Your Guide to Cryptocurrency
If you’re new to Bitcoin or crypto, you probably have a bunch of questions.
You might want to know what Bitcoin is.
Or where it came from and how it started.
You might be asking where its value comes from.
And how it works.
Once you understand Bitcoin better, you might want to know how other cryptocurrencies and tokens fit in.
Then you might be wondering how you can get involved.
The first thing to know is that Bitcoin is the foundation of modern cryptocurrency. But cryptography and secret code began long ago.
It started with a secret language on one continent and a classified operation on an island on another.
Code Talkers and Hut 8
Two men worked together in a secret location. They couldn’t tell their families what they did, the work was so important.
They took instructions in English and translated them into an unwritten language born of the plains of North America. On the other end, translators received the messages and converted them back to English.
The language formed a flexible, unbreakable form of code. It could be used on regular transmission lines without the risks of being decoded. And because it used regular equipment and people, the system was mobile and flexible. This form of code gave them a tactical advantage.
400 code talkers used Navajo and other first nations languages to help win the war in the Pacific during WWII. Their code was never broken.
On the other side of the pond, another group was hard at work in Hut 8. This group was assembled to decode enemy messages. They built on Poland’s techniques to develop a sophisticated way to decipher German coded messages.
The head of the group at Hut 8 was Alan Turing, the father of modern computing. His work at Bletchley Park during WWII was one of the factors bringing the war to a faster conclusion. It also helped to advance cryptography at the time.
These two groups foreshadowed a new vision of exchange and money to come. It was a flexible, borderless and unbreakable program based on cryptography.
Seven decades later, in the fire of a financial crisis, Bitcoin appeared.
The birth of Bitcoin
In 2008, a financial executive got on one knee and begged for relief. Several gigantic firms had failed in spectacular fashion. The market was crying for stability.
And the government was forced to take several unprecedented actions to save the financial system.
Unnoticed by the world, a digital white paper was released on October 31, 2008. In nine pages, someone or a group called Satoshi Nakamoto described a vision for a new financial system.
This one would be fixed but flexible.
It would be based on a defined incentive structure.
The entire system would be open source and driven by math.
The system would be secure and self-sustaining.
It combined a collection of innovations.
And it would be decentralized and outside of the control of the government.
In many ways, it was a combination of the Code Talkers’ strengths and Bletchley Park’s cryptography.
At the time, nobody knew what to make of this new thing. It was 2009, after all. The internet was still a fraction of today, and the iPhone was still a baby.
But here was an elegant idea all wrapped up in cryptography, network effects, supported by a ledger and fully digitized.
This was the birth of Bitcoin.
What is a cryptocurrency?
Bitcoin is called a cryptocurrency because it is a product of advanced cryptography.
Bitcoin is an open-source software program with a clearing and reward system. All of which provides a powerful layer of security.
Clearing is done through the verification of every transaction using sophisticated math and competition. It occurs every ten minutes, 24/7, every day of the year.
The competition is between crypto miners around the world. Crypto miners use specialized computing equipment and power in a race to solve cryptographic equations. In the case of Bitcoin, this is called Proof of Work.
The winner of the competition forms a block in the ledger and receives a reward.
The reward is a predetermined number of Bitcoins programmed into the system. This reward is reduced by half every four years until Bitcoin’s 21 million coins are mined and rewarded. The last halving was in May 2020.
The clearing process keeps track of the movement of every Bitcoin across public addresses in the ledger. This is where the blockchain fits in.
What does the Bitcoin blockchain do?
When I was a kid, my grandmother used to say that we all have our own little piece of the universe. This is a great way to think about a cryptocurrency blockchain. It’s a ledger that represents the universe for a specific digital coin.
Bitcoin has its own blockchain ledger. Ethereum has its own blockchain ledger and so on.
The ledger keeps a record of what address owns what Bitcoin or piece of a Bitcoin called a Satoshi. Every Bitcoin is divisible into 100,000,000 Satoshis allowing for fractional ownership.
Each block in the blockchain ledger represents a specific number of transactions. It is connected to the previous block forming a continuous chain or record. This allows every coin to be tracked from its issuance as a reward, forward. This feature makes the record of Bitcoin transactions immutable.
Rather than owning a physical asset like a paper bill or a metal coin, you own a claim to a record in the ledger. This claim is your little piece of the Bitcoin universe.
