Cryptocurrency 101

by - 5 min read

Cryptocurrency 101

by admin - 5 min read

by admin


rapper 50 Cent released his album Animal Ambition in 2014. At the time, he let people buy the album using Bitcoin, taking a chance on the cryptocurrency before most people even knew what it was. Back then, a single Bitcoin was worth only $662. The album didn’t do so well either, pulling in a total value of roughly $463,000 in Bitcoins. The currency sat dormant in his account for years, until he recently discovered he’s a Bitcoin millionaire, 50 Cent’s earnings are now worth $7 million to $8.5 million, based on the current fluctuating Bitcoin valuation. “Not bad from a kid from the south side,” he posted on Instagram, admitting that he forgot about the decision he made four years ago. Thanks to Satoshi Nakamoto, the unknown inventor of Bitcoin (though the name may be an alias), 50 Cent accidentally made millions.

Nakamoto didn’t intend to create a currency when he created the now-renowned Bitcoin. What came out of a digital cash system project found its way to the mainstream, and quickly became the global phenomenon that is cryptocurrency:

“Announcing the first release of Bitcoin, a new electronic cash system that uses a peer-to-peer network to prevent double-spending. It’s completely decentralized with no server or central authority.”

-Satoshi Nakamoto announcing Bitcoin on SourceForge (an open-source software platform) in January, 2009.

While not understood by most people, many of us now are aware of cryptocurrency. Cryptocurrency is a form of digital money that is designed to be secure and, in many cases, anonymous. It utilizes cryptography, something that came out of a need for secure communication in World War II. In its basic stages, it was the process of converting legible information into an almost uncrackable code, for the purpose of tracking purchases and transfers. The internet and digital technology, combined with mathematical theory and computer science, evolved cryptography into a way to secure currency, information, and communications online. Along with the Bitcoin boom, over a thousand alternative cryptocurrencies have secured their position in the cryptocurrency universe, namely Ethereum and Ripple (the latter of which increased in value tenfold in one month), among others.

In short, cryptocurrency (we’ll use Bitcoin as an example), is a digital and global money system. The system itself allows people to send or receive currency across the internet. Everyone using the system is called a “peer”, and money is exchanged without being linked to a real-world identity. If your name is John, you’re not John in the system, but rather an “identifier consisting of 26-35 alphanumeric characters,” (e.g. 1BvBMSEstWetqTFn5Au4m4GFg7xJaNVN2). This sequence of numbers is called an “address”, and can be generated for each peer without any cost (though if you wanted, you could link your name to your address). If someone on the system wants to send you money, they send it to your address.

Each address has two pieces of cryptographic keys: a public key and a private key. A public key is like an ID number, you give it to people so they know where to send you the currency. The private key is secret, like a password. Only with this can the owner send their Bitcoins. In a sense, it’s used to sign the transactions. So, someone can send money to your public key, and you can use your private key to access your Bitcoins to send money to them (specifically to their public key), more or less like an e-transfer.

A blockchain is the database used to keep a record of all the transactions that have taken place in the Bitcoin network. It also keeps track of new Bitcoins as they are generated. With both these pieces of information, the blockchain can keep track of who has how much money at all times. (For more clarity on blockchains, here is a breakdown.)

The Bitcoins themselves are generated by “miners”. They do this by solving a math problem, and the level of difficulty of each problem depends on the amount of people purchasing Bitcoin at the time. These complex problems require extremely powerful processers to solve them, and the process is called “mining”.

There are also digital “wallets” which cryptocurrency users can purchase to keep track of all their public and private addresses. Since you can have as many addresses as you want, it can get hard to manage multiple accounts. It’s easier to hold all this information in one place, just like a real wallet would. (If you still don’t understand cryptocurrency, here’s an even simpler explanation from Coindesk.com.)

There are a few more unique elements of cryptocurrency worth noting:

  • No permission needed: Anyone can download the software for free. After installation, you can receive and send cryptocurrency to your heart’s content. There is no gatekeeper, and no one can stop you.
  • Instant transactions: Since transactions happen in a global network of computers, it doesn’t matter if you send funds to someone on the other side of the world or someone in your own house. The transactions are instant in the network and confirmed within a few minutes, regardless of your physical location.
  • It is irreversible: A transaction can’t be reversed by anyone. After confirmation, there’s no way of getting your money back. As well, there’s no safety net if you sent your funds to a scammer. Also, be sure not to lose your address. 50 Cent got lucky he could remember his address, but several people have lost out on potentially hefty amounts simply because they lost theirs or forgot where it was. Due to the nature of cryptocurrency, it’s now gone forever.
  • It’s decentralized: Nakamoto found a way to build a decentralized digital cash system, something people have failed to do for years, until now. A defining feature of cryptocurrency, its decentralized nature means it’s not issued by any central authority, making it tentatively closed from government interference. This also means that no banks are involved. As it stands now, Bitcoins are not issued or regulated by any bank or government.

Although cryptocurrencies are meant to be used as currency, people are mostly interested in trading the cryptocurrencies themselves, just like stocks. However, if you are looking to invest, be wary of its fluctuating value. As cautioned by multiple experts including Jim Cramer of CNBC’s Mad Money, cryptocurrency is more of a gamble than an investment. Canada’s Securities Administrators also issued a special warning about the high level of risk associated with digital currency­- linked products. According to Inverse.com, what was once dirt-cheap cryptocurrency in early 2009, “experienced a sudden surge in price towards the end of 2017, reached a record high of $19,783, and then ended the year down at $13,889.” Self-made millionaire Tony Robbins told CNBC’s Fast Money that Bitcoin is like going to Vegas — only bet what you can afford to lose.

As for the future of cryptocurrencies, it’s impossible to tell if it will eventually become part of the real-world economy, or if it’s just a massive bubble. Currently, no government has officially accepted the system. However, giant companies such as IBM have already started adopting the blockchain technology, and if investors continue to back cryptocurrencies for the long run, there may come a point in time when blockchain based economies become a reality.


 

Helen Jacob | Staff Writer

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