This will be part of a multiple post series on cryptocurrencies.  Disclaimer: My strengths do not lie in cryptography, coding, or computer science, so I will examine this from a purely financial/economics perspective.

The mainstream media loves to dogpile Bitcoin like a concussed NFL quarterback at any and every opportunity.  In fact, one of the few times the media was actually somewhat positive on the currency was during their flurry of reporting activity at the height of the 2013 bubble (which was a real Joe Kennedy moment for anyone paying attention). I believe Bitcoin really is a revolutionary technology.  I’ll explain why, but firstly, for the non-tech. savvy, or those who are late to the party, what is it?

It’s been a while since my dalliances in Bitcoin, and I am by no means an expert, but I understand the basics.  This is a somewhat complex technological solution to a real world problem, so I cannot really get into the specific details here.  I will, however, post links at the bottom of this article for anyone who is interested to learn more.

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Satoshi scores a touchdown prior to getting wrecked by the media.

How Bitcoin Works.

If you read nothing else, past this point, consider Bitcoin to be like an encrypted email monetary system of the internet.  Below I will explore it in a little more depth.

In very vague and not-so-technical terms, Bitcoin is a 100% decentralized electronic currency which is based on cryptography and mathematics.  Electronic devices known as “miners” do computational work in the form of complex mathematical calculations and upon solving, they broadcast the solution to other market participants in the network for confirmation.  When the participants in the network are in consensus the transaction of the Bitcoin is considered to be legitimate.

This is all carried out over a peer-to-peer network, much like the type of arrangement for torrent download, or (for anyone who remembers back long enough) Napster.  Every market participant keeps a copy of a network verified ledger called the “Blockchain” stored upon their device, making the system entirely transparent, but the system is layered with encryption which provides pseudo-anonymity.

The difficulty of the work become exponentially more difficult as more and more bitcoins are added and the number of remaining Bitcoins left to be “mined” will decline.  It bears stating that while Bitcoins are finite, they are divisible, so you can trade Bitcoins in decimal units (0.325 BTC, 0.0002 BTC etc.)

Another thing worth mentioning is that the code behind Bitcoin is open source.

Bitcoin’s creator was anonymous, taking the pseudonym Satoshi Nakamoto. While some have speculated that this recently arrested Australian is the true Satoshi, it is unlikely that we will ever know for sure.

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The mainstream media hard at work. Cryptocurrency, as with any new technology, is likely to be loved by some and loathed by others.

 

So what’s the big fuss?

Well, Bitcoin has several innovative aspects to it:

  • Transparency: As stated before, Bitcoin is transparent in the sense that every single transaction is recorded on the ledger.  It gets a bad reputation for being the currency of choice for smugglers and criminals.  I would posit that this isn’t true.  Bitcoin is pseudo-anonymous, and generally I would imagine that most criminals still fund their activity in traditional currencies.
  • Decentralization: Bitcoin is borderless, in the sense that the market literally spans the world. There are no specific statist interests behind the currency that I am aware of.
  • Faster Transactions (currently): Transactions on average take around 30 minutes to complete, as proof-of-stake is still needed.  More on this in another post.
  • Lower Transaction Fees: The banking sector extracts fees for processing payments, Bitcoin cuts the costs of these fees substantially. Or at least, provides competition which will suppress banking fee costs. Which is a direct result of…
  • Solves the Double Spending ProblemYes, the underlying technology actually solves a problem which, before 2009, was an issue for electronic cash transfers.  This is really the crowning achievement of the underlying technology.

 

Conclusion:

Whether you believe that cryptocurrency will be the dawn of a new golden age in transparency and economic development, or will be squashed like a bug, I posit that the underlying technology will have a lasting legacy on the world.  In fact, given that the titanic banking system has now woken up to cryptocurrency’s existence, this is practically assured.

Below are some links and videos for further reading and deeper understanding of what Bitcoin, Bitcoin mining is and what the Blockchain is.

 

See here for the Wikipedia article on mining.

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