Private and public keys
Your claim in the ledger is secured through a private cryptographic key that only you own. If you lose your private key, you lose access to your Bitcoin. And if someone else steals your private key, they can access your claim in the ledger. So personal digital security is crucial.
From the private key, you create a public key or address. The public key is used to transfer or accept access to a piece of the Bitcoin ledger. When you hear the term “wallet,” this is where you hold your Bitcoin private and public keys.
Some wallets are designed for specific cryptocurrencies or altcoins. Others can hold keys for several different cryptocurrencies, altcoins and tokens. They may also keep track of your balances.
The Bitcoin ledger isn’t just one single entity but rather a single source of truth. There is one record replicated across thousands of computers around the world.
This is where the term distributed ledger technology comes in, or DLT. This feature gives digital assets their flexibility and borderless advantage.
All of the records across nodes have to match up through the mathematical verification process.
When you read about Bitcoin, you will hear terms like hash rates, difficulty levels, and so on. These are all part of the complex clearing mechanism executed and secured by Bitcoin mining operations.
In the wider asset mix, Bitcoin is unique for several reasons. One of which is that it’s a digital asset.
Digital assets are the next evolution
In a podcast, James Wallace, co-founder of Exponential, described the relevance of digital assets. He said assets have moved from paper to electronic and now to digital.
Paper is easy to imagine. Paper money. Paper stock and bond certificates. Paper contracts.
The paper is a representation of ownership in physical form. Or, in the case of contracts, a physical representation of an agreement.
When assets became electronic, they became easier to transfer but retain elements of the paper era.
Electronic assets rely on a series of electronic and physical clearing elements. Clearing is typically centralized. It involves both the adjustment of electronic records and the physical or paper records as the backing. Human beings are involved at various steps.
This is how almost all of our traditional markets work.
The move to digital changes all of this.
It clears every 10 minutes automatically, without human intervention and decision-making in the process. Digital assets are easy to exchange directly with another person anywhere in the world without interference.
This is why the Bitcoin network is called a peer-to-peer network.
The foundations of modern cryptocurrency
Now, if we break up crypto into eras, we could say there is the era before Bitcoin and the era of Bitcoin.
Cryptographic technology, called ciphers, were used as early as WWI. WWII saw the development of Enigma, the German version of the cipher. The Poles decoded Enigma in the late 30s and shared their intel with the British. At Bletchley Park, Alan Turing and others made significant advances in cryptography.
Over the decades following the war, there were numerous advances in technology and communications.
The lead-up to Bitcoin saw several notable projects from members of a group known as the Cypherpunks.
The origin of the Cypherpunks is credited to a paper by David Chaum in 1985. The group was started by Eric Hughes, Timothy C. May and John Gilmore in 1992. They had an extensive mailing list of subscribers, including many future notable tech founders.
Ultimately all of these projects were early and missing a couple of key elements. They were well ahead of their time. This is not uncommon in new technologies. If you think back to 2017, there was an explosion of projects, ICOs and tokens. Many failed. Some projects were unsavory, and most were simply too early.
Bitcoin’s valuation began with pizza
A group of tech enthusiasts had read this white paper by a guy called Satoshi. They had followed his cryptic comments online. And now they had these Bitcoin things. Nobody knew what to do with them.
Eventually, someone decided to pay someone for a couple of pizzas.
Remember, the value of Bitcoin at this point was measured in cents. Nobody knew what it could be used for or what it could do.
So someone convinced someone else to exchange these digital tokens for something.
That one exchange changed the way the users viewed the digital tokens. With that one act, Bitcoin became a currency, a transferable asset and a measurement of some form of value.
That’s right, pizza. And every May 22, Bitcoiner’s celebrate the date of that momentous event.
The narratives of Bitcoin have evolved over time. Each of these is an attempt to explain what the value of the asset is. In one narrative, it is a form of currency. In another, it’s a payment system.
More recently, it has become digital gold. Another narrative makes it a vote against the traditional system.
Others call it a hedge against inflation. Some have said it’s the new global reserve currency. We have argued that it’s both much more than digital gold, and the every person’s way to step outside the system.
The value of Bitcoin is derived from a series of characteristics.
