crypto assets:
A friend of mine told me over the weekend about a recent conversation she’d been having on Linkedin. She was sent a rambling long winded message as a second touchpoint and said that the message was so confusing… it made her feel like understanding crypto currency was beyond her grasp.
Which I am sure was not the result that the company writing the message was aiming for.
But this happens so often In outreach messages. Now as a copywriter this, pains me as it is so easily solved by?
Yes, you guessed it a decent copywriter
Over the next few articles…..
I am going to attempt to demystify cryptocurrency to the best of my capabilities (ok hands up…. I did work in finance for 30 odd years!) over the next couple of posts
Let’s break it down into the basics
First step in to how to achieve a fundamental understanding of what crypto assets are and how they work. I am going to be answering some of the most popular search terms regarding it on Google:
1. What is Bitcoin?
2. Why does Bitcoin have value?
3. What are the different categories of crypto assets?
Still with me? …. Phew pause as I wipe the beads of sweat away from my forehead.
In the beginning:
On August 18 2008, the domain name bitcoin.org was registered.
Later that year on October 31, a link to a paper authored by a Satoshi Nakamoto,
Titled Bitcoin, a peer to peer Electronic Cash System was posted to a cryptography mailing list.
Now this paper detailed methods of using a peer to peer networks to generate what is described as a system for electronic transactions without relying on trusted third parties.
On January 3 2009, the Bitcoin network came into existence when Satoshi mined the Genesis block of Bitcoin block number zero, which had a reward of 50 Bitcoins.
Now the goal of Bitcoin was to create a decentralised form of currency that did not need to rely on third parties for issuance or verification.
In other words, Bitcoin is not controlled or owned by government and Bitcoin transactions do not need a bank to verify them as valid.
The entire financial and banking industry is built on trust through verification. That's the primary function of a bank.
For example, let's say that you deposit a cheque from your employer. Well, they verify that the cheque is real, and then they debit the funds from your employers account, and then credit your account.
They do the same when it comes to sending a wire or paying your credit card.
All of this is done to ensure the integrity or the trust level of the financial system against deceit in the form of counterfeit money fraudulent transactions and theft.
Everything that Bitcoin needed to serve as an independent form of peer to peer electronic money, including a transparent process for trust and verification, was built into its code.
So how was this accomplished, well it was done through a revolutionary invention called a decentralised blockchain?
Huh what’s a blockchain?
A blockchain is a public ledger of transactions and the data contained within these transactions is stored in what are called blocks, and each block contains data that identifies the previous block before it, creating a verifiable chain of transactions.
Now to ensure that this blockchain data cannot be hacked or changed a copy of the blockchain ledger is broadcast to a decentralised network of nodes around the world.
Now in order for somebody to hack and change the ledger, they would have to simultaneously hack at least 51% of these nodes within a 10 minute window, which is the time that it takes to add the next block to the chain, given our current state of technology, this task would be impossible.
Therefore, the blockchain application creates a transparent distributed ledger of transactions that cannot be hacked, providing the level of trust and verification needed to process financial transactions without a third party.
A bank processing all of these blockchain transactions requires significant computer processing power and the energy to run those machines.
The people who process these transactions are called miners, so a reward system was built into the Bitcoin code that rewards miners with a portion of Bitcoin for each block that they process. This is called a block reward.
The Bitcoin code was designed to limit the number of Bitcoins that can ever exist to just 21 million, this intrinsic scarcity is another essential feature of Bitcoin that gives it value and that allows it to serve as a functional currency.
Governments like the US can print as many US dollars as they'd like. In each time they do, the value of the dollars that are already in circulation is decreased.
This is called inflation and it's why a Big Mac cost £3.29 today instead of 25p
Bitcoin cannot be inflated which means that as demand for Bitcoin increases the price can only go one direction which is up.
This limited supply is one of the primary factors driving bitcoins massive price appreciation. Now imagine if there were only 21 million ounces of gold on earth, and that a single ounce would never be found again.
