Cryptocurrency 101 for Beginners: Understanding Bitcoin, Coinbase Systems
What is Cryptocurrency?
"Depending on who you ask, defining cryptocurrency will elicit answers from “the
money of the future” all the way down to “the biggest bubble since the DOTCOM
bubble”. US senator Thomas Carper summed it up best in layman's terms.
“Virtual currencies, perhaps most notably Bitcoin, have captured the imagination of
some, struck fear among others, and confused the heck out of the rest of us.”
For a more accurate definition, cryptocurrencies are simply currencies that do not
have a centralized lender like a country’s central bank. They are created using computer encryption techniques that limit the amount of monetary units (or coins) created and then verify any transfer of the funds after their creation," writes Stephen Satoshi.
This creation technique is known as “mining” due to its theoretical similarity to mining gold or other precious metals. To mine cryptocurrency, one needs to solve an increasingly complex algorithm or puzzle. Solving these algorithms take a lot of computer processing power. In other words, it costs money to mine them, so we can’t just create value out of thin air. Therefore these currencies and their value are secured by the laws of mathematics as opposed to any central government or bank.
As cryptocurrency adoption increases, so does the number of real world uses. Everything from physical goods, gift cards, tickets to sports games and even hotel bookings can be purchased using cryptocurrency. Certain bars and restaurants have now also started accepting it as a means of payment. A number of NGOs now accept donations in Bitcoin and other cryptocurrencies as well. There are also more illicit uses, with the cases of underground online marketplaces dealing in illegal goods, such as Silk Road and AlphaBay. These currencies have a huge number of advantages versus the currencies that we know and use today. This is what makes them so attractive to both long term investors and short term speculators. Of course, like any investment, cryptocurrencies do indeed have some drawbacks to them - and we will examine these later on in this book.
While the practical applications of cryptocurrencies date back a mere 7 years, the technical aspects actually date back a further 30 years to the 1980s. Cryptographer David Chaum was the first to theorize a cryptocurrency when he in- vented an encrypted computer algorithm that allowed secure, unalterable ex- changes between two parties. Chaum later founded DigiCash, one of the first companies to produce units of currency based of his algorithm. It’s important to note that only the DigiCash company, could produce the currency, which is a model unlike Bitcoin and other cryptocurrencies where anyone can mine the currency (providing they have the necessary computing power). After running into legal problems and rejecting a part- nership with Microsoft that would have seen DigiCash paired with every home Windows operating system, the company went bankrupt in the late 1990s. Chinese software engineer Wei Dai published a white paper on “b-money”, which laid the foundations for the architecture behind the cryptocurrencies that we know today. The paper included information on complex algorithms, anonymity for purchasers and decentralization. However the currency itself never came to fruition.
US based E-Gold was another failed attempt at creating a cryptocurrency in the 1990s. The Florida based company gave customers e-gold “tokens” in exchange for their jewelry, old trinkets and coins. These tokens could then be exchanged for US dollars. The website was initially successful and there were over 1 million active ac- counts by the mid-2000s. One of E-Gold’s pioneering strategies was that anyone could open an account. However, this led to a number of scams being run through the website. In addition, poor security protocols led to large hacking incidents and the company went out of business in 2009.
The modern cryptocurrencies that we know today began with Bitcoin, which was first outlined by anonymous entity (the identity has never been confirmed as a single person or group) Satoshi Nakamoto. Bitcoin was released to the public in early 2009 and a large group of enthusiasts began mining, investing in, and exchanging the currency. The first Bitcoin market was established in February 2010. In late 2012 Hosting and website development platform Wordpress became the first major retailer to support payment in Bitcoin. This step was key as it gave the currency real world credibility and showed that large corporations had confidence in it as a currency.
Further resources: Cryptocurrency for Beginners: 7 Questions to Ask