Issue #2 - All About Cryptocurrency
Issue #2 - All About Cryptocurrency
Welcome.
I am challenging myself to regularly research and highlight ideas changing or impacting the world and making them easy to understand. I want to share that with you to spark conversation, and hopefully, I can learn even more from you.
In this issue, I discuss Cryptocurrency.
This newsletter discusses topics from my perspective and with my opinions. I plan to monitor and decide where to focus my career and hobbies or invest my money (hence the name of this newsletter). And what will cause me to scream into a pillow. Finally, my views are not the views of my employer.
#1 What is Cryptocurrency?
What does a data center, like the one in the picture above, have to do with cryptocurrency? Does the image remind you of the machine city from The Matrix? Charles, is this another post-apocalyptic post? Sort of. Maybe. Like with all technology, there is a spectrum of use cases, some extreme or revolutionary, and those get the most attention. Enter cryptocurrency. Cryptocurrencies rely exclusively on computers to function.
Cryptocurrencies are virtual currencies, secured, and decentralized from central authorities.
As with metaverse, cryptocurrency is a portmanteau, combining crypto, short for cryptography, and currency. Cryptocurrency implements the technology called blockchain. However, blockchain does not mean cryptocurrency, although cryptocurrency is the most famous use so far.
Block
Each cryptocurrency transaction becomes part of a block on the chain and stores its information, along with the previous block. Once transacted, blocks can not be altered. Each new block holds its information, along with the last block’s information, which includes the previous block’s information, and so on. This structure is called a hash tree.
Chain
As a block fills up (there is limited data storage for each block), the block is closed and written to the chain. The chain lengthens as blocks are added (remember, with previous block’s information) and can not be altered or deleted. The blockchain implements encryption to enforce this, and is why it is viewed as a secure way to store information. But, what about the chain? How big can it get?
Mining for Blocks
Remember the photo of the datacenter from above? That represents a cryptocurrency mining operation. Mining on a cryptocurrency blockchain serves two purposes: to verify transactions and mint new units.
New units of value on a cryptocurrency blockchain are created through a competitive mining process by solving complex math equations. But in reality, users who complete mining activities function more as auditors than prospectors looking for gold. They are completing the hard work of verifying the legitimacy of transactions and minting new units.
Therefore, how is a value assigned or maintained? Initially, with an assessment of the costs involved in mining blocks - energy, equipment, and time. Values can then change as the network grows, forces of supply and demand take hold, gains trust from its users, and the algorithms become more difficult to solve.
Other Blockchain Use Cases
Blockchain sounds interesting. But why only use it for currency? When analyzing blockchain through a technical lens, I can find a few applications that maximize the decentral and security benefits:
Supply Chain Management - tracking raw materials through a supply chain to ensure quality and combat illegal activities such as slave labor
Smart Insurance - improving contracts, and claim management
Healthcare Information Storage - health data exchange, clinical trial management
#2 Why Should You Care?
Cryptocurrency exists in stark contrast to traditional fiat money (money declared legal tender by a government but not backed by physical commodities - like gold). Examples of fiat money are the US Dollar, the European Union Euro, the Japanese Yen, etc. They have characteristics such as being controlled by a central entity, being cost-efficient to produce, and contributing to a more stable economy.
There is no central authority that issues cryptocurrency. Thousands of versions exist only in digital forms, and the values change constantly based on the blockchain. Cryptocurrency ledgers are public and can be viewed by anyone, and this means some potentially identifiable information is public, forever, and unalterable.
As of February 2022, only two countries have recognized it as a legal tender - El Salvador and Ukraine.
Sounds great, right? Price volatility! No central authority! It sounds like the wild west of money!
The Next Big Thing or Already a Big Thing?
If you do not know what you are doing, you could be scammed, lose money, pay fees, or all of the above. Or it could be exhilarating and lucrative. But, be guarded. Some cryptocurrency networks are attractive to criminal networks to move money undetected. The US Federal Trade Commission warns about potential scams.
But what if you want to hold some cryptocurrency? What if you acknowledge that cryptocurrency exists to challenge government and bank-controlled monetary policies directly? What if that excites you and, at the same time, gives you a broader vision for its future?
New ways of doing things are always exciting. Helping the world transact with each other without using fiat currencies and regulations, fees, limits, and taxes is attractive. But do not be naive; the wild west is becoming tamed. Many governments view cryptocurrencies as assets and are taxed just like securities. Also, transaction fees are associated with trading the crypto - sometimes referred to as “gas” - or the cost to transact on a network. Further, some cryptocurrencies have a unit cap - meaning there are only so many possible units on the blockchain - for example, there are only 21 million Bitcoins. This is a feature of the Bitcoin blockchain, meant to mimic the finite supply of gold. Scarcity, right?
Lastly, crypto is gaining broader appeal as a sexy new investment promoted by celebrities like Matt Damon. If you watched the Super Bowl, you saw commercials for the new trading app, Crypto.com. Felt a bit more like gambling than an investment.
#3 Cryptocurrency Watchlist
These are the top 4 cryptocurrencies:
Bitcoin
Ethereum
Tether
Binance
Once you hold crypto, you need a place to securely store your encryption keys (passwords) used to access your holdings on the blockchain. Sure, you can keep them in a file on your desktop, but what if you misplace it? You lose your holdings with no way to recover. Below are a few of the most popular digital wallets to store, buy, or sell.
Coinbase
Trezor
Metamask
Paypal
#4 Conclusion
I’m hopeful this issue helps explain cryptocurrency and some of the pros and cons. Thinking about the future and visions of a metaverse society, I can understand why there is a pull away from traditional currency and toward decentralized, virtual options. I remain cautious about transferring money onto a blockchain without an apparent reason. The landscape is too speculative, and I’m just not interested in joining that club.
After Russia launched an attack on Ukraine on 24 February 2022, Bitcoin (BTC) fell 5%, and Ethereum (ETH) fell 8%. Both have since corrected, but such a substantial one-day swing resembles more of a stock market dip than currency fluctuations. Imagine if your purchasing power changed that much each day when using the USD or EUR. Do you want that kind of volatility? It goes entirely against monetary policy objectives.
One final note:
While bitcoin hasn’t behaved like gold, it has behaved more like something else: a tech stock.
Want to discuss this further? Let’s chat on Twitter or send me an email.
Until next time,
Charles