What is “Cryptocurrency” and “Blockchain”?
Everybody has heard of “Bitcoin” and “Cryptocurrency” these days, but few can explain in detail what these buzzwords mean. We’re here to provide a detailed guide about blockchain technologies like Bitcoin for traders. You’ve likely traded other assets in the past and want to learn about Bitcoin for a future place in your portfolio. Let’s start by examining “What is Bitcoin?”.
What is Bitcoin?
Let’s define Bitcoin. Bitcoin is a digital currency that can be used by anyone with an internet connection. The Bitcoin protocol is a piece of software run simultaneously by thousands of people around the world. Bitcoin “miners” use computers to perform functions within this global software, such as security and fraud prevention. Bitcoin miners also introduce new “Bitcoin” (both the name of the currency and the global technology network upon which it is based) to the cryptocurrency market, which can then be bought, sold, and traded by you and I.
Bitcoin (the currency, also called “BTC”) is different from a normal currency like the US Dollar, because Bitcoin isn’t issued by a centralised bank or national government. The supply of Bitcoin is built directly into the Bitcoin software, an application of blockchain technology (more on this later). Because Bitcoin isn’t nationalised, it is equally useful to people everywhere, and is frequently traded across borders.
Bitcoin has value depending on the simple laws of supply and demand. Only 21 million Bitcoin will ever exist. At the time of this writing, nearly 18 million Bitcoin have been mined in its 10 year history. Some of these Bitcoin have been lost, and others have been locked away in forgotten Bitcoin “Addresses” (the code and storage mechanism associated with private Bitcoin ownership). This means that only 15 or 16 million Bitcoin may actually be available in circulation today, making Bitcoin a scarce asset (compared with the hundreds of billions of US Dollars in world, for example).
Bitcoin was the first “Cryptocurrency”. There are now many alternatives to Bitcoin, often called “Altcoins”. Bitcoin is easily the most widely used and valuable cryptocurrency. Because of its scarcity and value as an international currency-like asset, many investors are starting to stockpile Bitcoin just like physical gold. Where BTC was traded for pennies a decade ago, a single Bitcoin now trades for thousands of dollars. If Bitcoin adoption increases and supply decreases, BTC’s price could grow far higher, though its future success cannot be guaranteed.
How Did Bitcoin Start?
The Bitcoin blockchain was created by an unknown individual who went by the pseudonym Satoshi Nakamoto. Nakamoto published “Bitcoin: A Peer-to-Peer Electronic Cash System” in 2008 (for anyone truly wishing to know “whats Bitcoin?” or “What is Cryptocurrency?”, this is a great place to start.) This 8 page document outlined the theoretical mechanics and technology behind a digital technology meant to bring financial freedom to people all around the world.
The Bitcoin network was launched in 2009, and BTC slowly started to be exchanged by internet intelligentsia. Within a few years, Bitcoin had begun to gain value, and the media started to cover this wild, experimental asset.
For years, Bitcoin has been driven by volunteer developers (who improve and augment the Bitcoin software), entrepreneurial Bitcoin miners, Bitcoin users (people who spend BTC as money), and Bitcoin investors/traders (those who use Bitcoin currency in the hopes that it will gain value). This decentralised group has grown from dozens to hundreds to, today, millions.
There are more than 32 million Bitcoin addresses at the time of this writing. Though it has been 10 years since Bitcoin’s genesis block, we are still likely in the early days of BTC, especially when compared to our FX and stock markets.
Bitcoin’s Differences From Fiat
“Fiat” currency is money that’s issued by a centralised power like a government. It’s essentially the forex market we trade, the largest market in the world. Fiat isn’t backed by any tangible asset like gold or silver. People simply agree that it holds value, and the stability of this value is largely dependent upon the stability of the government that issues the fiat.
One of the main differences between Bitcoin currency and the many fiat currencies around the globe is its decentralisation. Fiat currencies are created by centralised banks. They are typically only useful as money within a single country or trading bloc.
Fiat currencies offered up by failing governments tend to lose most or all of their value, as has happened with the Venezuelan Bolivar in 2018. Bitcoin has no such single point of failure, thus retaining value as long as people around the world continue to use it as money.
Fiat currencies typically have unlimited supplies, theoretically. Governments will continue to create new fiat whenever they feel it is necessary – quantitative easing. This means that holders of fiat can never be sure that the value of their money won’t deteriorate due to inflation.
The Bitcoin supply grows at a steady rate, though this is occasionally reduced. For example, in 2020, the inflation rate (the new BTC introduced to the system through each additional block in the blockchain, every 20 minutes) will be cut in half. When the 21 millionth Bitcoin is eventually mined, there will be no new Bitcoin ever produced, much like a gold mine is emptied.
