What is Cryptocurrency?

Yesterday I covered a little about what currency is itself so today we’re going to focus in on what cryptocurrency is.

Or, at least what cryptocurrency is as I understand it today.

Like I said in a previous post, I am fairly new to this space. Although I am technical — I’m a developer by trade — I am by no means an expert on these things and am definitely prone to being incorrect about something. So if I say something wrong, please let me know! I’ll be happy to correct myself and give you credit.

For me, this is primarily a means I’m using to learn, and and I just want to share what I’m learning along with you.

Now, let’s dive into what cryptocurrency is. Yesterday I said to tell me what you think the benefits are to a cryptocurrency versus a currency just by knowing that it’s a purely digital currency.

In light of what I said about currency yesterday, does that already set off some light bulbs? Yesterday we started out having apples as an orchard owner and taking them around and trying to trade them for jeans, and now we’ve evolved into using paper or metal coins that are much easier to carry around and much more transportable. There’s also the added benefit that they don’t rot like apples do after a certain amount of time. And so that was kind of our next you know as far as a civilization that was kind of our next iteration of the currency. So now there’s cryptocurrency it’s purely digital there’s nothing physical that you hold in your hand that means you have even less to carry around with you. Basically, all you need to have a what’s called a wallet where your cryptocurrency is stored, you know, you have basically two pieces of information when you have a wallet. You have what’s called a public address, and you have a private key. Okay, and so your public address is this long series of letters and numbers, I think it’s somewhere around 34 characters or something, and that is what you give to someone if you need them to send you some money. So, in this case, let’s say bitcoin, I give you my bitcoin wallet address, mine is actually in the show notes, and so you can see what a wallet address looks like if you check out the show notes of the podcast or the description on YouTube. And so you give that to people, it is kind of like giving your account number and routing number to someone, and so you give that to someone and then that’s how you receive money. And then to actually create transactions from that wallet you have what’s called a private key, and that is also a very long series of letters and numbers. That one key is the only way to get access to your wallet and actually send and receive money, or I guess send money or kind of convert it to another currency or something like that. The only way to get money out of that wallet I whether you want to send it to someone else in the form of the same currency. So whether I want to send you some bitcoin from my bitcoin wallet or whether I want to convert some of my bitcoin into another cryptocurrency like the cerium or maybe, I want to convert my bitcoin into USD you know convert over to dollars. Either way to do any anything like that to withdraw money or send money from that wallet I’m going to have to have that private key. And so that’s a very very important piece of information if you lose it you have no way of accessing your funds. And so there are some tragic stories out there of people who had you know dozens or even hundreds of bitcoins that they just kind of have on a hard drive that they mined years ago when it was really really cheap, and you know some of them still have this hard drive laying around. The hard drives are crashed, or something they can’t recover the data and you know those dozens of coins are now worth tens or hundreds of millions of dollars, and so the tragic stories like that. The reason you know they can’t access it apart from maybe in the situation like a failed hard drive or something is they just lost their private key. So you lose a private key, you essentially don’t have the money, I mean it is there but you can’t access it and no one else can either. It doesn’t get like absorbed back into the network to be reminded or to go to charity or anything. It exists, and it can’t go anywhere, but you also can’t access it, and so that really sucks, and so you definitely want to hold onto that private key. Right now you don’t have to know exactly what that is but just going back to the fact that, you know to be a cryptocurrency there’s kind of some common traits and one of them is like we already said, it is purely digital. So it’s a public address, and private key and the private key isn’t the currency, the public address isn’t the currency that’s simply the wallet. The currency is just essentially ones and zeros that the network agrees is currency and has various amounts and so, we will go a little bit deeper into that especially like specifically with maybe bitcoin on another episode, but one aspect of cryptocurrency is it’s purely digital. So you’re not going to go and grab some kind of paper or coins or something, there have actually been scams on eBay where people sell you a bitcoin and then they like drop in the mail some metal coin, and that is not cryptocurrency. So do not buy something that’s physical, someone saying that it’s a physical cryptocurrency. So what’s another aspect of cryptocurrency? So they are decentralized. So what does that mean? Well it means there is no central bank or governing authority or like regulatory body or something like that. There’s no centralized authority that says yes, Bob has this amount of money in his account, and Alice has this amount of money in her account, and you know yes, you’re authorized to do that transaction Bob because you have enough money and yes, Alice you are authorized to buy that mill at the restaurant or whatever it is because you have enough money. When we have a centralized system like that what we’re doing is we are trusting that the bank will first off keep our money