What are Cryptocurrencies?
We have had many questions about bitcoin and blockchain recently. Because this is such a hot topic, we will try and explain as simply as we can, this complicated subject that has gained in popularity so fast.
Bitcoin was the first of what is now several cryptocurrencies. In January of 2009, the bitcoin network came in to existence. A person or persons named Satoshi Nakamoto implemented the bitcoin software as open source code. The identity of Nakamoto remains unknown, and that person or group does not have control over bitcoin today.
Bitcoin was the first decentralized – meaning no one administrator, central party or institution is in charge – digital currency. The network is peer-to-peer and transactions are directly between users with no intermediary. Transactions are verified and recorded in a shared public ledger called a blockchain – on which the entire bitcoin network is reliant. All confirmed transactions are included in the blockchain. Blockchain is a software system that resides on thousands of computers all over the world. It is maintained by both ordinary people and sophisticated computer experts – known collectively as miners. Mining bitcoins is complex and takes an enormous amount of processing power –so much energy that they can heat your home!
All bitcoin transactions are permanently recorded by miners who upload bundles of transactions, or blocks, to the chain. All these transactions are maintained on all those computers previously mentioned. Each time a block gets completed, a new one is generated. There are countless numbers of such blocks in the blockchain, connected to each other (like chain links) in proper linear, chronological order. Each block contains a hash – a mathematical algorithm that has information security applications — of the previous block. The blockchain has complete information about different user addresses and their balances right from the first block to the most recent.
The blockchain was designed so transactions cannot be deleted or altered. The blocks are added through cryptography – military grade technique for secure communications. The ever-growing enormity of the blockchain may be a potential problem for storage and synchronization (process of downloading and verifying all previous bitcoin transactions on the network) in the future.
Back to bitcoin! The blockchain is perhaps the main technological innovation of bitcoin. Because it is unregulated, its users dictate and validate transactions when one person pays another for goods and/or services – thus eliminating the need for third parties to process or store payments. These transactions are validated on the blockchain network through computing “consensus” – multiple miners verify the transaction, which prevents fraud.
Even though the price of bitcoin has been incredibly volatile of late, there are a growing number of individuals and businesses using bitcoin. Popular online services such as Namecheap, Overstock.com, and Reddick are accepting bitcoin as payment. Even brick-and-mortar establishments such as restaurants, retailers, and car dealerships have announced the ability to use bitcoin for payment.
While the future of bitcoin as the primary cryptocurrency is uncertain, the blockchain technology is not going away. The benefits of decentralization, the removal of the middleman (which could mean lower transaction fees), and importantly, the ability to process transactions in seconds/minutes instead of days/weeks, makes for some compelling prime advantages for the future of the blockchain.
Market Commentary:
In staying with our bitcoin/blockchain commentary, Occam Capital® is not able to purchase nor are we endorsing the purchase of bitcoin or any of the other cryptocurrencies. Everything is subject to change, but the current speculative price point for bitcoin, the inability to assign some kind of valuation to this or any other cryptocurrency, and the sheer daily volatility preclude this an “investment” for our consideration. As an aside, a very technology savvy friend has been trying to set up an account with several sites in addition to Coinbase, a popular digital currency exchange in San Francisco. After two weeks, he is still waiting for verification of his account so he can purchase among the various cryptocurrencies. The speculative demand, which in our opinion is the main factor at this juncture for the rapid rise and fall in price, has clogged the exchanges for those who wish to simply set up an account and trade cryptocurrencies. Be careful out there!
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