A Beginner’s Guide to Cryptocurrency

You hear about it each morning in financial reports. You see it on the market ticker. You read about it in the Money section. It’s interesting because it’s unusual, even mysterious – perhaps, a little intimidating.

Cryptocurrency.

Even the name sounds exotic like the stuff zombie robots use to buy weapons in the fight against their human overlords.

Okay, calm down. We’re getting a little carried away.

In fact, cryptocurrency is just the next evolution in web commerce. And, by the way, it isn’t new. The most common form of cryptocurrency has been around for a decade.

Even so, cryptocurrency isn’t just a stack of Andrew Jacksons in digital form. To explain this new medium of exchange, we have created a list of things you should know about cryptocurrencies – especially Bitcoin.

1. Aiming for security

The “crypto” in cryptocurrency means “hidden.” Designers of cryptocurrency attempt to secure transactions by encrypting the details, including the parties and their sources of exchange value. That information can then be checked against other transactions, making it very difficult to commit fraud, steal from accounts or to create counterfeit value.

Bitcoin accomplishes this by tying transactions together into “blockchains.” These specially encrypted units are compared at regular intervals and must match one another across the network or the faulty transaction is invalidated. Banks are so impressed by this level of security, they are beginning to experiment with blockchains in their transactions, too.

2. Mystery in paradise

Bitcoin was created in the fall of 2008, although its originator remains mysterious. “Satoshi Nakamoto” is credited with writing the code. There is one small problem: This is a fictitious name. Whether one person or a team, the Bitcoin project has proven to be the most successful cryptocurrency released by far. Its market capitalization was estimated at $75.8 billion as of August 2017.

Developers and coders worldwide find the Bitcoin ecosystem an attractive place to apply their talents. As an open source system, Bitcoin opens the door to participation. Each function in the system is available for innovation. Blockchain creation credit goes to the fastest contributor. This competitive record-keeping process is called “mining.” Payment service providers assist in commercial exchanges between cryptocurrencies and standard currencies. Multiple startups have been formed to jump into the Bitcoin universe.

3. Decentralization

Where national currency values are controlled by central banks and political processes, and often behind closed doors, Bitcoin and other cryptocurrencies control basic unit values through an algorithm which is made public.

Bitcoin’s “money supply” is controlled by a planned increase in units available over time which will end with a maximum of 21 million in 2140. Sixteen and a half million Bitcoins are in circulation today.

As this money supply tightens, each Bitcoin should, in theory, become more valuable. Eventually, the smallest unit of Bitcoin measurement, the equivalent of a penny, could be useful in transactions. Just one 100-millionth of a Bitcoin, this unit is called a Satoshi.

Not all governments appreciate this approach to organizing value exchange. At least five countries have made Bitcoin illegal. Others have taken a different approach. Switzerland, Finland, and Belgium have declared Bitcoin exempt from the Value Added Tax, effectively treating it as a commodity.

4. Popular push

You may be surprised to learn of it, but more and more businesses are accepting Bitcoin as a form of payment. Microsoft, Dell, Dish – you can pay them all in Bitcoin. There are over 1,400 ATMs which use Bitcoin, most of them found in North America. In Switzerland, you can pay your taxes in Bitcoin.

Fraud, hacking and leaks make information security of prime importance for commerce. As familiarity grows, more people are likely to find the security features of Bitcoin valuable in their personal transactions.

5. Bumps in the road

While Bitcoin clearly has incredible potential as a new form of exchange, there are some issues you should understand.

The extreme security of transactions comes at a price. Experts estimate a Bitcoin transaction requires almost 4,000 times more energy than a typical credit card transaction. Furthermore, Bitcoin owners access their coins through digital “keys,” often kept in a digital “wallet.” Because owners – “addresses” in Bitcoin terminology – are only identified in encrypted code, there is no way to prove those Bitcoins are yours without your wallet. One man threw out a hard drive which held the only copy of his digital wallet – and lost 7,500 Bitcoins forever.

Further, there is no process for refunds on transactions. If you make a mistake in the amount, those extra coins are gone. An intended Bitcoin transaction worth $5 ended up costing one person $137,000, with no way to get the excess back.

Some of these “growing pains” have been exploited by criminals. Two pros at phishing stole $1 million in Bitcoins in 14 months. The potential use of Bitcoins for money laundering has also been noticed. The FBI owns 1.5% of the world’s Bitcoins.

Not surprisingly, many people are only dipping a toe into the Bitcoin ocean. While there are a few “big fish” holding Bitcoins valued in the millions of dollars, 90% of registered addresses own less than a tenth of a Bitcoin.

6. The future

In the decade since the introduction of Bitcoin, the cryptocurrency world has been marked by opportunity, volatility, and consolidation. While other cryptocurrency formats have attempted to penetrate the market, Bitcoin remains the most powerful player. When you combine the need for financial security, declining trust in governmental institutions and an ever more mobile society, it seems likely that Bitcoin and the world of cryptocurrencies will become more integrated into our everyday lives.

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