Bitcoin and Blockchain 101: Introduction to Cryptocurrency
So you’ve heard about Bitcoin all over the news, including how if you would have “invested $100 years ago then you could have purchased your own private island by now.” Now you want to know what it is and how you can hurry up and make the millions of dollars that have been promised to you.
This post is not about that.
Instead, we are going to go over the technology that helped Bitcoin (and subsequently all other cryptocurrencies) come to be: Blockchain. In my opinion, blockchain technology is the most important revolution of our generation, including the Internet. In fact, some consider this the NEW internet.
So what’s the big deal? Two hyphenated words:
De-Centralization & Power-Transfer
A Brief and Simplified History of Bitcoin
Before we dive into blockchain, let’s talk about the most popular cryptocurrency first: Bitcoin. Bitcoin was invented by Satoshi Nakamoto. No one really knows who it is, if it’s a man or woman, or even if it is an individual vs. a group of people. So for simplicity sake, we’re going to refer to Satoshi as “they.”
Satoshi dropped a white paper 9 years ago explaining that they found a way for people to securely transfer money to each other, without the use of banks or any other financial third party. You could buy things directly, as well as move money around as you pleased without anyone knowing.
They claimed this technology had more security than our current financial system. The best part: they would share all of the skeleton code (open source), so anyone in the world could take this idea and make it better.
“Wait, how is this different than PayPal?”
With Bitcoin, anyone and everyone in the world can view your account and transactions, and validate that the money is there. You could transfer the funds to your best friend to split that hotel in Jamaica, but no one would know that it was really you. None of your identifying information is associated with the account.
Instead, there is a public key (long series of random letters & numbers) that everyone can see and a private key (the one that give you access to the funds). The fund transfer is validated publicly, but only you and your friend know who the money went to. The fact that this system allows funds to move in more silence than the “g” in lasagna is why Bitcoin has been the go-to method of payment on the black market for the last 5-7 years.
“I like to think of it as digital dollars. What makes Bitcoin different than regular money is what’s called blockchain technology. This allows users to send money to anyone without worrying about the middle man like banks or government entities; this is the same effect if I were to hand you a $100 bill. The transaction is simple, fast and does not require the bank or fees, I just hand you the money. This is the goal of Bitcoin but on a digital scale.”
– Kevin Matthews, Building Bread
The entire world’s exchange of money currently runs off trust. It’s not that we trust each other, but we trust a third party. That third party can be a bank, or even a person. With blockchain, THE WORLD and everyone in it, is your third party. They validate your transactions, validate that you paid, and lock the info up in a permanent record of sorts.
The problem is, trust in third parties like financial institutions and corporations is deteriorating. Think about the hacking of Target, Equifax, Chase Bank, eBay, etc. Before now, there were no alternatives. That is, until blockchain.
“So how does blockchain technology work?”
Imagine an open ledger (like a sign in sheet at a funeral) but before you can sign, everyone else at the funeral has to verify that you are, in fact, there. Once everyone at the funeral signs and verifies everyone else, then the ledger is locked in a secure box with a crazy long password and put in a car to travel with the rest of the boxes on the blockchain funeral progression parade.
If you want to open the box with the ledger to view who was at the funeral, you have to figure out that very long key which would take at minimum 15 minutes on a really really fast computer. The “key” is the token (or cryptocurrency). And that has value. The whole point is that you no longer need a major third party to validate and secure information. Everything is “decentralized”, yet still secure. That’s how blockchain technology works.
This technology isn’t new; it has been around since 2007. Why is the world just talking about it now? Well, aside from a major run up in the original cryptocurrency, there have been hundreds of businesses that have chosen to go public and raise money via an Initial Coin Offering (like an IPO, but instead of going to Wall Street, they use blockchain).
“There are currently well over 1,000 different cryptocurrencies. Many are based on the same blockchain technology as Bitcoin. For example, LiteCoin uses much of the same technology with lower transaction fees and faster fund transfer times. However, many ICOs or initial coin offerings are scams. High-risk traders are trading them like penny stocks with minimal oversight so far.”
– Joshua Crum, Rebuild Repair Credit
Remember when I said that blockchain is open source? Well hundreds of people have taken the original code and improved on it! They have been making their own coins and/or blockchains to make their respective organizations more efficient. Companies are experimenting with this new area to make it easier to purchase and track real estate sales, execute contracts, improve video gaming, and even make the world’s fastest supercomputer using power from all of the computers currently in the world (including yours).
Imagine the Ways Blockchain Can Revolutionize the World:
- Being able to vote in the election and have every vote be verified by everyone would be huge. Votes could take place without anyone seeing the name of the voter, or more importantly, who they voted for. This could take the probability of voter fraud and ballot manipulation down to zero.
- Airlines could keep more accurate flight logs, which leads to more on-time flights and less technical difficulties.
- You would no longer need to have traditional bank accounts. Hey, we can dream!
The most important thing is that blockchain puts power back into the people, as opposed to a central power. If there is an unwanted change, or somebody attempts to manipulate the system, the blockchain will fork, meaning people will follow the most secure chain.
We are still in the very early stage of this new technology. There has been a lot of hype and investment in this segment, but it is still too early to say if we will find a profitable use for blockchain. Is it wise for newbies to jump on board?
“Newbies should avoid it. Like Warren Buffett, don’t invest in anything you don’t understand. And there’s a lot to understand about Bitcoin, including how it works, who owns it, who created it, and who’s controlling it. Many hype Bitcoin as being this “alternative” to government currency, but it’s honestly “controlled” by about a dozen entities that own or have vested interest in the market. Just understand the dynamics before you get involved.”
– Robert Farrington, The College Investor
Maybe it will be adopted world wide and there will be a huge disruption in the banking industry. It’s possible the government will step in and “block” the growth of blockchain in order to keep things business as usual (as we are seeing in some other countries like China). Or, it would be interesting to see if the government will adjust and implement blockchain technology to keep the status quo (already happening now in the US).
Only time will tell, but it would not be wise to ignore this.
About the Author
Lafayette K. Ford is a banker, networker, consultant, and financial literacy educator. He currently leads a private banking team that specializes in financial planning, banking and providing personal cash management solutions.
This is not a recommendation, solicitation or endorsement of any investment or security.