Once an elusive topic left mostly to computer geeks, it seems these days everybody is talking about cryptocurrency, bitcoin and blockchain.
Bitcoin’s value skyrocketed in 2017 from $1000/unit to almost $20K by December, and then dropped faster than it had climbed, currently hovering around $8,000. Ever since, Bitcoin and other blockchain-based cryptocurrencies have been the subject of much controversy, from how they could transform our financial system to whether they have any value at all.
Beyond the Buzzwords
The thing is, beyond adopting the buzzwords, few people—except perhaps the developers themselves—really grasp these technologies, and if they do, have a hard time explaining it in layman’s terms.
Last Week Tonight’s John Oliver put it best when he described cryptocurrency as “everything you don’t understand about money combined with everything you don’t understand about computers.” He is not wrong.
In an attempt to demystify these enigmatic-yet-important technology drivers, I set out on a mission to learn as much as I could. Here are the basics:
As defined by John Pavlus, in his January 2018 article in Scientific American, cryptocurrency is “a form of digital currency that relies on the mathematics of cryptography to control how and when units of the currency are created and to ensure secure transfer of funds.”
Bitcoin was the first cryptocurrency, invented by someone (or a group of people; no one knows for sure) called Satoshi Nakamoto, who initially developed bitcoin as a “peer-to-peer electronic cash system.” Think Napster, but for money.
Wikipedia defines blockchain as a continuously growing list of records that are linked and secured using cryptography. Each block typically contains a cryptographic hash of the previous block, a time stamp and transaction data, which makes it resistant to modification.
Still confused? Once again, it’s John Oliver to the rescue! He helped me grasp the concepts of cryptocurrency, bitcoin and blockchain, and how they’re connected.
Here’s my summary based on Oliver’s explanation (and some other more technical resources). But for the full experience (and if you’re OK with the occasional expletive), I encourage you to watch the whole segment. (It’s not only informative, it’s hilarious).
What we need to know about bitcoin
Bitcoin only exists as computer code, and has no bank or government creating or controlling it. It has value, because people agree it has value, and should be treated like a speculative investment, rather than a currency. “Kind of like Beanie Babies in the ’90s. They were worth lots of money because people were willing to pay lots of money,” said Oliver.
Since bitcoin reached $20K in December 2017, it’s dropped by nearly half. However, people continue to invest in cryptocurrencies driven by fear of missing out (a condition commonly known as FOMO). Furthermore, whether it takes off is irrelevant, because the most important thing about it is the blockchain it’s built on.
What is the bitcoin blockchain?
Thousands of computers—called “nodes”—are connected across the globe to create the bitcoin network. New blocks of bitcoin are “mined” by downloading the latest version of a blockchain’s transactions for verification, then using brute-force computation to search for solutions that solve a difficult mathematical puzzle. The first node to discover the solution adds the mined block to the chain, essentially claiming its financial value as payment.
Bitcoin mining requires so much compute power to run these complex mathematical equations that it gobbles up more energy than is required to fuel the entire country of Denmark. In fact, a recent article in the Washington Post said the practice of bitcoin mining just about shut down Iceland’s power grid in February.
Why bitcoin is secure
Bitcoin is decentralized because it’s built on blockchain. So rather than verifying the transaction through a central location like a bank, blockchain creates a ledger for every transaction ever made, and stores them across a vast number of computers, which has advantages of both speed and security.
Company or bank ledgers are stored in one location, making them hackable. Bitcoin ledgers reside on thousands of computers, making it almost impossible to hack. Therefore, blockchain improves security, efficiency and trust.
Why is investing in cryptocurrency risky?
There are now over 1,500 cryptocurrencies because of open source blockchain architectures. Startups are using them to raise capital by selling coins as an alternative to issuing stock in what’s called initial coin offerings (ICOs).
It’s difficult to tell which companies are real and which are scams that sell tokens with no services to follow. Many of these companies are now under investigation by the SEC.
Bitcoin itself is extremely volatile and insufficiently regulated. In some cases, governments are concerned about it being used for illegal purposes.
Recent bitcoin headlines highlight its volatility and speculative nature. In April, New York’s attorney general began investigating bitcoin exchanges.
Time will tell its value: It could be worth nothing, or it could be worth billions and adopted as a new global currency. Oliver’s words of warning: Bitcoin trading is basically gambling, and should be treated as such.
A version of this post with more details on how bitcoin’s volatility impacts the semiconductor industry can be found here on 3D InCItes.