safe, and prevent fraud things like that. Banks felt that all the time, financial institutions felt that all the time, Equifax literally just lost 143 million peoples personal information in one of maybe the biggest hack in history. And so there is a huge dealing anytime you have one of these organizations, they are subject to being hacked. Also, we are trusting them to say that our balance that they claim as our balance is actually our balance. We are trusting them to reconcile our transactions and come up with the correct balance, and we are trusting them to prevent double spending on our account where maybe like we swiped our card twice and maybe the money somehow like two transactions were allowed to go through, but there wasn’t enough money to cover both transactions. We are were trusting the bank is the point, we are trusting the bank or a governing body to say these transactions are allowed to take place and take the money and make sure it gets to the proper destination that we are trying to send it to. So the aspect of cryptocurrency is that it’s decentralized and so what that means is there is no central authority here. So how does it work then? Well, that is largely due to a technology called blockchain. Now I’m going to lightly touch on that today, but I will most likely do a future episode on blockchain specifically just to try to go and do a deeper dive on what exactly blockchain is. And I want to take some time to form that post because I want to make sure that it’s understandable because a lot of the stuff even at times can get over my head and I am technical. And so, I want to really be able to dive in and understand it in depth so that I can clearly communicate it to you in a way that makes sense. And so, I will touch on it today though, but basically, a decentralized network here or blockchain is everyone who participates in running what’s called a node which all that is. A node is a computer that someone has in their house or some people maybe have like lots of, all these computers and servers like in warehouse somewhere whatever it is, there’s all these are called nodes or they are servers that have a copy of the entire transaction history of the currency in question. And so let’s take bitcoin for example because every currency is going to have its own blockchain its own kind of network. And so let’s say okay the bitcoin network I don’t know how many but say there’s thousands of computers out there all across the world. Every computer has the exact same data they all have a copy of all the transactions that have ever taken place involving bitcoin ever. So since 2008 since it came out, here’s all the transactions of where bitcoin has been sent you know wallets that have been sent, wallets that it has been sent from and here’s everything here. Now running a node right now you know it’s I think a couple of hundred gigabytes is the size of the ledger, so what that is is it’s a ledger it’s a copy of everyone’s transactions and balances and stuff. So running a node is something that anyone can do, you can do it, anyone can do it for free other than you know having to pay the cost of having a computer on and having an internet connection to actually make sure that you can download the transaction data. So anyone can set that up and so you can look in the history of the network and see all the transactions that have ever taken place with bitcoin. This is huge because you don’t have to trust, no one’s trusting a central authority to say yes like you know so-and-so sent like Bob sent Alice one bitcoin. Everyone can see that this wallet address sent that wallet address one bitcoin. Now not everyone knows that the first wallet address is Bob and the second one is Alice and so we don’t really frankly care. We care that you know if something is called into question, we are not trusting a third party to resolve the dispute, it’s all right there on the blockchain. It can’t be manipulated once transactions are verified and written onto the blockchain, they are set in stone they are irreversible. So this is huge, and I will go into more detail on blockchain at another time, the big thing you just have to wrap your head around is that everyone can participate and you don’t have to trust anyone, everyone can verify transactions themselves. So another mark of cryptocurrency is like I just kind of said, that they’re not secured by people they are secured by math. It’s actually a quote from a really good walk-through of what cryptocurrency is that I will actually put in the show notes as well as on the website and YouTube. It’s from a site called block geeks, and it’s an article or just an ultimate guide to what cryptocurrency is. So this is our quote they said: “Cryptocurrencies are not secured by people or by trust, but by math, it is more probable that an asteroid falls on your house than that a bitcoin address is compromised.” So there’s a lot of complex math involves some of it is even over my head, but the way the bitcoin is set up, the way cryptocurrencies are set up is that everything is mathematical. Everything is verified with math, transactions are verified that they are legitimate transactions. No double spending is going on, that you know Bob has enough money to send that one bitcoin to Allison. All these things are verified by math, so you are not counting on someone. Someone that’s the point, you are not counting on someone to say yes, all these things are allowed happen. So another aspect of cryptocurrency is because everything is done by maths, they are essentially fraud-proof. To overcome the bitcoin network, it would like more energy than the entire earth can produce; you will have to break the law of thermodynamics to be able to forge a transaction and calls the networks actually accept it, like actually to take control of the network. You get 51% of of the power and the ability to come to a majority consensus on these transactions you would actually have to have more power than the earth can produce because how everything is