But the truth is dozens of cryptocurrencies are exploding
- Msn investing
An interesting fact: The first commercial bitcoin transaction was to buy 2 pizza for 10, bitcoin in Today the same is worth $ Is the cryptocurrency bitcoin the biggest bubble in the world today, or a great investment bet on the cutting edge of new-age financial. PDF | At the time of writing this article, the Bitcoin bomb has exploded; after peaking at $ on 14 April , the value of Bitcoin has. BOVADA CDL
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You are now good to go in having these cryptocurrencies available to you for the purposes of buying, selling, and investing. Using these wallets is straightforward, but do a Google search on these or any other wallets you choose to use if you get stuck. Associated with any crypto wallet is a word seed phrase, which you obtain when you set up your wallet. If you lose the seed phrase, you lose your wallet and everything in it.
Unfortunately, paper is easily misplaced, and reports abound of people losing incredible amounts of cryptocurrency by forgetting or misplacing their seed phrase. A word of warning about wallets: unless you build your own crypto wallet, you are depending on a third party to keep the cryptocurrency in your wallet secure. Electrum has a long history, and seems to have escaped unforced security breaches forced security breaches being those where bad actors steel your wallet credentials.
But I would caution against keeping too much crypto in any one wallet associated with any one address. Diversification is probably a good idea with crypto wallets. For added security, you might want to use a hardware wallet like the Ledger Nano X or Trezor T both available on Amazon. Hardware wallets enable you to get your wallets offline except for immediate transactions. For instance, bitcoins make up the currency native to the Bitcoin blockchain, and ether make up the currency native to the Ethereum blockchain.
These are computer programs that run on cryptocurrency blockchains and allow for the creation of exchange mechanisms that transact units distinct from but also derived from the underlying cryptocurrency. The Ethereum ERC standard, at the time of writing, supports , different tokens.
One such token is the Basic Attention Token , which functions like a cryptocurrency but also like an open-source , decentralized ad exchange platform. Although the analogy is imperfect, it can help to think of the relation between tokens and cryptocurrencies as the relation for financial instruments between derivatives such as options and futures and underlying securities such as stocks and bonds. Tokens are thus built on top of crypto.
In a sense, a coin native to a cryptocurrency is also built on top of it, so by that token pun intended , tokens are the more general notion and encompass the coins that make up a cryptocurrency. Also, one more bit of nomenclature at this early point in our discussion. Imagine if a quarter of your bank account simply went missing.
The case of James Howells is particularly poignant. He began Bitcoin mining early in the game in ; Bitcoin was founded in In he inadvertently threw away the hard drive with the credentials to his Bitcoin wallet. The hard drive ended up in a landfill and he knows roughly where in the landfill it is. On it is the information that will allow him to claim 7, bitcoins, valued at half a billion dollars i.
As you start buying cryptocurrencies and moving them around between exchanges and wallets, it will feel like you are moving money remotely in the same way as with your bank through its smartphone app. But this similarity is deceiving.
Crypto wallets are vulnerable to amnesia forgetting your access credentials, typically referred to as your private key or the seed phrase that allows you to reconstruct the private key. And they are vulnerable to theft someone stealing your private key and making off with all the crypto in your wallet. Moreover, there are no laws to redress this sort of amnesia or theft.
And people pay the cost. Working with a crypto exchange offers some safety against amnesia in that an exchange will have reliable ways of identifying and contacting you, such as through your email account or cell number. But theft remains a big problem. A crypto exchange may feel like a bank, but it is not a bank.
The big difference is that with a bank, you have a trusted third party that is legally liable for your deposited funds. With crypto, whether through an exchange or through a wallet, you are much more on your own. If hackers steal the private key to your crypto wallet, you lose all the crypto in that wallet. Similarly, if hackers break into your account at a crypto exchange, you lose whatever they choose to remove.
Even at Coinbase , hackers in the fall of stole cryptocurrency from 6, of its customers largely through phishing attacks. If a crypto exchange as a whole is hacked, all the crypto assets of the exchange may be compromised. The hacking of Mt. Gox , an early Bitcoin exchange, stands out to this day. Its bankruptcy almost ruined confidence in Bitcoin. In being hacked, Mt. People who owned those BTC lost them. But the recent theft from 6, of its customers is less encouraging.
