Digital Cryptocurrencies Explained

“So…what is a Bitcoin and why should I care?” I hear some of my readers asking.

Bitcoin was the first of more than 1600 types of digital or virtual cybercurrency (or cryptocurrency) available for investment or to transact commerce online today.

Invented by one or more unknown persons using the name Satoshi Nakamoto, Bitcoin was released as open-source software in 2009. Bitcoins are generated as a reward for a computer process known as mining and can be exchanged for other currencies, products, and services.

All digital cybercurrencies use cryptographical computer functions – advanced encryption techniques – to secure financial transactions, cryptocurrencies leverage blockchain technology to gain decentralization, transparency, and immutability (read-only, not editable).

Stated simply, blockchain is the record-keeping technology behind digital coinage. Digital information (the “block”) is stored in a public database (the “chain”).

Blocks store data about transactions such as the date, time, and dollar amount of an online purchase. They also log a unique digital signature, similar to a username, for each party to the transaction. Finally, blocks store information that tells them apart from other blocks, called a hash.

A single block on the blockchain can store up to 1 MB of data so a single block can potentially hold several thousand transactions under one roof, depending on their size and complexity.

A blockchain is created by a set of multiple blocks that are strung together. Before a new block can be added to an existing blockchain, a transaction must happen and be verified by a network of thousands to millions of computers which confirms the details of the purchase, including the transaction’s time, dollar amount, and participants. The transaction’s dollar amount and both the purchaser’s and the seller’s digital signatures are stored in a block. The new block is assigned a hash which is stored along with the hash of the most recently added block to the blockchain.

After all those steps have been completed with no errors, a new transaction block can be added to an existing blockchain.

Secure cryptocurrency payments of online transactions are denominated in terms of a virtual “token” which represents ledger entries internal to the system itself.

People like cryptocurrencies because their cryptographic security feature makes them hard to counterfeit. Many virtual currencies are decentralized systems with a distributed ledger enforced by a network of individual computers. Because no central authority issues digital currencies, they are thought to be immune from government interference or manipulation.

Another favored feature of cryptocurrencies is that their online ledgers store all previous blockchain transactions, reducing the threat from hackers and allowing backup and verification copying across all computers running the digital currency’s software. Transaction forgeries are nearly impossible since every new block must be verified by the ledgers of each user on the market.

One big advantage users of cryptocurrency transactions seek is to speed up and simplify transferring funds directly between two parties without needing to pay high fees to a trusted third party such as a bank or credit card company.

Public keys and private keys are both used to secure digital transactions. Users create a “wallet” (account address) which has the public key; transactions are signed with the private key. Cryptocurrency fund transfers require nominal processing fees compared to those charged for wire transfers by most banks and financial institutions.

Research from Britain’s University of Cambridge pegged total user accounts at service providers at over 139 million, with at least 35 million identity-verified users, the latter growing nearly four-fold in 2017 and doubling again in the first three quarters of 2018.

Furthermore, because hashpower requires a lot of electrically-driven computer time, “the top-6 cryptoasset systems consume approximately as much energy as the entire country of Belgium in 2016.”

U.S. President Donald Trump just called out Bitcoin, Facebook’s new Libra cryptocoin, and other “unregulated crypto assets” calling them unstable, flighty, and well-suited for criminal activity:

“I am not a fan of bitcoin and other cryptocurrencies, which are not money, and whose value is highly volatile and based on thin air. Unregulated crypto-assets can facilitate unlawful behavior, including drug trade and other illegal activity.”

Trump has hinted that he supports returning the U.S. to the gold standard – where dollars are backed by a physical commodity – promoted the national medium of exchange as the benchmark for global financial dominance:

“We have only one real currency in the U.S.A., and it is stronger than ever, both dependable and reliable. It is by far the most dominant currency anywhere in the world, and it will always stay that way. It is called the United States dollar!”

Presidential opinion notwithstanding, millions of dollars are being spent on new cryptocurrencies:

“Startups raised $3.9 billion through venture capital funding in 2018, and ICOs (initial coin offerings) continue to prosper, raising over $21 billion in cryptocurrencies last year.”

Although relatively few people know about and understand blockchain technology, cryptocurrencies for online commerce are a sign of the times and the wave of the future. Eventually, conducting transactions using virtual money which exists only as bits of computer information, will almost certainly become mainstream.