This means that Bitcoin is inherently much more scarce than fiat money supplies. Even though a single Bitcoin can be divided into one hundred million places (each 100 millionth of a Bitcoin is called a “Satoshi”), Bitcoin will always be a scarce asset when compared to the global population that uses money. Consider than only about 18-19 million people in the entire world can ever own a whole Bitcoin. With much of Bitcoin’s existing supply already controlled by investors, Bitcoin will only become more rare as time goes on.
Unless you hold large stores of cash, fiat currency must be held in a bank tied to the name of its owner. It’s almost impossible to use fiat money today without leaving behind a conspicuous digital paper trail.
Bitcoin balances are tied to specific Bitcoin addresses, which are long alphanumeric codes. Bitcoin isn’t truly anonymous, because dedicated research could theoretically tie a Bitcoin address to a real human identity. But this is a lot of work, so most people consider Bitcoin pseudo-anonymous, at least for the average person. For people who need true anonymity, there are techniques such as Bitcoin “Tumblers”, which anonymise addresses associated with specific transactions.
Bitcoin is entirely digital. “Private Keys” (the code that identifies specific Bitcoin, whoever has the keys “owns” the Bitcoin) can be written down on paper, and ownership can be transferred this way, but Bitcoin itself only exists within the Bitcoin blockchain.
Fiat currency is still largely physical. We’ll likely see the physical aspect of fiat money largely done away with in our lifetime, but for now cash is still king, at least for fiat.
There are many “forks” of Bitcoin. A fork occurs when developers adapt Bitcoin’s software, and and run the amended software as a new coin (though one still sharing the same “Genesis Block” as the original Bitcoin). Coins like Bitcoin Cash were created this way, and Litecoin was a “source code fork”, making use of Bitcoin’s code in the development of its own, though with a new genesis block.
There are numerous other “altcoins” which were not created by forking Bitcoin’s code. Instead, the creators of Ethereum, NEO, EOS, and hundreds of others created their own blockchains. Many of these altcoins are not “cryptocurrencies”, because they are used for more than just money. Sometimes, these multi-use coins are called “tokens”, which may have any number of use cases other than financial exchange.
What is Blockchain?
So what is blockchain? A block chain is a digital technology that makes cryptocurrencies like Bitcoin work. Because the Bitcoin blockchain is a “decentralised” technology, every node-runner and miner (the groups that make Bitcoin work) has a full copy of the Bitcoin blockchain. Put simply, the Bitcoin blockchain is a record of every transaction that has ever happened on Bitcoin. It has been called a “ledger”, like a paper record of transactions that banks used to use.
Advantages of Blockchain
So why does this matter? Well, when a “trusted third party” like a bank has your money, you really just have to trust that they are going to manage it ethically, and give it to you when you want it. Of course, banks have had numerous security breaches in recent years, so we know this doesn’t always work. Furthermore, banks aren’t accessible to everyone in the world.
Because blockchain records are public to all, there is no central point of failure (like an incompetent or unethical bank). If someone were to try to fabricate fake Bitcoin, for example, these would stand out like a sore thumb because they wouldn’t be accounted for on the record that every single other user in the Bitcoin network has.
Blockchains have also been adapted to store all kinds of data (not just financial records). Games, apps, markets and more can all exist “on the blockchain”. The conventional internet is stored on servers, like the ones owned by Google and Facebook. The blockchain internet doesn’t exist on a centralised server. This means that no one owns your data but you, and no electricity outage or terrorist attack could ever take down a blockchain.
Blockchain transactions can also be faster and cheaper than conventional banking fintech transactions. For example, you can transfer any amount of money via NANO (an altcoin) from one country to another in less than a second, for less than one penny. Such a transaction would take days if you were to go through a bank, and you would be charged a high fee rate. This has been especially advantageous for citizens of countries with restrictive policies on citizens’ use of their own money.
The Value of the Crypto Industry
Blockchain-based currencies are not guaranteed to be universally successful, but they’ve grown by unbelievable leaps and bounds over the past decade. Blockchain-based currencies make it possible to transact across borders in just a few seconds, for fees far less than those charged by banks and remittance institutions.
The blockchain/crypto industry is also a hotbed for technology creativity. Protocols like Ethereum and NEO are attracting some of the most talented tech creatives in the world, and these people are redefining what is possible with blockchain technology. This innovation is driving new users to individual cryptocurrencies, which results in them becoming more scarce and valuable.
We expect cryptocurrency to become ever more mainstream. As blockchain tech becomes commonplace for everyday people, everyone will want to own some of these digital tokens and coins. Those who buy in now, during the still-early days of the industry, may be rewarded richly. Of course, there are high levels of risk when buying experimental digital assets, but the potential reward is just as high.