In any case, banks provide additional safety nets that are lacking in the crypto world. Yet the bank, once I pointed out the theft, restored all those stolen funds. If you accidentally wire money from your bank to the wrong account or wire the wrong amount of money, your bank will be in a position to reverse the transaction. With crypto, all transactions are irreversible, so once you send crypto, the only way to get it back is by asking the party that received your crypto to give it back.
And often that party will be anonymous, so good luck with that. Even the legal system is unclear about what it means to steal cryptocurrency. Cryptocurrency theft is a multibillion dollar a year problem, and there is no system of legal redress. Maybe the rules are all internal to the cryptocurrency, but who controls those rules and could they be changed? I have difficulty conceiving of a mere bookkeeping entry as having any value… My gut is cryptocurrencies are just self-perpetuating Ponzi schemes that could go bust if the Fed ever tightens.
One is simple dollar cost averaging , and the other requires more work trend trading. The alternative to being bullish on crypto is being neutral or bearish about it. If you are neutral, you may just ignore it. If, on the other hand, you are bearish on crypto, thinking that it is ultimately going to crash and burn, or even if you think it is going to go down significantly in the short term, then you will likely want to sell crypto short.
Short selling crypto, especially with its extreme volatility, is, however, a recipe for losing a lot of money. Short selling requires margin trading , which Coinbase no longer allows because of recent regulatory changes in the U. Coinbase is based in San Francisco. On the other hand, Binance, based in the Cayman Islands, does allow margin trading and thus short selling of crypto. They made billions when the housing market collapsed in These same hedge fund managers think that Bitcoin, and crypto in general, is a bubble that ultimately will deflate to zero.
Even so, they are unwilling to short Bitcoin on account of its volatility as well as their inability to predict the details of its expected demise. Satoshi Nakamoto, the pseudonymous inventor of Bitcoin, is thought to have mined 1. All these bitcoins have to date gone unused did Satoshi die and are they forever lost?
In that case, your simplest strategy is dollar cost averaging abbreviated DCA. In this strategy, you set aside a fixed amount of money and invest it in equal portions at regular intervals until the amount is used up. In the limiting case, this strategy involves nothing more than putting aside a fixed amount for crypto and investing it all at once, such as when it has taken a huge dip after a historic high. In actual practice, however, dollar cost averaging means setting aside a sum money, dividing it into more than one equal portions, and investing each portion at regular intervals.
In that case, you obtain 15 units of the cryptocurrency the first week, 10 the second week, 30 the third week, and 15 the fourth week. Note that in this four-week window, the cryptocurrency went up as much as it went down from the starting point, but you ended up gaining because you made back with extra during the low more than you lost during the high. As it is, the consistent pattern, at least for Bitcoin and Ethereum, is that however high these cryptocurrencies have gotten and however much they fall in value, they always eventually rebound and reach new unprecedented heights.
Or course, dollar cost averaging will make you that much more money the further down in the fall from the last high you start. If you use this strategy, set aside the money you will use, and invest it according to your plan at the regular intervals specified by your plan. To make this strategy work, you need to stay the course with it.
Even so, recognize that your ability to stay with your DCA strategy may require some courage on your part given the extreme volatility of crypto. To counter this temptation, you may want to automate the investment at each interval and ignore the investments as they are happening in real time. You therefore want to buy as the market is low and sell as it is trending up toward a peak.
Conversely, you want to sell as the market is high and buy as it is trending low toward a trough. Trend trading looks for patterns in the price movement of an asset and attempts to profit by exploiting those patterns. Does trend trading work? Some of these tools may be off the shelf, others you may need to build for yourself, and all of them will need to be continuously monitored, adapted, and updated. This can easily become a full-time job.
And even if you are successful with simulated trading showing a virtual profit , you need to make sure you stay the course with your trading strategy once your own money is on the line and thus stand to see a real profit or loss.
If you want to do trend trading, you need to do your homework. Unlike dollar cost averaging, trend trading is not something you can just jump into. You first need to learn the ropes. In trend trading there are lots of moving pieces to keep track of. This will require conditional orders such as stop and limit orders where you can automate buys and sells when prices of the crypto in question reach certain ranges within certain time frames.
One final caveat: As with dollar cost averaging, the money you set aside for trend trading should be an amount you can afford to lose, especially in the early going. Even the best trend traders make plenty of mistakes in spotting and timing trends. As a trend trader, you expect to be losing on some trades and then hope to be making it back with more on others. But if trend trading were a magic bullet, you would see a lot more successful trend traders. The competent card counter has a better than 50 percent probability of beating the casino.
