Salt, Wampum, Benjamins – Is Bitcoin Next?

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Currency was first developed about 4000 years ago. Its genius was in the ability to supplant barter, thus greatly improving trade and providing a better means for storing value. As illustrated in my title, currency has taken on many different physical forms through the years. Given the recent advances in technology, is it any surprise that the latest form of currency resides in the ether-sphere?

This article explores the basics of cryptocurrencies and the important innovation they support, blockchain. I will also discuss whether Bitcoin, or another cryptocurrency, can become a true currency worthy of investment.

A primer on cryptocurrency and blockchain

Cryptocurrency is an independent, digital currency that uses cryptology to maintain privacy of transactions and control the creation of the respective currency. While not recognized as legal tender, cryptocurrencies are becoming more popular for legal and illegal transactions alike. Bitcoin (BTC), developed in 2009, is the most popular of the cryptocurrencies. It accounts for over half the value of more than 750 cryptocurrencies outstanding. In this article, I refer to cryptocurrencies generally as BTC, but keep in mind there are differences among the many offerings. Also consider that, while BTC may appear to be the currency of choice, Netscape and AOL shareholders can tell you that early market leadership does not always translate into future market dominance.

Before explaining how BTC is created, acquired, stored, used and valued, it is vital to understand blockchain technology, the innovation that spawned BTC. As I researched this topic, I read a lot of convoluted descriptions of what blockchain is and the puzzling algorithms that support it. The following paragraphs provide a basic description of blockchain. If you are interested in learning more, here are two links that are relatively easy to understand.

The Ultimate 3500-word guide in plain English to understand Blockchain – Mohit Mamoria

A blockchain explanation your parents could understand – Jamie Skella

Blockchain is an open database, or book of records, that can store any kind of data. A blockchain database, unlike all other databases, is stored real time and is accessible for anyone to view its complete history of data.

The term block refers to a grouping of transactions, while chain refers to the linkages of the blocks. When a BTC transaction is completed, BTC “miners” work to solve the cryptology algorithm that will enable them to link it to the chain of historical transactions. As a reward for being the first to solve the calculation, the miner receives a “newly minted” BTC. As the chain grows, the effort needed to solve and verify the algorithms increase in complexity and demand greater computing power. As an aside, consider the following statement by Bitcoin Watch (courtesy Goldman Sachs): “BTC worldwide computational output is currently over 350 exaflops – 350,000 petaflops – or more than 1400 times the combined capacity of the top 500 supercomputers in the world.” Needless to say, a tremendous amount of computing resources and energy are being used by BTC miners, and it is still in its infancy.