verified in a blockchain ecosystem I guess, is through a process called mining which without getting into the weeds too much it is essentially math. So these days you can’t really at least with bitcoin you can’t really mine it with your regular computer at home, you can mine other cryptocurrencies. By the way, there are over 1000 cryptocurrencies, and so you definitely can go and check them out, I’ll include a link to a cycling coinmarketcap.com in the show notes just so you can kind of see what’s out there. I wouldn’t put it in a ton of money into any obscure ones right now, I think there are a lot of fraud going on in some of these smaller coins. To mine a coin, you are basically listening for transactions; so since I want to initiate a transaction in bitcoin, so I want to send bitcoin to a friend of mine, and I put in his address, and I put in the amount of bitcoin, and I hit send. Well instantly my computer broadcast to the whole network. So all those nodes that I just talked about earlier, all those nodes I broadcast my computer says hey you are sending this number of bitcoin to JC’s friend and they take that transaction and first off make sure that I actually have enough money to send that transaction and then through a series of really complex math problems all the minors out there which are basically for bitcoin at least these kind of specialized computers that are made to do one thing really well and that is solve these math problems. So these are computers that literally are made to do something like millions or maybe even billions of computations a second basically trying to solve these math problems, to be able to run through all these like possible inputs to try to get the right output that they need. So I don’t want to go too deep into the weeds there but the point is mining takes a lot of energy like electricity, and so it’s a very expensive process especially for bitcoin but whoever actually find the solution first to the math problem actually gets some bitcoin and so it is profitable over time. But anyway, the process of validation is basically where I broadcast that transactions all the nodes on the network and then the process of mining starts and all the transactions typically within about a 10 to 12 minute period. I think it’s around 4000 transactions and maybe 2000 I’m not sure, but once you hit kind of the limit for what’s called a block which is 2000 or 4000 transactions something like that. As each transaction is verified, it is added to this block, and once the block is full 2000 or 4000 transactions, it is then a verified block. You know once someone solves the math problem to say yes all the transaction are verified, the block gets written to the blockchain which is immutable, it cannot be tampered with or altered. As soon as a block is written to the blockchain, it is broadcast to all the nodes again they download the block, and now everyone has a copy of that block with all the transactions inside it. And so if anyone ever tries to sneak in and say well you know if I go in and say hey, I really didn’t send him one bitcoin I only sent him like half a coin, everyone else is going call BS, and they are going to know when that transaction took place, and they are going to say no, like every other node on the network is showing that you sent one so you’re wrong. So the block is added to the blockchain, and then that miner who solves the math problem gets some bitcoin and the reward kind of varies. But right now there’s actually a link I will add to the show notes and it’s called bitcoinblockhalf.com. And it kind of shows what the current reward is and also shows the countdown to the next time the reward is halved because part of bitcoin when it first went into effect or when it first kind of got introduced they said okay there is only ever going to be 21 million bitcoin but we are not going to release them all at one time, they are going to be released a little at a time as blocks are verified and added to the blockchain. And so and because they needed to create incentives for the miners to actually go through these really expensive math problems and actually verify these transactions to keep network safe and to keep the transactions like actually trustworthy. And so they said okay, we are going to release X amount within each block; well every 210,000 blocks they half the number of coins that is in the reward. So the current reward is actually 12.5 bitcoin if you successfully mine a block and so that would come out to at today’s prices I don’t know roughly like $80,000 I think. Well let’s see, well over $90,000 but every 210,000 blocks that reward gets halved and so right now it looks like the ETA on that date is the 12th of June in 2020, the reward size will be halved from 12.5 to 6.25 coins. You can choose for yourself, the reason it’s an estimated date is because there are varying degrees of speed and like how fast the miners are able to solve each block and so that introduces another aspect cryptocurrency and mining which is called the difficulty. So difficulty is kind of exactly what it means like how hard is that math problem that they have to solve. And so every single block that gets added to the blockchain, the coder or I guess the blockchain kindof looks at how fast the miners solved that last block and if it was I think less than 10 minutes the difficulty goes up, but it feels like over a certain amount of time. I’m not sure what the exact amount of time as I think it’s maybe 12 or 15 minutes I’m not sure. But if it is over a certain amount of time then it brings difficulty down, and so this prevents the all the question being mined too fast because there’s a whole market of people out there who are coming up with these really specific computers made for mining and they are called miners. A popular one that you can look up is called the antminer S9. it is actually referred to as an ASIC computer which I think stands for Application Specific Integrated Chip which all you have to know is that it means the chip