A game like roulette or craps has a clearly defined probability associated with each outcome. Even securities stocks, bonds, derivatives can have clearly specified probability models that, with varying accuracy, describe the behavior of their prices over time. By contrast, cryptocurrencies live in a Wild West. In August and updated November — things move fast in the crypto world , the New York Times reported that new cryptocurrencies are created daily though most fizzle out quickly.
At the time of this writing in the late fall of , CoinMarketCap. But these numbers, as capricious as they may seem, are nonetheless way too conservative. Token Sniffer , at this time in early December , lists , tokens in total, at the current rate adding about , new tokens a month. Because cryptocurrencies are entirely digital, with their implementations and transactions moving across electronic communication channels at close to the speed of light, the creation of new cryptocurrencies can and does happen very quickly.
Nor are quickly created cryptocurrencies any less technologically sophisticated or conceptually inferior to those that constitute the gold standard of crypto, such as Bitcoin and Ethereum. The technology and functionality of the two are roughly comparable Ripple even has a big advantage in transaction speed.
Essentially, what you are paying for is the brand. Thus, except for scamcoins bogus coins with no tech infrastructure, which are designed simply to fleece early investors , the source code for these and other cryptocurrencies is readily available, easily replicated, and quickly implemented, allowing for new cryptocurrencies to be created at will and ad nauseam. It was started as a joke in , and is a minor variation of Litecoin , which in turn is a minor variation of Bitcoin see the Dogecoin Whitepaper.
Even to this day, if you visit Dogecoin. He then put it all on a website from which people could download and run the software implementation of this cryptocurrency. As it is, Palmer never made any money off of Dogecoin. He just set up the framework.
People, voting with their feet, then became nodes in the peer-to-peer network that became Dogecoin. And as that network matured and interest in crypto soared, Dogecoin became valuable, eventually reaching a fantastical market cap. Kennedy, barely survived the stock market crash of He got out of the market with little time to spare.
But the catalyst to move him out of the market occurred when a shoeshine boy gave him a stock tip. The incongruousness of the advice and of the source convinced Kennedy — if he needed further convincing — that unbridled speculation ruled the stock market, and that it was time to get out.
I had a Joseph-Kennedy moment recently in conversation with an acquaintance. But it can be hard to make sense of the money chasing crypto. Dogecoin is emblematic of the proliferation of cryptocurrencies and the absence of market forces to rein them in. Crypto-enthusiasts will often note that individual cryptocurrencies come in limited supplies and thus come with built-in protections against inflation.
Bitcoin, for instance, will only allow 21,, bitcoins ever to be created. The total supply of Dogecoin is set at ,,, This fact alone should concern any potential crypto investor. What this means, practically, is that the crypto world is constantly being diluted with new coins. In fact, three rationales readily suggest themselves for picking winners in crypto investing. Note that these need not be mutually exclusive and can even be mutually reinforcing. These rationales are widely in use, motivating investors to put money toward crypto.
Think Bitcoin and Ethereum. Think Solana. Think Shiba Inu, but also Ponzi scheme and house of cards. Of these, the first-mover advantage seems the best haven for crypto. Thus it would seem that cryptocurrencies like Bitcoin and Ethereum, because they got in on the ground floor, will continue to thrive whatever the vagaries of the rest of the crypto world. The second rationale, which looks to improvements in the implementation of cryptocurrencies has some merit.
But the problem is that any improved implementation can always be reimplemented. Indeed, the Solana whitepaper is readily available and invites such reimplementation. Of course, one might argue that Solana has a first-mover advantage in implementing its souped-up proof-of-history blockchain technology, and that this may keep copycats forever in its rear-view mirror.
But how much are you willing to risk on that possibility? Of these three rationales, the last inspires the least confidence, requiring ever increasing numbers of people to invest in crypto, which at some point must come to an end, as all Ponzi schemes eventually do. Shiba Inu is called a memecoin, but hypecoin might be a better designation. None of these rationales for investing in crypto and trying to pick winners, whether alone or in combination, is all that satisfying.
And none seems particularly sound. No probability models convincingly describe the market behavior of cryptocurrencies. Nor are there any reliable valuation methods to estimate their worth. The first rationale above i. For often strange reasons, these currencies then take off, growing wildly.