One is the limited number of Bitcoins available. These 21 million coins are produced as rewards for clearing and securing the network, and the rewards decline every 4 years. The most recent reduction in rewards, called the Bitcoin halving, was in May 2020.
But that isn’t the only thing that makes it valuable.
Cryptocurrency as an evolution of money
Crypto has created a renewed interest in the subject of money. People are going back to read old Nick Szabo articles on the origins of money. They have a detailed view of value, transfer and centralization.
A lot of this renewed interest is an attempt to understand not money itself but the concept of money. Cryptocurrency has become a form of financial literacy.
What is clear from all the debates about money is that money is an idea. A form of measurement. A value transfer.
The key feature of money isn’t it’s transferability or divisibility, although those are important. The key feature is acceptance. And acceptance is derived from the issuer, which in the vast majority of cases is some form of government.
Bitcoin is not issued by a government. It doesn’t reflect the productivity of a people, asset base or nation. The number of Bitcoins issued cannot be altered. The entire system is an interplay between users, miners and mathematics.
All the elements of Bitcoin mean that it isn’t under the control of any government.
Bitcoin is an asset and a form of community.
So the value of Bitcoin, in particular, is derived from what it is and what it isn’t.
Bitcoin hasn’t wavered since inception
As of this writing, Bitcoin is trading in the mid $30,000s. The system has operated since 2009 without being down. Without being hacked. Without a glitch.
Bitcoin has not received a government bailout.
It was never halted to control trading.
It hasn’t required open market operations from the Fed.
It doesn’t require any form of moral suasion.
And Bitcoin isn’t regulated, although many of the gateways now are.
Bitcoin combined advances in technology, networks, storage capacity, energy and speed. It merged a suite of technologies into a powerful idea.
This idea has been taken and shaped into an entire almost parallel financial offering.
The cryptocurrency space is more than 8000 cryptocurrencies, altcoins and tokens. All of these have been built on the idea and elements of Bitcoin. They have different takes on these elements, but it could be argued that the core ideas are derived from Bitcoin.
One of the most important interpretations of Bitcoin was developed by a former Bitcoin engineer.
Then there was Ethereum
Vitalik Buterin left Bitcoin to become the name behind Ethereum. Bitcoin is called a currency, but Ethereum was marketed as the world computer. Ether is Ethereum’s currency.
The emphasis of Ethereum is to be foundational for smart contracts. The term smart contracts was coined by Cypherpunk, Nick Szabo.
When you hear about stablecoins, Central Bank Digital Currencies, and Decentralized Finance (DeFi), these are in Ethereum’s wheelhouse.
Remember CryptoKitties? They’re on Ethereum too.
Like Bitcoin, it has a ledger or blockchain and proof of work. It utilizes an incentive system. Its future mission is to move towards proof of stake model. Proof of stake is a different incentivized clearing and security system than Bitcoin’s proof of work.
We are seeing experiments in financial products and services through DeFi. The DeFi system relies on Ethereum, and it’s smart contract capability. DeFi includes projects for staking to earn a return. Other DeFi projects provide access to new tokens or funding for projects.
Most of these projects rely on Bitcoin or Ether cryptocurrencies for access and participation.
The Bitcoin financial system
The Bitcoin financial ecosystem has blossomed since 2017. Borrowing from the traditional system, it has numerous financial products and offerings.
Some exchanges internationally also offer leverage for trading Bitcoin.
Bitcoin’s international pricing structure has matured due to the development of these financial products.
There are also custody solutions, insurance products and banking for cryptocurrency. You can also access Bitcoin through various funds, including Grayscale and 3iQ. Or more recently, MicroStrategy has turned itself into a quasi publicly listed Bitcoin fund.
The entire cryptocurrency space is evolving, with Bitcoin in the lead. Ethereum is driving numerous innovative excursions through smart contracts.
Cryptocurrency is the purest form of exchange on the planet
Two different secret codes contributed to winning a war. One used cryptography. The other used an unwritten language as an unbreakable, mobile code.
Today, we are the beneficiaries of these ideas in the form of an asset. Cryptocurrency exists independent of human intervention, and no government controls it. The asset is tamper-proof and censorship proof.
It’s borderless and flexible and uses our current infrastructure to access the network.
It started with Bitcoin, and blossomed into an entire industry and movement.
Bitcoin as a service, represents the purest, form of exchange between people.
And it’s available to everyone, including you.
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