inside of this computer is only made for one specific application which is where the name comes from, where that acronym comes from. It is only made for the application of solving bitcoin math problems. And so it’s really good that it can’t do anything else but it is really good at that one thing. And this whole market is making faster and faster miners and so you know if there was no such thing as difficulty then it will really be whoever can come up with the fastest miner in the world is the one who would get most of the coins ,and they’d be able to mine those 21 million much faster than I guess it was intended for this. And so there is currently 16,672,775 bitcoin in circulation as I’m recording this and the last coin is estimated to be mined around 21:40. So I will never see that coin mined, but that is a little bit how about how it works. So approximately every 10 minutes a reward is coming out and a block is being added to the blockchain, and that is kind of all you really have to know. Now that’s true for most cryptocurrencies, there is another type of cryptocurrency that doesn’t involve mining, and I want to get into that later. Bitcoin and a lot of other cryptocurrencies have a mining process, and it’s called proof of work which is basically where the miner who solves the mathematical equation has to shout out the answer and prove that they actually did all this computational intensive energy or intensive work, so it’s proof of work. There is another type out there, it is called proof of stake which is something totally different that I am not going to go into right now. Bitcoins does not use proof of stake, ethereum is I think set to use proof of stake in the near future but right now it still proof of work but there are other coins out there that are proof of stake. We are not going to go into that today though. So that’s a little bit about mining and that’s pretty common with cryptocurrency. So let’s just talk a little bit real quick about some of the benefits of cryptocurrency. So other benefits other than it being a digital supplies which is which is huge and it’s more secure because you have thousands of nodes verifying it and you have all these people who to verify they have to do all this like really expensive work to verify the transaction. So decent advisers trying to hack something because it would take a crazy amount of power and money and all that kind of stuff. Some other aspects of it is it is really fast. Think about this so right now, maybe you want to pay somebody for some kind of like service or maybe someone overseas. You know I am in the US maybe I’m paying someone that came and helped me out on an app I was building. Well if they sent me an invoice and I paid with my credit card I have to login put in my credit card details tells him it’s like five or six different pieces of information. It’s all like sensitive information that could potentially be hacked, or you know stolen off of somebody’s server somewhere, and I put all those information in and then I finally can hit send and then in the wake-up seconds and then says is authorized and then they’ll get their money. Well with bitcoin or with cryptocurrency is it’s one step, I just need to know that guys wallet address and I initiate the transaction for my wallet to his and it’s one step I only need that one piece of information. I didn’t put in a ton of like really sensitive information and you know he gets his money. So it’s much faster for me as a user and it is also global like I can send my money to him in the UK and he’ll have it most likely within like at most a couple of hours. It is not going to to take days that it has to go through my bank to another bank to another and to another bank and finally get to his bank it doesn’t have to do all that. So it’s faster its global and also anyone can use it. You know you don’t have to be like a citizen of certain country there any restrictions on anyone. Anyone can download the bitcoin software and begin using bitcoin or anyone cannot download software for ethereum, litecoin, ripple, monero or whatever any of these coins and they can use it. So one last kind of aspect of cryptocurrency where most cryptocurrencies is a controlled supply, this isn’t true of all them but most of them it’s a controlled supply. So unlike here in the US the Fed can just turn on the money printer and print more money on it cause the value of the dollars you down in a cryptocurrency world it’s all predetermined. So in 2008, it was already predetermined in the code, you can go back and look at the source code that there will only ever be 21 million bitcoin ever. That number cannot change and so when you have a controlled supply, as the demand rises the value of the currency rises because the supplies aren’t going to rise. And so that’s why you have some people estimating the coin hitting as high as 500,000 or even $1 million for one coin eventually because it is a controlled supply. So scarcity will stay down while demand rises. So that is a bit about cryptocurrency, I’m sorry if that was all over the place. Please ask questions because I would love to answer specific questions about what cryptocurrency is and I have definitely some future episodes and posts coming on what blockchain is specifically, what proof of stake is and some other things I mentioned and some of these other currencies. And we will also dive deep into bitcoin in upcoming episodes. So with that I’m going to sign off for the day and remember to just reach out to me on twitter or leave a comment on the blog or on youtube. You are just a ask away I mean I know the answer, but it will give me the opportunity to look it up and learn a little bit myself and then I love learning. So I would really appreciate it. Alright, so I will see everyone tomorrow and have a good one.


I am not responsible for your money. Please do your own due diligence when considering investing in anything I mention on this site, even if I'm really excited about it myself.

Written on November 9, 2017