Cryptocurrency Fundamentals: What’s So Special About Bitcoin Anyways?

It seems like just yesterday the word “cryptocurrency” was on everyone’s lips.

Prices were soaring. One month ago Bitcoin traded for $1200 USD.  Now it’s less than half that.

The bubble has burst and, no surprise, the topic has faded from the mainstream news. Meanwhile, more and more scams are being uncovered.  Regulators are taking a hard look at cryptocurrencies and several investigations are underway. But, before we write the whole thing off, let’s take a look at why everyone was so hyped about it in the first place.

Cryptocurrencies Promise To Remove The Middleman In Almost Any Transaction.

When you send an email transfer, do you know how it actually works?  There is a surprising amount of steps.

You give the order, to your bank.  Your bank has to do a bunch of verification and encryption which costs them time, space and resources.  Then they send the encrypted transfer over to the recipient. Then the recipient tells his bank to go over and communicate with the sender’s bank. And finally, if everything checks out, some numbers on a computer screen get taken from the first bank and go into the second bank.

It’s really just a big, complicated, messy way to count money, make sure everything is secure and people aren’t sending out fake transfers.  Generally, banks are responsible for ensuring everything works. To do this they need IT guys. They need special software. They need computers and data centres which take up space and use electricity.  These are some of the factors that go into your bank fees. It’s also one of the reasons a money transfer can take several hours to go through.

Until now there was no better way to do this.  There were also a lot of legal issues. Someone had to be accountable for the money.  Someone has to keep records, keep a ledger of all transactions to make sure there is no double spending, or fake money being created out of thin air.  Normally the banks would be entrusted to do this, but we all know banks cannot always be trusted either. So what’s the solution?

Blockchain technology.  Blockchain is like electricity to a lightbulb. It is the essential science that makes it work.  First, it’s a script that you install on your computer (it takes away all the special software, which removes the need for banks to have big data centres). It has a public ledger that everyone can view and that anyone can audit at any time so that you can verify that no one is cheating the system or lending out money they don’t have.

Essentially, it’s a secure way to make a transfer online without a bunch of people in the middle.

Now you might be thinking… “Great. I can send money faster, and cheaper than I can with my bank.  That’s what all the hype was about?”

Not quite.

You see, as the world goes more and more digital, it’s important to be able to make online exchanges in a secure way.  

For example, think of the deed to your car.  Do you know exactly where it is? Keeping track of that little slip of paper can sometimes be a hassle.  Then if you ever want to sell your car, you need to go down to your insurance place and get transfer papers.  Then finally, after doing all the paperwork (which is basically only there to create a record of the transfer anyways), you give them the slip of paper and they give you some money.  

Don’t you think that’s a little behind the times for this digital age?

Imagine there was a way to store the deed digitally.  Instead of a slip of paper, its a file on your computer.  Whoever has that file is the legal owner of the car.

An exchange using blockchain technology would go like this:  You (the seller) would sign in to your account where the deed is stored, then send a request for a certain amount of money in exchange for the deed.  If the buyer accepts, the blockchain program would automatically confirm the money is available and it would then exchange the digital money for the digital deed.  You have just legally sold a car – no paperwork required – no banks required.

If you need to show proof of ownership to anyone, all you have to do is bring up the digital file on your phone instead of digging out a small slip of paper, which is why industry insiders are so excited.  It has the potential to radically change the way we trade and exchange value. It’s going to change our lives the same way email and messaging has changed how we communicate.

The challenge is predicting the future of a technology is in its infancy.  There are a lot of ideas, but there will only be a few winners. Just like during the Dot-com Bubble. There were scammers. There were stupid ideas. There were good ideas that just never panned out.  

So it is with the Crypto Bubble. It’s just no one knows how things will pan out yet and who will win or lose.

Personally, I’m looking forward to less paperwork, less time dealing with middlemen and more time conducting my own business.

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