And once you get even within a few percentage points of the total market capitalization of Bitcoin or Ethereum, the crypto in question has probably roughly maxed out, with any significant rise depending on a rise of Bitcoin and Ethereum. Bitcoin and Ethereum in this way act as hard limits. At the same time, many of the other cryptocurrencies are showing significant losses.
But there are significant dependencies in the market behavior of different cryptocurrencies, which suggests that if there ever is a crisis of confidence, especially in Bitcoin and Ethereum, the losses can be catastrophic. Both tech stocks and crypto have taken serious hits. All the top cryptocurrencies, except for the stable coins, are showing palpable losses. Here are the top twenty-six cryptocurrencies as of today. Red on the right indicates loss. The only green occurs with the stable coins.
Yet despite these upheavals, with crypto losing half of its value from all time highs in recent days, confidence in crypto remains. As it is, white papers for most cryptocurrencies offer nothing so earth shattering as to distinguish them fundamentally from other cryptocurrencies. In consequence, any fundamental analysis of crypto seems impossible. In fact, many in the traditional investment business see putting money toward cryptocurrencies not as an investment so much as sheer speculation, given the violent swings in cryptocurrency prices and the attendant high probability of loss.
Munger raises here the interesting concern whether crypto is not just a bad investment but also a bad thing in general. Munger, in citing kidnappers and extortionists, suggests that cryptocurrency will behave like cash and thus bypass law enforcement. There Rogoff argues that cash facilitates crime, making possible the drug trade, human trafficking, and tax evasion.
Yes, crypto will make certain types of criminal activity easier. But criminals operate not just outside but also inside governments, and what happens when a corrupt government outlaws crypto? Cash and crypto can prevent corrupt governments from controlling and monitoring all means of exchange. To the degree that those governments are tyrannical, cash and crypto will seem good and desirable, especially to those who value human freedom.
Not coincidentally, the original impetus for developing crypto was to advance freedom and privacy. China, in September , weighed in by banning all cryptocurrencies. The more important question for this article is not the morality of crypto, but whether in its current blockchain-based incarnation it can withstand efforts of governments to shut it down. So far, governments, China notwithstanding, have tended to give crypto a free ride.
More on this concern in the final section of this article. Back to Buffet and Munger. As traditional investors, they were slow to embrace technology stocks. Indeed, Buffet neatly sidestepped the Dot-com Bubble of by not investing in internet companies. So their negativity toward crypto is not entirely surprising. Elon Musk readily comes to mind. His one reservation about crypto, and Bitcoin in particular, is that the mining of crypto is not environmentally friendly, requiring too much energy consumption.
Except for the environmental cost of Bitcoin more on that later , he would accept bitcoins in payment for Tesla automobiles. I first learned of Bitcoin in from a computer science colleague when this cryptocurrency was in its infancy. I bought some bitcoins and ether a few years later when the price was ridiculously low by present standards, not as an investment so much as to learn by experience how crypto exchanges and crypto wallets worked such as by sending myself crypto from one wallet to another.
I never sold, and thus made a phenomenal return. The manias of the past seem different. Mackay focuses especially on economic bubbles, showing just how far off the deep end people can go in driving up the price of things to ridiculous heights where they are unsustainable and come crashing down. Past economic manias tend to show a sharp rise followed by a sharp fall, with death being permanent after the fall.
But with the Mississippi Company and Dutch tulips, people eventually came to their senses, and the object of the mania came crashing down never to be resurrected. Cryptocurrencies feel different. They inspire a lot of interesting ideas and technologies. A lot of very bright people are working on them. And new applications and implementations of cryptocurrencies are constantly being invented.
Should you, then, be bullish on crypto, thinking it will keep going up in value? But which crypto? The major coins like Bitcoin and Ethereum? These seem to keep hitting unprecedent highs, and so staying bullish on them seems not totally unreasonable. That said, some other coins have in recent days seen much more dramatic increases than either Bitcoin or Ethereum. Take, for instance, Solana and Shiba Inu, both of which have seen several hundred-fold increases in the last year and a half. But are Solana and Shiba Inu poised to be the next Bitcoin and Ethereum, or are they on their way to becoming more like Filecoin and Zcash, which have seen their best days and are looking at steady decline?
