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As of this writing, the value of bitcoins in circulation is more than $186 billion US dollars. That is the same market cap as Coca-Cola. This is incredible, considering that Coke made $35 billion dollars last year. In contrast, Bitcoin, a virtual currency, doesn’t sell anything.
Today, there is a limited supply of individual cryptocurrencies. However, one day, the supply could be infinite because of the low barriers to entry. Anyone can create a new cryptocurrency. All you need is the interest and know-how.
According to my count, nearly 51 new cryptocurrencies exist since Bitcoin first came about. Such cryptocurrencies include:
PotCoin: Developed for the cannabis industry.
Coinye: Its mascot was Kanye West, until Kanye sued them for trademark infringement.
Petro: Developed by the Venezuelan government, backed by Venezuela’s oil reserves.
How Bitcoin and Blockchain Came About
In October 2008, “Satoshi Nakamoto” (not his/her real name) published a paper called “Bitcoin: A Peer-to-Peer Electronic Cash System” on the website metzdowd.com. This was Bitcoin’s first introduction as a digital currency.
The paper shared the intention of Bitcoin. They hoped to bypass government currency controls and simplify online transactions, eliminating third-party payment processing intermediaries.
Just a mere three months later, in January 2009, Nakamoto released the first Bitcoin software that launched the first units of the Bitcoin cryptocurrency.
In order to prevent inflation, the creator created a fixed amount of 21 million bitcoins. At the time of writing this, 16.9 million bitcoins are currently in circulation. That leaves 4.1 million bitcoins to be discovered.
Bitcoin thrives due to anonymity. Anyone can look at the Bitcoin ledger to see the transactions. However, the account information is meaningless, since it is just sequences of numbers.
This is why the dark web prefers to utilize Bitcoin. It is virtually untraceable. That allows nefarious characters to buy and sell goods without raising the ire of governments around the world.
How Bitcoin Works
Bitcoin is a cryptocurrency that you hold electronically in your computer or in a virtual wallet. No one person, institution or bank can control or manipulate the currency. Therefore, it is decentralized.
How to Buy a Bitcoin
There are many various platforms online where you can purchase cryptocurrencies. For instance, AvaTrade, a forex trading platform, provides off-exchange trading of cryptocurrencies.
Blockchain
Blockchain is the technology that maintains the Bitcoin transaction ledger. Thus, the Bitcoin blockchain acts as a database or ledger of Bitcoin transactions.
Peer-to-peer networks receive the database, and there is no central authority. Thus, participants in the network must agree to the validity of each transaction before recording the transaction. This agreement is known as a “consensus”, and the process is called “mining”.
After someone uses bitcoins, miners engage in a complex and resource-intensive computation to verify the legitimacy of each transaction. Miners must create a “proof of work”, which is a piece of costly and time-consuming data, to meet certain requirements. However, by design, no one can tamper the transaction records once they are added to the blockchain.
Uses for Blockchain
Blockchain may very well change how people do business in the future. It offers a level of trust. Blockchain possesses the ability to have permanent records of the transaction, allowing you to see any changes in real time. This transparency will fundamentally change the way businesses conduct themselves. By design, information recorded on a blockchain cannot be altered.
There are many benefits of blockchain for businesses. It can reduce time for obtaining information, decrease the costs of intermediaries, and alleviate risks of fraudulence.
Blockchain can easily transfer everything from stock, currencies, and even property rights without having to go through a middleman. In fact, it offers the same safety, quicker speeds, and lower costs than does a clearing institution.
Financial Markets
Think about financial markets. They handle billions of dollars each day. A middleman must verify and clear each transaction. By eliminating these middleman, these financial markets could save millions of dollars each day.
The banks clearly love to save money, as Goldman Sachs, JP Morgan, and Bank of America have all created a coalition to implement blockchain into their banking practices. In addition, financial players like Visa, AmEx, and Nasdaq will also support blockchain-related services and technologies.
Blockchain can also be used in other sectors. For instance, blockchain has the ability to verify legal documents, health records, and even private securities.
If you are an accountant like me, there is even a possibility of blockchain eliminating our accounting jobs. That may be somewhat scary to think about, especially if you’ve read the book, The Truth Machine: The Blockchain and the Future of Everything.
Remember back in the 1990s when AOL was booming? For most people, AOL was their introduction to the Internet. Much like AOL, Bitcoin has a lot of momentum today. And also similarly to AOL, Bitcoin has been an introduction to blockchain. To me, the best aspect of Bitcoin is the technology within blockchain. It will be fascinating to see where the industry will move in future years.
I glad someone explained this in layman’s terms. Either me nor my tech savvy husband understand it (me more so…) – so that’s what it does. Skipping the middle man and anonymity…I can see why Reddit loves this topic 🙂
Glad you enjoyed it Lily!!! I have to admit before I did the research that I was a bit clueless. Even now it feel opaque at times…
Agree, it will be fascinating to see where this all heads over the coming years – but I’m happy to sit on the sidelines and watch with interest, while I stick with my boring ol’ stock investment plan.
Hahaha…you and me both. I wish I had enough foresight to pick the winners. I just don’t know who will win in the end so I’ll content to wait for someone in the S&P 500 to buy one of the winners out 🙂
Agree with Lily. Thanks for the understandable explanation. This is not an area I have pursued from an investment standpoint. Let’s see where it goes. Tom
Tom @ Dividends Diversify recently posted…The “Fine Art” of Saving Money
I’m right there with you Tom!!! I’m sitting on the sidelines for now.
