Cryptocurrency, as you have surely deduced, is derived from ‘cryptography’ and ‘currency’. It’s function is currency and its language is cryptography.
Cryptography is the art of solving codes.
Highly complex codes which would take the average human weeks, months or years to solve can be solved by computers in a matter of minutes.
At present there are hundreds of cryptocurrencies in circulation, often referred to as digital currency. The most famous being Bitcoin.
The Bitcoin whitepaper was published in 2008 authored using the pseudonym Satoshi Nakamoto. Satoshi is believed to be a collective of coders but very little is known about the exact identity(ies). On 3 January 2009 Satoshi created the Bitcoin genesis block.
Mining is the process of providing computing power to secure the Bitcoin Blockchain. It also serves to cryptographically timestamp transactions. The use of that power is rewarded with Bitcoins.
Blockchain refers to the public ledger that verifies and assigns all Bitcoins in circulation. The physical Blockchain is the hardware that powers the network and stores the data. The substance or data contained in the Blockchain is the allocation (through digital consensus) of where Bitcoins of varying value are assigned to specific addresses. Essentially a worldwide public ledger.
In future posts we will investigate the methods by which the network is secured. In one sentence, it is multi-nodal cryptographic verification.
The supply of Bitcoins is modeled on the characteristics of gold or other finite and scarce natural resources. It can only be issued by network consensus which is how decentralization is achieved. The important aspects to understand are that the supply is diminishing (which gives Bitcoin scarcity), ends in 2140 and will total ~21 million Bitcoins on completion. Currently there are ~16 million BTC in circulation. This number increases each time a Block is completed.
As we progress we will learn more about the mechanics that the system operates on. We will learn about privacy, security, and how decentralization underpins the entire system.
We will begin to understand how the Bitcoin Blockchain is immutable and, uncontrollable.
We will investigate cryptocurrency exchanges, alternative cryptos, digital storage, and the plethora of new developments that are germinating each day.
This is the future; and it’s wonderful! Won’t you please come and join us?
One thought on “What is Cryptocurrency?”
I was a sceptic for a long time, not bothering to take the time to understand what the real value behind cryptocurrency was. However, the whole concept clicked into place for me when I understood one thing: the world needs a means by which to store value. What do I mean by that? For any person, 100 hours of hard work in an economy should retain its value through time and across countries.
Here is the picture of how the world currently works:
You dedicate 100 hours of work, building a house, teaching a class etc. and in return you get paid $1000. You decide to hold on to that money – put it in a bank account to earn “interest”. In 5 years’ time, that $1000 may have earned interest, but it also would have been eroded by inflation. So theoretically, it would still have the same spending power it had 5 years prior. But that is not true.
First, you are subject to concepts like monetary easing, where the central banks can exponentially devalue your $1000. You are subject to exchange rate fluctuations which are determined by political factors like currency wars or Jacob Zuma firing the finance minister on a whim. You are also at risk of the government deciding to take a bunch of your money if the ECB demands it does so (Cyprus/Greece etc.).
So, in order to have the same purchasing power you did 5 years ago, you essentially need to work MORE today. Your work 5 years prior, has not diminished in what it produced for society or the economy, but what u received for it has. That means that there has been no store of value. That is why people are stuck in a constant search for ways to “invest”.
Gold has successfully been a store of value throughout the years. One should not think of the value of gold in $ terms. That is more of an indication of the weakness of the $. Instead, look at how an ounce of gold has always been able to purchase a man’s work suit and 100 ounces has always been able to buy an average home. So if you were paid 100 ounces of gold 20 years ago, you can still buy the same home even if you didn’t “invest” what you were paid. The fact that gold’s value has increased against the $, just means in that the $ is being made exceptionally weak by all the factors listed above.
Cryptocurrency, like gold, is a way out of the trap. It removes all the external factors of politics, it is finite (like gold) and, while it will fluctuate considerably in the near term, as it gains in adoption and popularity, it will almost certainly become the store of value that the world is desperate for.
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