Cryptocurrency is the new buzz word in today's financial landscape. You may have heard of people investing in cryptocurrencies like Bitcoin or Dogecoin, but do you know what it's all about? At its core, crypto originated with the creation of Bitcoin.
Since the emergence of modern banks in the 14th century and the subsequent introduction of banknotes, credit cards, and digital money, significant changes in the financial landscape have been rare but revolutionary. However, cryptocurrency, led by Bitcoin and its anonymous founder(s) Satoshi Nakamoto, is poised to join this exclusive club. Crypto was first developed with Bitcoin and was founded with the ambitious goal of creating "a system for electronic transactions without relying on trust," as envisioned by Nakamoto. Over time, Bitcoin has gained a substantial following and has generated interest in other forms of cryptocurrencies, marking a potentially transformative development in the world of finance.
Crypto’s original intent was to solve the current issue of trust between 3rd party systems. This started with the creation of credit cards and cheques which prompted the creation of the Automated Clearing House (ACH). A system that enables electronic funds transfer with all transactions backed by third-party verifiers such as the Federal Reserve. Yet, the system is 60 years old, vulnerable to fraud, and involves costly monitoring. Instead, Bitcoin was created as a native online payment method that addressed this issue by using a decentralized ledger system that eliminates the need for trust in intermediaries. Instead, it relies on equations and functions, making transactions more secure and efficient.
Bitcoin does this by using one-way or hash functions which are easy to solve with given inputs but impossible when attempting to reverse engineer the output. Bitcoin also threads prior transactions into new transactions by distributing a ledger that contains the history of every transaction. This is distributed on every Bitcoin and is included in blocks of data that contain timestamps and a list of recent transactions. Every block of info is cryptographically chained to the previous block, meaning that all blocks are intertwined into a single chain of data known as the blockchain.
To make a transaction, you need to have a private key to access the block and ledger within. This helps to verify if you have the coin. Without this transactional ledger, you would have to mine and solve the one-way function. This would involve putting in the total amount of computing power used since the beginning of Bitcoin and some more. This is inefficient and impractical as computing time exponentially increases. The incentive to mine also decreases as Bitcoin halves the amount one can mine every 4 years. Effectively decreasing their original mining result from 50 bitcoin in 2008 to today’s 6.25 bitcoin. But mining is crucial to the integrity of the currency. By mining they verify the transactions so that no one can double-spend.
Crypto has garnered both praise and skepticism for its unique characteristics. Many supporters of Bitcoin celebrate its decentralized nature, which allows for transactions to be conducted without the need for intermediaries or central authorities. This decentralization makes all transactions private and secure, especially from authorities. The diminishing mining results make Bitcoin virtually resistant to inflation. Many have utilized this to defend savings from inflation in countries where their currency inflates rampantly. It is commonly discussed as a store of value with parallels having been drawn to gold.
Yet, there are also drawbacks associated with Bitcoin and most Crypto. Mainly that it is not used as a currency, but rather seen more as an investment due to its volatile nature. Additionally, since Crypto relies on advanced technology such as blockchain, there is a risk of potential collapse if computing power were to efficiently reverse the one-way functions that underpin the system, although this is considered unlikely. Another concern is the lack of regulation and oversight, which has led to potential issues with fairness, fraud, and market manipulation. Some cryptocurrencies may not have the best interests of their users in mind, resulting in fraudulent schemes or "rug pulls" where investors lose their funds.
Regardless of whether you view cryptocurrency as a currency or an investment, it is undeniable that it is volatile in today's market. It is important to monitor its fluctuations and stay updated with the latest developments. Having covered some foundational aspects of crypto and Bitcoin, it is worth noting that many nuanced topics within cryptocurrency have not been fully explored. The future trajectory of cryptocurrency remains uncertain. Where it will head is largely unknown but staying informed and keeping a vigilant eye on this rapidly evolving field is crucial.
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