What do you think would happen to the price of gold? Yes, it would skyrocket.
But Bitcoin is not gold. So why is a single Bitcoin now worth 1000s of US dollars?
Well, simply put, Bitcoin gives control back to the people. In order for something to successfully serve as a form of money, it has to have four characteristics.
The first is that it must be durable
The medium of exchange must not whether fall apart or become unusable. It must be able to stand the test of time and as for Bitcoin, as long as a single copy of the blockchain ledger exists, Bitcoin cannot be destroyed.
Second, it must be portable
It must be easily movable and hold a large amount of universal value relative to its size.
Third, it must be divisible.
It should be relatively easy to separate and put back together without ruining its basic characteristics.
Fourth, it must be intrinsically valuable
which means it should have value in and of itself and its value should be totally independent of any other object. So essentially, it must be rare.
This is the one area that critics of Bitcoin like to point out the most. How can this newly invested currency created by an unknown person actually have value?
while the reason that it has value is pretty clear and in fact, I can think of nine of them.
1. Bitcoin is borderless, for the first time in modern history you can effortlessly send digital money to any person in the world that you want, even if they don't have a bank account.
2.Bitcoin is limitless. You can send as much as you want for any reason that you want.
3 Bitcoin is free from oversight, you don't need anyone's permission to use it for Bitcoin is not under the control of a central authority.
4.No one can stop you or your transaction, and no one can seize your account or the funds within it.
5.Bitcoin is private, your transaction is anonymous, nobody knows that it's you and your name is not attached to the transaction.
6.Bitcoin is extremely fast. Unlike a traditional bank wire it only takes minutes instead of days to process a Bitcoin transaction.
7. Bitcoin is inexpensive to use. Sending a Bitcoin transaction, whether it's 10,000 BTC or point 001 Bitcoin costs pennies.
8. Bitcoin is a store of value there is only a finite amount of bitcoin that can ever exist. So, its value cannot be diluted.
9. Finally it's secure the Bitcoin network has never been hacked and due to its design, it likely never will.
So now that you have a basic understanding of what Bitcoin is and how it works, let's discuss some of the terminology that's used in this industry, so the trading symbol for Bitcoin is BTC or on one or two rare foreign exchanges, you might see it listed as x BT.
Now, neither of these are to be confused with BCH.
BCH stands for bitcoin cash and bitcoin cash is not real Bitcoin.
So, what is Bitcoin cash?
Bitcoin cash is a hard fork off of the original Bitcoin blockchain.
So, what is a hard fork? well because the source code for Bitcoin is completely open and transparent, somebody can take the source code and modify the rules.
If they do not like the current set. Now this might include changing the reward amount that miners get paid, or the number of transactions that can be included in a block. And once this code is modified, the people behind the update can create a fork off of the Bitcoin Blockchain.
So, think of this as a branch extending out from the trunk of a tree. So if a group of miners decides to support this new branch and process transactions for it. And if users decide to use this new modified version of Bitcoin, then the new fork can continue on a brand new life of its own.
Well, on August 1 2017, a group of miners decided to create a hard fork of Bitcoin called bitcoin cash, basically they wanted to increase the number of transactions that were processed in each block. This would allow more Bitcoin transactions to happen more quickly. But these larger blocks also gave an advantage to the individuals who pursued the fork in the first place, a handful of the largest miners in the world with massive Bitcoin farms, filled with specialised computers.
This can give them a huge advantage or even a monopoly over the mining process and threaten bitcoins decentralised nature.
This fork caused a massive rift in the Bitcoin community.
Personally, I believe the individuals that are behind bitcoin cash are completely self -serving, and that they have been trying to deceive new individuals coming into this market by telling them that BCH is the real Bitcoin, which it's not.
In my next article I will cover the different types of tokens that exist.
There is more to the crypto market than just cryptocurrencies, and in fact there are four different categories of coins…
