A Crash Course on Cryptocurrency

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Crypto tokens and their associated blockchain technology have become all the rage in certain circles, but many people don’t really understand the technology at all. This article is intended as a primer on what crypto is, without the strong biases (for and against) that generally accompany such information. Time to  dive into a Crash Course on Cryptocurrency.

 

What Is a Cryptocurrency?

Cryptocurrency is a term used to define any digital coin or token that is used to exchange value, generally for a product or service. In this sense, it is similar to traditional fiat currencies, such as the American dollar. However, most cryptocurrencies have no central authority comparable to the Federal Reserve or U.S. Government, meaning that their value fluctuates dramatically according to the whims of the market.

Bitcoin is the most famous and, by extension, most valuable crypto token, but many alternatives to it (called altcoins) also exist.

 

How Does It Work?

Most cryptocurrencies run on blockchain technology. The blockchain is a decentralized public ledger that lists every transaction that a particular token has ever been used for. This information is stored digitally on virtual “blocks” that work like the SD card you store digital pictures on. When one fills up, the system adds a new block so that new transactions can be recorded. These blocks are said to be “chained” together, hence the term blockchain.

Each token has its own blockchain, so let’s look at Bitcoin’s as an illustrative example.

How Bitcoin Works

Image by: WSJ Graphics 

Each transaction on the Bitcoin blockchain contains three data points: the Input Address, Amount, and Output Address. In reverse order, the Output Address is the electronic wallet that received tokens in a given transaction. For example, if Ellis gives Bitcoin to Ellen, Ellen’s Bitcoin address is the Output. The Amount is also self-explanatory, as it indicates how many Bitcoin were transferred.

The Input Address can be a little more confusing. Returning to the example above, you might think that Ellis’s Bitcoin address would be the Input Address, but you would be incorrect. Instead, the Input Address is the account(s) that transferred the Bitcoin to Ellis that he is now transferring to Ellen. For instance, if Kim originally gave Bitcoin to Ellis, her address is the Input Address for the Ellis to Ellen transaction.

That might seem convoluted, but it allows individual tokens to be traced through every account they have ever been in, back to their origin point. Supporters cite this as a security feature, as any suspicious transactions can be traced and reversed in a way that isn’t possible with online banking.

Speaking of security, every Bitcoin transaction is also verified by volunteer “miners,” or individuals using powerful computers to crunch the numbers and determine whether each new transaction makes sense given those that came before it. If Ellis previously gave all of his Bitcoin to Bob, the transaction to Ellen will fail because the tokens are no longer in his account. Miners receive Bitcoin for their efforts, theoretically ensuring that there are always enough miners to process Bitcoin transactions.

Unfortunately, periods of especially high volume can tax volunteer resources and slow processing down. The current system can process 3-7 Bitcoin transactions per second, a number that pales in comparison to the 24,000 Visa can process in the same time frame. These long wait times (and the unstable value per token) are often cited by opponents of cryptocurrency as reasons that it is not an economically feasible alternative to fiat currencies.

How Many Bitcoins Are There?

Each blockchain includes programming for how many of a given token may be released onto the market. For instance, Bitcoin’s limit is 21 million BTC. Most tokens do not launch with their planned market cap in circulation, instead of releasing new tokens as payment to miners verifying transactions. Once the planned market cap is reached, miners are compensated via processing fees paid by those involved in a given transaction instead.

If you’ve heard of cryptocurrency investors, they tend to prefer smaller circulations so that individual tokens hold more value. For instance, consider the altcoin Ripple (XRP). Its planned circulation is 100,000,000,000 XRP, making it virtually impossible for one XRP to have enough value for investors to profit off of. However, a larger supply promotes lower valuations that facilitate day-to-day transactions. In December of 2017, Bitcoin was valued at approximately $20,000 USD per token. Can you imagine trying to buy a gallon of milk at the grocery store with a currency worth $20,000 per unit?

 

How Do I Get Crypto?

If you’re interested in owning your own cryptocurrency, your best bet is to use an “exchange” that facilitates fiat-to-crypto and crypto-to-crypto transactions. Coinbase.io is often recommended to beginners for its ease of use and ability to fund your account with a credit card, though these conveniences cost extra in terms of fees and exchange rates. As you gain experience, you might want to get an independent wallet that allows you to shop around to get the best pricing.

Wallets generally consist of two random strings of characters. The first is like a username in that it distinguishes your account from all of the others on the blockchain. As such, it is public information. The second is your private key, or the password you type in to verify that it is actually you completing a given transaction. Anybody with your private key can complete crypto transactions as if they were you, so this information should be kept as securely as your banking information.

 

Where Can I Learn More About Crypto?

CoinMarketCap is considered the gold standard for cryptocurrency pricing information, including a given token’s planned circulation, current circulation, and price trends. You can also learn a lot on crypto news sites such as this one you are now. Finally, social media platforms such as Twitter, Reddit, and STEEMIT often have vibrant crypto communities, though again you need to watch out for bias in what they are saying.

 

Final Thoughts

Crypto is an ever-evolving field that can be taken much more in-depth than the information above. An altcoin called Ethereum has a programmable blockchain that developers can use to create a centralized hub of technological innovation. Blockchains can be “hard-forked” to separate one blockchain into two distinct ones, each with its own token. However, understanding these details isn’t necessary to grasp the concept of cryptocurrency as a whole. If the technology interests you, you will have plenty of time to research the particulars.

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