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Cryptocurrency: What do you need to know?

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Cryptocurrency has been around for a while now. Bitcoin (BTC), the most popular cryptocurrency, was launched in 2009. The first public transaction occurred a year later in 2010, when a gentleman bought two pizzas for 10,000 BTC. Hindsight is always 20/20, but as of writing this article 10,000 BTC is worth roughly $95,000,000, so this transaction would easily break the world record for most expensive pizza purchase.

You may have heard of some “buzz” words surrounding cryptocurrency like blockchain, decentralization, and miners. We’ll try to explain some of those terms in this article, but as a brief disclaimer, we are not encouraging the purchase of cryptocurrency, but rather discussing it as a subject of interest for our readers. 

We’ll start with blockchain. At its most basic level, blockchain is simply a new method of securely storing and sharing data. Bitcoin’s blockchain is shared with thousands of computers around the world and every single computer has the entire history of the blockchain. For example– let’s assume that the current blockchain only has 5 entries (transactions): A-B-C-D-E. Those 5 transactions have all been approved and every computer in the world knows that is the sequence.

So, let’s say a criminal tries to take advantage of the system and claims that he owns 5 Bitcoins. The only way he would be able to make this claim is by changing the blockchain.  He tries to submit the following transaction: A-B-C-D-F-G. The new transaction is transaction G, but he has changed the blockchain by replacing transaction E with transaction F. Since the blockchain is shared with thousands of computers around the world, when that transaction is sent off to be approved, it will be declined, because all of the systems recognize that transaction F has not occurred yet.

In reality, as of writing this article, there are 634,386 “blocks” on the blockchain, and each block contains data of roughly 1,000 transactions. Before a new transaction can be approved, data validators called “miners” must confirm that the new transaction complies with all of the existing transactions as demonstrated above. A miner can be anyone with a computer willing to try to solve the complex calculations necessary to confirm that all previous 634,386 blocks were maintained in the correct order. For properly confirming these transactions, the miner is paid for their services in cryptocurrency.

Now, let’s tie this all back to decentralization. For nearly all of developed human history, currency has been controlled by governments and banks. Governments print money and banks keep track of the financial transactions. The problem is, this leaves significant room for corruption. Governments can print as much money as they see fit, and essentially have the ability to dilute the value of their currency at their discretion. In the 1920s, German currency was so worthless due to overprinting that there are stories of people pushing wheelbarrows full of money down streets.  Robbers would steal the wheelbarrow and leave the money! More recently, in the 2000s, Zimbabwe had daily inflation rates upwards of 98%, and the inflation rate in November of 2008 alone was estimated to be 79,600,000,000%. Times were so dire, they even printed a 100 Trillion Zimbabwe note. Eventually, the country was forced to do away with its own currency and use other governments’ currencies for trade.

With cryptocurrency, there is a fixed amount of BTC available. There is currently just over 18,000,000 BTC in circulation with a maximum of 21,000,000 BTC. As there continue to be more blockchain transactions, miners are paid less and less to verify a transaction, until the value of mining a transaction reaches 0 BTC, at which point no more BTC will be distributed and users will be required to pay a transaction fee to compensate the miners for confirming each transaction.

Cryptocurrency, with the use of blockchain, bypasses the previous necessity of having a centralized database that could be corrupted or fraudulently altered. Miners are financially incentivized to make sure that all transactions are legitimate. No transactions can be manipulated, because there are thousands of computers across the world ensuring the legitimacy of the history of the blockchain in real time. The only way to manipulate the blockchain would be if one computer could override (hack into) every other computer that was monitoring the blockchain, and the odds of that have proven to be infinitesimal.

In summary, cryptocurrency is considered to be extremely secure, leverages technology in a new way, and its value is controlled by the users, not any government actor. While cryptocurrency in general has a lot of positive momentum, we have also seen the negative aspects in the extremely volatile value of the major coins (namely Bitcoin). Reports indicate that governments have been researching issuing national cryptocurrencies, which would help legitimize and improve the use of cryptocurrency, but indications are that we are still years away from any major traction in that area. Until then, it is likely going to be very difficult to use such a volatile currency in any widespread manner.