I’m currently working on a blockchain related project, but it’s not about bitcoin. The ledger system is promising to a lot of industries. I’m curious to see blockchain will help improve our lives in the future!
Ms. Frugal Asian Finance recently posted…Did You Win The Husband Lottery?
That’s so cool that you have first hand experience with it. It’s all theories and conjectures at this point so I couldn’t tell you much more than I’ve researched. It sounds fascinating.
The blockchain is such a cool technology. Personally, I have invested in a mining machine because I like playing around with computers. I bought it back in September and it has already paid itself off, so it was definitely a fun introduction to Ethereum and blockchain in general.
I guess the downside of most of the implementations is a transaction fee you can generally avoid as a buyer with “fiat” currency. Every transaction has an associated transaction fee that pays the miners to be a part of the network. They also get paid with block awards, which is where the remaining bitcoin will come from. Once the 21 million bitcoin is reached, miners will only be paid in transaction fees.
Bitcoin and most other cryptocurrencies are not really anonymous today because if you very few people accept it as currency. So you have to get your money in somehow and out somewhere else and every time it transacts with fiat currency it is traceable. Once you have the address it starts at, it is a simple exercise to track it through the blockchain.
In the end, it is certainly exciting and useful technology. Is it worth investing in? I think so, at least as a speculative small portion of your portfolio.
Thanks for sharing Justin!!! I have to admit that I didn’t know any miners until you mentioned it. I think that’s so cool that you’re doing it and getting first hand experience with it. I definitely wish I had invested a couple of bucks to learn the technology a lot earlier 🙁
Good explanation between the two Rob.
We’re not fans of the cryptocurrency investments (speculation really), but do think blockchain technology will make an impact into businesses that use it too!
Thanks for sharing Chris!!! It’s fascinating to sit on the sidelines and watch where things are going 🙂
So many people are talking about the B word nowadays. The taking over accounting jobs is scary but we’ll see what happens. I suspect middle and smaller sized or organizations would have to invest significantly and do a cost benefit to see how the tech fits into their goals whether it’s expansion or cost cutting.
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I do wonder if blockchain will be a little like computers. The big companies will significantly invest in the technology until it becomes affordable for everyone in the future. At least I hope it’s that way 🙂
This is a great explanation. The big thing is, in some respects, how we value these cryptocurrencies (e.g. what they do). Some of them have great utility for specific services, others (e.g. bitcoin I think) seem to act more like gold and supposedly store value (not saying gold has no utility or bitcoin does it). Because of the nascent nature of the industry I wonder how long it will take to shake this out to be more viable as an investment instead of a speculative play.
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I do wonder what will happen in the future. Not everyone can be winners, just like every metal isn’t a winner. I still don’t get why gold is so valuable 🙂
Great points rob. On the one hand block chain really excites me in terms of future prospects. On the other all these people investing in it scare me. Currency investing is a zero sum game, bit coin or not. It’s not like a stock market trade where rising earnings raise all boats. Bit coin is valued by perception only and the change in perception can whips out this speculation on a whim. For those who understand it, have at it. I suspect a large portion of bit coin investors don’t get that.
FullTimeFinance recently posted…Perfect is the Enemy of the Good
I’m right there with you. There is too much dumb money going into bitcoin right now. If you know what you’re doing I’m sure you can do really well. Unfortunately I am not that person…
My understanding is that blockchain technology retains all the transactions from inception to the most recent transaction. As you note, Bitcoin “miners must create a ‘proof of work’, which is a piece of costly and time-consuming data.”
Won’t the blockchain eventually collapse under it’s own weight? As more transactions are added to the blockchain, it will take longer and longer to process each new transaction. Eventually, it will take minutes or hours to transact on a Bitcoin. The anonymity will be outweighed by the inconvenience.
I was under the impression that since they sit on different nodes that it should improve the settlement speed of transactions in the future. I will fully admit I am a novice and don’t know everything but I thought generally blockchain technology was superior in speed to other ledger systems.
Thanks for the breakdown between bitcoin and blockchain. It will be interesting where cryptocurrency will be headed in the next 5 to 10 years. Will more companies use it as a form of payment especially in th US? Is the government going to step in and try to regulate how is it valued? Definitely something to look at within the next few years.
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I definitely could see countries banning cryptocurrency if they don’t have control over it. That’s why we have the central bank right 🙂
This is a very timely post. The John Oliver “Last Week Tonight” just did a show on this very subject. It will be interesting to see how blockchain infrastructure can be leveraged to hopefully create more protections for our data in the future.
I watched that episode the other day. It was incredibly fascinating how he described it and yet incredibly accurate 🙂 I definitely enjoy the way he breaks things down at times!!!
Thanks for this. My aunt asked me to explain ‘cloud money’, and thanks to friends and bloggers like you, I knew enough to give a high level answer. 🙂
Planet money had a show over the weekend about lost bitcoin, people who forgot they had it and don’t have access to their virtual wallet any more. It was interesting.
I can’t even imagine investing in bitcoin and then not having access to it. That would be a terrible feeling especially if you invested a couple of dollars early on.
Excellent explanation of cryptocurrency, one more reason to keep in mind to invest in this currency, I think it is the future of online markets.