMC)

The Federal Reserve System is, chiefly, the central bank of the United States. Within this seemingly-simple designation lie many duties and functions, including setting monetary policy for the United States. 

The Board of Governors is the conduit between the federal government of the United States and the Federal Reserve system. The Board of Governors has seven members who set discount rates (also known as interest rates) and requirements for what percentage of deposits banks must keep in reserves.

The Federal Open Market Committee (FOMC) has 12 members centered in New York City. Seven of the members are the Board of Governors plus the head of the Reserve Bank of New York and four rotating heads of other Reserve Banks. This Committee meets eight times per year and is said to formulate their monetary policy through these meetings.

Federal Reserve Banks Span the Nation

12 Federal Reserve Banks make up the physical network that is the national Federal Reserve System. The Reserve Banks lie within 12 geographical districts spanning the nation, and each bank services the states within its jurisdiction. While banks were originally given leeway to set their own policy, they were eventually resigned to being outlets for FOMC-set policies.

Reserve Banks do not have the impact that the Federal Open Market Committee or Board of Governors do. Reserve Bank heads alone cannot change interest rates, implement new regulations, or change reserve requirements. The Reserve Bank heads do, however, serve on the Federal Open Market Committee and so the specific presidents of Reserve Banks are important in that respect.

On an individual basis, Reserve Banks’ importance includes:

• Regulating FDIC member financial institutions within their geographical region
• Providing financial services to depository banks in their region
• Implementing Fed-dictated policy on a regional level

You can think of Federal Reserve Banks as the arms of the Federal Reserve’s greater body. You may be able to live without them, but you probably wouldn’t choose to. 

Federal Reserve Banks, and the Fed Itself, are Independent

I have a confession: the question of who owns the Federal Reserve was something of a trick one. The Democratic Staff of the Joint Economic Committee (p.4) notes that, upon the creation of the Federal Reserve, “Congress designed the Fed to be an independent agency within government.”

Independent, but of the government. Huh?

This unique arrangement essentially means that the Fed is, at least in theory, supposed to make the decisions it believes to be in the nation’s best interest without being subject to political pressures. Despite this supposed independence, Fed leadership is still “accountable to Congress”, as the Democrafti Staff puts it.

Noted features that support the view of the Fed as independent include:

• That it is not federally-funded, but instead funded by its own revenues created by lending, fees, and investments
• Long, staggered 14-year terms for Fed appointees intended to limit the impact that any single presidential administration can have on Fed policy

These features are intended to make the Fed independent, but it certainly does not make the Fed beyond reproach.

Criticisms of the Federal Reserve System

A 2009 Gallup poll found that the only federal entity Americans viewed more negatively than the Federal Reserve was the IRS. When tax collectors are the only ones you are looking down on popularity-wise, you know that you have your fair share of critics.

Some criticisms of the Fed include:

• That it is, despite its design, susceptible to political sway
• That it has an outsize impact to contribute to financial busts
• That it lacks transparency
• That it does not truly have the interests of the American people at heart, with bailouts of investment banks with taxpayer dollars being one specific critique

Critiques of the Fed, fair or not, shine a light on why cryptocurrencies have been embraced as what some see as a more trustworthy, less manipulable store of value than the U.S. dollar.

Conclusion

The Federal Reserve remains a lightning rod for criticism despite our findings that many Americans do not fully comprehend the Fed’s role in the American and global economies. The Fed shapes American monetary policy, which ultimately contributes to the ebbs and flows of global markets and economies.

Though it purports to be an independent entity, proponents of cryptocurrency often beg to differ. We argue instead that decentralization is the only true building block for financial independence.