Why do some crypto coins keep going up in value, why do some outstrip others, and why do some fizzle out? Such questions admit at best partial answers in terms of the rationales and rules of thumb given above. The question you, as a crypto investor, need to be asking yourself is whether crypto constitutes a sufficiently robust economic innovation that it will keep gathering momentum in the long run.
A cryptocurrency is not just an electronic or digital form of money, even if the two are often confused and even though they all use cryptography to secure transactions. For something to be a full-fledged cryptocurrency, it must satisfy the following four conditions.
Spoiler alert: Bitcoin, created in , was the first cryptocurrency to satisfy these conditions. It must be self-contained, not requiring recourse to some other already existing currency; It must allow people to use the cryptocurrency with nothing more than a public and private cryptographic key; It must have a mechanism for controlling the proliferation of the currency; and It must function without a third party being able to deny transactions for reasons extrinsic to the transaction protocol.
The first point about a cryptocurrency being self-contained instantly separates it from the ecash and digital forms of money that predated Bitcoin. Essentially, all the precursors to Bitcoin were payment schemes denominated in a conventional currency such as U.
Payments would be transmitted using cryptographic protocols, perhaps with tokens, but in the end they always had to be unpacked in terms of the conventional currency. Bit gold was a proof-of-work system, and it drew inspiration from Hashcash , which had been developed in Perhaps misnamed, Hashcash was never actually a currency or cash but rather a way of compelling internet users to prove that they had done some computational work in order for an electronic communication such as an email to get through to an intended user.
Without this proof of work, the communication would be automatically ignored. But bit gold lacked the immutable decentralized ledger of blockchain and depended on one computational puzzle to be solved before the next could be solved, rendering it unwieldy. Back in the s and s smart cards were often used to handle financial transactions. Once the Web really started to take off in the mid s, many worried that credit card transactions over the Web would be too insecure to rule out massive fraud.
DigiCash ended up going bankrupt in , but Chaum did introduce a memorable idea with it, namely, the use of blind signatures to maintain anonymity by rendering payments untraceable. Interestingly, one of the most successful digital payment schemes was developed the year DigiCash went bust: PayPal. With the rise of the smartphone, conducting financial transactions digitally has become ever easier, as we see with services like Venmo a PayPal subsidiary and Zelle owned by some of our big banks such as Bank of America and Wells Fargo.
But in the end, conventional money running through a central source must be used to make these systems work. Conventional money needs be front-loaded or guaranteed via a promissory note to ensure that adequate funds are in place, which can then be securely transferred, perhaps via digital tokens, to complete the transaction.
They were cypherpunks , who wanted to use cryptography to ensure privacy, especially in remaining free of government and corporate surveillance. Moreover, they distrusted conventional fiat currency and were looking for an alternative to it, one that was fully decentralized. David Chaum was a key player in this movement, and his idea of blind signatures was designed to ensure anonymity and privacy.
Blind signatures gave buyers anonymity by getting banks to digitally sign and thereby authorize transfers of money, but because the signatures were blind, transactions involving DigiCash would be untraceable back to the buyer. DigiCash, in giving banks and established financial institutions the authority to transfer money through blind signatures, centralized its digital currency.
In the evolution of cryptocurrencies, however, the move was to eliminate such centralized trusted third parties. Before , when the pseudonymous Satoshi Nakamoto published his white paper on Bitcoin , all the digital money schemes that had been proposed either fell flat or merely expanded the transactional range of conventional currency fiat money.
So what finally happened in that made Bitcoin the revolution in money that it is? A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution. Digital signatures provide part of the solution, but the main benefits are lost if a trusted third party is still required to prevent double-spending. We propose a solution to the double-spending problem using a peer-to-peer network.
The network timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work, forming a record that cannot be changed without redoing the proof-of-work. The longest chain not only serves as proof of the sequence of events witnessed, but proof that it came from the largest pool of CPU power. The network itself requires minimal structure.
Messages are broadcast on a best effort basis, and nodes can leave and rejoin the network at will, accepting the longest proof-of-work chain as proof of what happened while they were gone. Digital signatures are essential to all cryptocurrencies in that they enable one party to securely sign over currency to another party.
Digital signatures became possible with a crucial breakthrough in cryptography that happened in the s. In , Whitfield Diffie and Martin Hellman proposed the idea of public-key cryptography , which was then followed quickly in , through the work of Ron Rivest, Adi Shamir, and Leonard Adleman, with the first successful implementation of this idea, namely, the RSA public-key cryptosystem.
