37 - Cryptocurrency (w/ Archer Harmony!)
37. Cryptocurrency
Home to near two thousand different currencies at the time of recording, cryptocurrency has pushed the boundaries on currency exchange within the last fifteen years. What is cryptocurrency? Where did the idea begin? Should you buy in? Let’s learn to be scientifically conversational.
General Learning Concepts
1) What is cryptocurrency?
a. What is a fiat currency? A currency backed by a specific government, which allows for validity of that currency in economic trade. It is not backed by physical standards (eg. Gold / silver standards), but rather stability of government and those country’s abilities to support their currency. Having a backed currency often limits the amount of currency that can be made at any one time.
i. Benefits: Flexibility involving adjusting interest rates or simply adding financial credit; does not require on finding more gold or precious metals; simplicity.
ii. Consequences: No real, concrete value; potentially unstable economies during economic instability; governmental power.
b. What is cryptocurrency? A currency not controlled by any central authority; that is, a decentralized digital currency. The name derives from cryptography (confidentiality, integrity, and authentication) and currency (c-c-c-c-cash). Essentially, it acts as an alternative form of payment without needing to have a bank, linked social security number, or credit score. [2]
c. What is Blockchain? A ledger which records transactions in a verifiable and permanent way; a list of records linked to using cryptography. It is managed by clusters of computers instead of single entities, meaning to edit the transaction would require falsifying records in millions of instances. It is transparent as a shared and immutable ledger. It does not require a fee for processing a transaction.
d. Why was cryptocurrency developed? The idea was pioneered within the 1990s, but didn’t become widespread until Satoshi Nakamoto developed Bitcoin, a peer-to-peer cash system. The importance of the new system was that it prevented “double spending”: when one uses the same digital currency to be spent once, which can result in inflation and a loss of currency trust. This is obviously not a problem for physical money, but with crypto you can deal with this issue two ways: a centralized, trusted third party to verify or a decentralized group of individuals (in bitcoin’s case, miners). [2]
2) How does cryptocurrency work?
a. Mining: Users of bitcoin can do mining; essentially, confirming transactions before they are added to the blockchain. Those who do this receive cryptocurrency for their efforts. They are required to validate transactions and guess unique code numbers called “hash”. To guess this number (a 64-digit hexadecimal number), the only method that makes sense it to calculate many numbers with computational power that would potentially match the hash. This is why there are high computing costs associated with bitcoin mining: one needs a high hash-per-second rate.
i. “Think of it like one of those competitions where you have to guess the weight of the cake - only you get unlimited guesses, and the first one to submit a correct answer wins. Whoever can make guesses at the fastest rate has a higher chance of winning.” – ITPRO.co
ii. What if I want to become a miner? You don’t have a good chance! The set-up has become quite expensive, and the rising costs of energy consumption to compete rises and potentially nullifies any gain from mined crypto. The Bitcoin network processes 5.5 quintillion hashes per second, which makes it incredibly challenging to compete with industrial operations. Often, miners will band together to pool resources and profits.
b. Supply: There is a finite number of Bitcoins that can be in circulation: 21 million, expected to be reached in 2140. The mining process allows for the rate of 25 bitcoins every ten minutes, but one can own fractions of a bitcoin. Having a finite number of a cryptocurrency helps prevent any deflation. It is a hard currency that does not represent debt, often compared to holding gold coins.
c. Crypto value: Basic economics defines a rare (scare) useful (with utility) resource as having a value, which gives it a price. Because Bitcoin is scarce (limited) and useful (merchants around the world take bitcoin as payment) it has a value. That value is not the same thing as the price; the price fluctuates as buyers and sellers believe it to be worth more or less in the future. This makes crypto volatile, almost like a stock, a currency, the price of oil. Therefore, uncertainty with crypto, the untouchable nature of the currency (by governmental agencies), market size, large crypto holders, and competing cryptocurrencies can massively change the price of bitcoin. [2]
3) Other Cryptocurrencies
a. Litecoin: Launched in 2011. Faster block generation rate, which leads to a faster transaction confirmation.
b. Ethereum: Launched in 2015. Not only a platform, but also a programing language. Also, a faster block time than bitcoin. Instead of being an exclusive alternative to money, Ethereum is a platform for applications of its own currency.
c. Ripple: Became mainstream in 2012. Does not require mining to add to its method of confirmation, which reduces computing power and network latency. Seems to have been more adopted by banks around the world, especially for international use.
d. A million others: Well, over 1,000, at least. New ones are frequently created. Many are not significant; some are not even legitimate. This leads to people playing cryptocurrencies like penny stocks: if one cryptocurrency was worth only a few cents but surged in price, an investor could theoretically become very wealthy.
4) Fun Tidbits
a. HODL: Once uttered by a drunk, online user as a way to convey the intent on holding Bitcoin instead of selling, this phrase has become incredibly popular to signify that though a coin might not be profitable today, it will be one day. These users tend to not use crypto as a stock market for profitability, but rather as an eventuality for what the world will use as currency.
b. Volatility: Bitcoin’s price has varied to a peak of nearly 20k USD per bitcoin to almost nothing when first created (cents). If you had invested 100 dollars in Bitcoin back in 2011, it could have been worth 6.5 million dollars if you had sold it all during the peak price.
5) Solicited Questions
a. Should I invest in cryptocurrency? The market is volatile and, just as stocktraders advise, it seems the true answer is that if you choose to invest you must not invest more than you can afford to lose.