For about six months now, Bitcoin has been making headlines for making people nearly instant millionaires when it went up by a scale factor of around twenty.
There has been a slight increase in interest in the media about cryptocurrencies since this happened but all reporting on the subject has been inch deep into what they actually are. It’s easy to throw out the word cryptocurrency without really understanding what that actually means.
So, to start off, cryptocurrencies aren’t just digital currencies. They are based on a new revolutionary technology that many are theorizing will revolutionize the internet.
While those are very substantial claims, there is some level of substance behind it. Traditionally, currencies are created, monitored, regulated, printed and controlled by a centralized authority. So, in the United States, the U.S. government, the banks and credit unions do all of these things to the currency that we call the dollar.
For systems of currencies there has to be transactions, sending and receiving. So, there must be a ledger to keep track of these things or else how could we settle disputes? Usually this ledger is kept digitally on a centralized server owned by banks and other institutions.
So, there is a consensus. If the consensus is broken and there is a dispute, we have the institutions to come in and have the final say to maintain consensus.
Cryptocurrencies don’t have this central server/institution. They are based on what is called blockchain technology. They work on a peer-to-peer network. Whenever there is a transaction, it is put into the network instantaneously and is awaiting confirmation. Before it is confirmed it is malleable, after it is confirmed it is set in stone and can never be changed, not even by the creator of the network themselves.
This is where the blockchain comes in. Each transaction is entered into a block. Each block contains the same amount of information. In Bitcoin’s case, this is 1mb of data. After 1mb is reached on a block, all the information is confirmed by all other peers in the network and then a new block is created. Once a new block is created, all other blocks in the chain are set in stone.
The biggest differentiation here is that instead of these blockchains of information being processed at the bank’s server room, it is processed within a network of everyday people’s computers. For most cryptocurrencies today, all of their computing of these blockchains are exclusively done on everyday people’s computers.
This is what is called mining. Mining is where, simply put, a cryptocurrency pays someone to use their computers processing power to process the block chains. This creates new coins of whatever cryptocurrency is being mined. This is why they are called decentralized currencies, because all the power is not in the hands of a centralized institution but rather a non-incentivised network of computers owned by random people.
Many people are saying that this same blockchain technology can be applied to any digital information, like the internet. A popular belief is that this new concept of blockchains will spark a revolution of the internet in what is being called the internet 3.0.
There are currently thousands of cryptocurrencies. Some of them have just been created to exist and others were created with a purpose. Many tech projects that are based on blockchain technology are also creating cryptocurrencies to help fund their projects, like Gollum, which is trying to take the idea of shared processing power in mining and apply it to the entire internet.
For example, if you don’t have a good enough computer to play a game you could simply rent processing power from a cloud service that some like to call the world wide supercomputer.
One of the more conservative projects is simply working with credit unions to create a cryptocurrency to U.S. dollars card that you could use anywhere. This would make cryptocurrencies much more useful in a practical world.
It has become almost like a decentralized stock exchange and just like the real stock exchange there is money to be made. People have made millions of dollars investing, holding, and trading cryptocurrencies just like anyone would do on the stock exchange. Traders even apply the same kinds of analysis that stock brokers do.
The perks of the crypto market is that it has no regulation. Most people in our general public don’t know what cryptocurrencies are, much less in our government. While there have been a few very small bills that have been passed in governments around the world, this is something totally new and has yet to be regulated.
Cryptocurrencies are also extremely accessible. All anyone needs to do to buy them is sign up for a major crypto exchange and buy into whichever you like the most.
Decentralizing everything is great in many ways, but people in power don’t tend to like that, so regulations may come soon. But if the idea takes off, which it has shown it is starting to do, it could revolutionize many different fields. All of these cryptocurrencies are racing to find the winning formula.
The trick is to bet on the right horse.
Cryptocurrencies are great because they take power out of the hands of the advantaged and they decentralize monopolized markets. They do better what people are already doing. This is all great, but here’s a word of caution: the cryptocurrency market is very volatile. You can lose money in it if you aren’t smart or are very unlucky.
Cryptocurrencies are a lot more relevant than the mainstream media makes them out to be. There are already billions of dollars in cryptos being traded every day. They are already working on ways to revolutionize the internet, but it is still in its infancy and only time will tell if it is just a trendy fad, or the next multi trillion-dollar industry.