Consider a Caesar Cipher , where you treat the letters of the alphabet as positioned evenly around a circular wheel, and then move every letter a fixed number around the wheel. If encrypting a text means moving the wheel a fixed number clockwise, then decrypting it means moving the wheel that same fixed number counterclockwise. Cryptographic schemes developed through most of human history have been a lot more complicated than the Caesar cipher, but they all shared this feature of being able easily to reconstruct encryption from decryption and vice versa.
Public-key cryptography eliminated this symmetry so that decryption could for all practical purposes not be reconstructed from encryption. Public-key cryptography depends on this asymmetry between public and private keys. Such a scheme would be useful for spies in the field, who no longer had to worry about their cryptosystem being compromised in case their public key was discovered.
But it quickly became clear to cryptographers that private keys could be applied to messages and thereby show that only someone who knew the private key had indeed applied that key to the message. How so? Because the public key would be widely available, and by applying the public key after the private key had been applied, one would not only recover the original message but also demonstrate that the private key had indeed been applied.
And who else could apply the private key except its owner? Just as a physical signature is unique to the person writing it, so digital signatures would be unique to the person knowing the private key. Hashing, or cryptographic hash functions , can be thought of as assigning a digital fingerprint to data. Bitcoin uses the hash function SHA Unlike physical cash, a digital token consists of a digital file that can be duplicated or falsified. Do this but make no further change to the text.
Now the hash that gets returned is 4b5ea01f cab3f 1cd4e5cd 6f7b4ed4 61f41b9e ebbfd a5e0b11a 1f60d84b Even though the two texts strings to which SHA was here applied are very similar semantically as well as by any information-theoretic metric for determining similarity of symbol strings , the outputted hash values are very very different. Hashing thus guarantees data integrity and data origination. Digital signatures and hashing represent the foundation pillars for Bitcoin. They are the conceptual breakthroughs in computer science that make Bitcoin possible.
Peer-to-peer networks are well understood, with successful implementations of them going at least as far back as with the original Napster not to be confused with the music streaming service previously called Real Rhapsody and renamed Napster when Roxio acquired the Napster brand and logo. A peer-to-peer network is a networked collection of computers, run by people or groups of people, known as nodes, that interact according to certain mutually agreed upon protocols.
Bitcoin introduced peer-to-peer networks to eliminate trusted third parties, such as banks and credit card companies. Decentralization guarantees that with a large number of nodes, no individual node will be able to subvert the network in the way that a centralized authority might be able to subvert a payment scheme. Majority of CPU power in the Satoshi abstract identifies the main potential point of failure for Bitcoin. A majority of CPU power, if cooperating in an attack on the network, could subvert it.
Traditional trusted third parties are like monarchies. A competent and benevolent monarch can keep a monetary scheme moving forward happily. Peer-to-peer networks promise instead a democracy. Yet even though moving to a peer-to-peer network can safeguard against one or a few bad actors, democracies invariably depend on the good will of the majority.
And what if the majority turns bad? What if, for instance, governments hostile to Bitcoin start turning up their CPU power to such a degree that they assume the role of the majority and subvert the network one can imagine cubicle after cubicle at the NSA serving as nodes on the network? The question facing Bitcoin is whether trust in its peer-to-peer network is misplaced. Even so, the term block appears often in the actual paper and the terms ongoing chain and record that cannot be changed appear in the abstract.
These all refer to the same idea, namely, a cryptocurrency blockchain , or simply blockchain. A blockchain is a ledger of transactions that grows in real time and that is validated at the end of each block, so that each existing block as well as the entire chain of blocks to date is validated in the form of a Merkle tree. Validation takes the form of hashing applied to blocks individually as well as across blocks, and thus ensures that the ledger formulated as a blockchain has not been tampered with such as someone modifying bookkeeping entries for past transactions.
Cryptocurrency blockchains constitute a complete record of all transactions ever conducted in the underlying cryptocurrency. Proof of work is the final piece of the Bitcoin puzzle. A question that naturally arises is why nodes and the people working them on the Bitcoin network should want to maintain the network in the first place, facilitating transactions and keeping a record of them.
Bitcoin uses a proof-of-work consensus mechanism where miners those nodes that maintain and govern the network engage in solving computational puzzles recall Hashcash that calculate the winning hash that validates the most recent block and thereby are awarded bitcoins.
