Cryptocurrency 101: Why the Hype?

Breaking Down Bitcoin’s Background

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All money is a store of value that you can exchange for goods or services. Since ancient times, that value was recognized with precious metals, like gold and silver. These metals are hard to get, you have to dig the right ore, smelt that ore, and refine the metals for use. Jewels had value also, because up until modern times, nobody could make real ones.

Metals could be made into coins or decorative items, jewels were very rare and had higher values. Paper currency evolved because rich people were inconvenienced. It was annoying to cart around heavy trunks to buy something big. They got together and agreed to honor “notes” between them, redeemable in coins locally.

Ways were found to rig the system though. Shaving a bit off coins and keeping the shavings, minting your own coins with cheaper metals but plating with good metals, etc. Paper money was more complicated to forge and had no intrinsic value of it’s own, only in the promise of it’s issuer to exchange it for “real” money.

Once countries started to mismanage how much currency they issued, they dropped the precious metal backing standards altogether. This “fiat” (Latin for “by decree”) money was the current standard. Some countries abuse it more heavily than others and get hyper-inflation and collapses followed by regime changes over it. See Zimbabwe and Venezuela, still in progress. America and other stable countries try to limit how much is released via some formulas that their economists believe in.

In the US, money used to be gold and silver, now fiat, only backed by “the full faith and credit” of the government. If we didn’t have a lot of investments worldwide and the firepower to protect them, it would be “religious literature,” no more than that. Such a dubious system seems to work, if only because there has been no other available.

The Emergence of Cyptocurrency

In 2008, some people discussed electronic money and how to best implement it so that you didn’t have to trust a government or a bank to buy and sell stuff with something of value. The reason it supposedly has value is that every “Bitcoin” or other version of cryptocurrency depends on solving a unique math problem using computers. They call the process of finding these solutions “crypto mining”.

In 2009, a computer guy calling himself “Satoshi Nakamoto” (not his real name) published a white paper outlining a mechanism for doing such a thing. Read it only if math and computer theory skills are something you possess. In 2010 it was made real. People started mining and spending Bitcoin, which started at a low joke value. One of the first programmers convinced a guy to sell him a pizza for 10,000 Bitcoin. If he held on to them, they’d be worth many millions today.

It would be instructive at this point to say that Bitcoin and other crypto-currencies aren’t physical objects. You have to download them into a digital “wallet.” There is cryptography involved at this point. You are given a set of numeric values. These are called your Public and Private “Keys.” Your Bitcoin (or fraction thereof) is kept in a computer file called a “blockchain” (kind of a verifiable ledger) with your Public Key listed along with it. When you make a transaction, i.e. buy something, you transfer a number of coins or a fraction of a coin to someone else’s wallet. You are asked for a confirmation identifier made by using both your Public and Private keys in an equation. This produces a verification that can only come out right if you have both keys and the transaction goes through.

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It gets more complex of course. The way mining is done, the number of Bitcoins that can ever be mined is capped by the math applied at about 21 million. Some Bitcoins get lost by forgotten keys, some from hackers in the early stages. Hopefully those issues are fixed now. The values of the existing Bitcoins should, over time, trend to a level number once you can get no more, just share what is there.

Of course each Bitcoin in theory can be broken up into 10,000 separately own-able pieces (called “Satoshis” to honor the inventor). That means 21 million times 10,000, or about 210 billion units of value, with Bitcoin alone. Other cryptocurrencies have similar limits.

Since 2010, the price on the open market has fluctuated wildly. Currently at the writing of this article the price conversion is about $10,941.40 per Bitcoin. At this point I should mention that there are a lot of other cryptocurrencies out there. Most have been made by copying Bitcoin’s open source code base. Those symbols above represent other flavors of it. They have names like Dash, Bitcoin-Cash, Ethereum, and Monero. All are competing to be a chosen currency of the internet user.

Crypto Assets

The IRS, by the way, considers crypto an asset. They already have raided one crypto exchange to get the real names of bigger users and expect any gains made to be listed on tax returns. Since there are other exchanges, one can assume for now that they can’t monitor all of it. Some in many governments would like to establish more control over the phenomenon. Whether they can succeed or not is another matter.

Keep in mind that crypto is currently in its starting decade and very unstable. People have gained lots but also have lost a lot of money. Since it’s value is supposedly based on math-assured scarcity and not on faith in a government or bank, maybe it will survive and thrive. For that same reason it might be destroyed by the collective action of those same governments if they can do it. It’s still a wildcard in the game. Good luck!

Karl Donaldson
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