I first heard about Bitcoin from the dark web. First, don't freak out. The dark web is a small portion of the deep web (the web not indexed by search results) that you can’t access on standard browsers and it’s also anonymous. The dark web isn’t all a place for selling drugs and getting involved in sketchy (mostly illegal) activities. Do people use the dark web for this? Sure, but people also use houses and street corners to engage in illegal activities. You get where I’m going.
So I puttered around on the dark web for a bit (I encourage you to read this article) and came across something called “Bitcoin,” the first major cryptocurrency to exist. In 2010, one Bitcoin back then was about $2. Today, Bitcoin has already surpassed $7,000. Ah, the ignorance of my youth.
So you can get a better understanding of what people are talking about when they talk about cryptocurrencies, and decide whether to add some to your portfolio, I’m going to walk you through a series on cryptocurrency. Let’s get started with the basics.
WTF is cryptocurrency?
Cryptocurrencies are digital currencies that sit on top of a technology called “blockchain.”
You’ve most likely heard of Bitcoin, which is the hottest cryptocurrency of the moment, with one Bitcoin growing in value by more than $3,000 in just the past month. Bitcoin was the first cryptocurrency that was created and is currently the highest valued, but there are other coins like Ether and Litecoin that are growing in popularity.
Cryptocurrencies are similar to fiat currencies (i.e. dollars, pesos, euros, etc.) in that their transactional functions are the same, but a notable difference is that there’s no centralized entity (like a government mint) that can majorly influence how many coins of a certain cryptocurrency are produced. For example, Bitcoin is set up so that once there are 21 million coins in circulation, coin production (or “mining”) ceases. Because of the limited supply, Bitcoin is considered scarce, which is one of the components that makes it have value.
The blockchain for cryptocurrencies is a public ledger, which is an open record of every transaction made
WTF is the Blockchain?
Think of the blockchain as a massive public record of transactions (in this case, spending or receiving money). Each block that goes on the chain is a record of a transaction and that block is encrypted, making it highly difficult to hack the block. Once a transaction completes and a block is added to the chain, no one can modify the block — not you, not another member of the transaction, not anyone. This is a part of what makes the blockchain appealing to many different industries. It cannot be modified, therefore it ensures that the record of something will withstand the test of time (at least for now).
Each time a person makes a transaction (i.e. sends or receives cryptocurrency), a network of “miners” must verify that the transaction is valid. This step is called “proof of work.” This is a big part of what makes the blockchain secure. I won’t go into it here, but if you want to understand this concept more, check out this post.
The blockchain is also decentralized, which means you don’t have to put your trust in a “benevolent” third-party financial gatekeeper. Traditionally, you go through a third party, such as a bank or PayPal, to exchange money. You're trusting these institutions to keep your money safe or make sure your transactions and data are secure. But human error and nefarious hacking makes this centralized way of storing data vulnerable to costly miscalculations and security breaches. The blockchain doesn’t ask for your data and it won’t mess up your transaction (unless you do.) You just give over your “wallet” address, which is a string of 30 numbers and letters; you can verify that your transaction through the public ledger. You only need to trust the security of the network, not the banks.
OK, cool. So get back to Bitcoin. Why is that the major one?
Bitcoin is the first cryptocurrency to come into existence. In 2009, a mystery person (or group of persons, some speculate) called “Satoshi Nakamoto” created the white paper that introduced a way to eliminate the need for third-party involvement, like banks, to exchange money. Instead, Satoshi’s new idea introduced a "purely peer-to-peer version of electronic cash.” In January 2013, the value of one Bitcoin was $13.41. Now it’s valued at more than $7,000 and predicted to reach $8,000 soon. While the market is volatile, Bitcoin’s value continues to grow, although it’s been hard for anyone to accurately predict how fast that will be and/or where it will end. There are the skeptics who say we’re experiencing a “Bitcoin bubble," much like the Dot-com bubble in the early ‘90s when the World Wide Web went more mainstream, but others see cryptocurrencies like Bitcoin as payment of the future.
Questions or want more resources? Let us know in the comments!
Laura Porter is a digital media consultant based in Washington, D.C.
Next in the series: Pros and cons of investing in cryptocurrency