Note that nodes are also incentivized to maintain the network because of transaction fees in moving bitcoins from one wallet to another. As it is, only one miner is awarded bitcoins in validating any given block, with a new block being validated ever ten minutes.
Winning miners are decided by whichever node best solves the computational puzzle which roughly consists of finding a block hash with the most leading zeros. When Bitcoin started in , 50 bitcoins were awarded to winning block hashes. This number gets divided by two every four years so that in it went down to 25, in it went down to The resulting geometric progression ensures that the total number of bitcoins ever produced cannot exceed 21 million.
All the blockchain-based cryptocurrencies that have succeeded Bitcoin, from Ethereum to Solana, satisfy these conditions as well. Some use proof of stake or proof of history or proof of something-or-other rather than proof of work as their consensus mechanism and way to incentivize the maintenance and advancement of the underlying blockchain proof of stake being the most common alternative to proof of work.
The one exception to these four conditions in the post-Bitcoin world is what are know as stablecoins. Stablecoins violate the first of these conditions. In any case, stablecoins are there to assist full-fledged cryptocurrencies by allowing quick convertibility into both crypto and conventional currency.
Satoshi Nakamoto, whoever he is, did not invent any fundamentally new concept of computer science or cryptography. Nonetheless, in creatively putting together existing concepts from these fields and thereby creating the first full-fledged cryptocurrency, one that to this day dominates the crypto world Bitcoin , his influence is enormous.
For his impact, he surely deserves the Nobel Prize in economics. Unless he is dead or incapacitated, perhaps awarding him the prize would draw him out of hiding. They do novel things in the world of finance that many people want, such as allow for anonymous exchanges of digital currency that feel a lot like exchanges of ordinary cash.
They promise to bypass intrusive government control. At the same time, cryptocurrencies raise a lot of concerns, some of which I touched on in section 1. The biggest concern for me personally with blockchain-based cryptocurrencies as they exist now is that they may in fact represent an immature technology, and thus in the end may give way to a better form of cryptocurrency.
Just as the automobile did away with the horse and buggy, such a superior cryptocurrency of the future could do away with cryptocurrencies of the present by greatly devaluing them or even sending them to zero. Even so, in this section I want to consider some of the features of existing cryptocurrencies that commend them and that even in their present form are making them a revolution in money and finance.
At the same time, I want to point out some of the fault lines that may make this revolution less than totally successful. More strikingly, in early June of , the El Salvador government approved Bitcoin as legal tender. Since then, Bitcoin has become ever more entrenched in the El Salvadoran economy. In October , Bloomberg reported : Adoption of the cryptocurrency is a way for Salvadorans to access more payment methods in a nation where more than three-quarters of citizens are unbanked, [according to central bank President Douglas Rodriguez].
He called it a means of inclusion for those whom the financial industry deems too low-income or high-risk. Rodriguez reiterated that use of the cryptocurrency was optional and expected it to be used alongside the U. The next step for the government is providing Salvadorans living in the U.
Doing so could offer a cheaper way for those living abroad to send money back to El Salvador, Rodriguez added. To make things more efficient, Litecoin was released in as an alternative, and so were others like Bitcoin cash. These function in a similar way but were designed to have faster transaction times.
The currency used by the app developers and users is a token called Ether. However, the power requirements demanded by the PoW blockchain system, equivalent to a small country like Sweden, are proving problematic. Story continues The PoS system is more scalable. Proof of Stake gets its name because participating nodes use their own cryptocurrency holdings as a deposit for transactions.
This makes processing speeds faster and should avoid some of the bottlenecks of PoW. These two currency types are defined by the technology used. They exist as part of an existing blockchain, such as an Ether token for Ethereum. They represent value but only in the system for which they were created.
This makes them vulnerable to the problems with their ecosystem. There are thousands of tokens currently in existence. Finally, there are Stablecoins. These exist to combat one of the main drawbacks of cryptocurrencies — volatility. Stablecoins are linked to fiat currency or gold for stability. They are a hybrid between standard cryptocurrencies and tokens. Where can you learn more about cryptocurrencies, and how can you get involved?
To an outsider, cryptocurrency can be confusing and seem overly complex. However, organizations and platforms are springing up that are trying to help people enter the crypto world. Some of them even include online academies, a market with the major currencies, and a secure wallet to store the coins.
An excellent example of this all-in-one approach is Spanish-based Bit2Me. So, we started our own academy.
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