Cryptocurrency - Guide For Beginners

During the winter of 2017, a majority would have thought of this word as a gift dropped during the holidays from Santa himself and all those who blamed themselves for missing out on getting that Amazon stocks early or those missed the dotcom frenzy, during the start of the millennium, they all saw the next big thing in its prime, or so they thought.

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Most of them who heard it for the first time were skeptical as they saw an ungoverned space paraded by millennials who were deeply into gaming. Realizing that this is not their cup of tea, they backed away in the initial stages itself. However, many followed the crowd mentality and statements like, “The optimum time for buying the digital assets is now or else you will regret it for the rest of your life”, from that “Tech Guy” during the Thanksgiving dinner would have added fuel to the fire.

All this contributed to one of the worst timing of an investment and if someone had bought the assets during the frantic days (starting from the end of November 2017 and culminating on January 2018) would be down by at least 70% of their investment.

But is that all that Cryptocurrency is, the answer would be a “No”.

Hence the following questions need answers, “What is Cryptocurrency?”, “What is the technology behind it?”, and the most important one, “Should someone invest in it?”

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Origin

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The invention of Cryptocurrency was during the latter part of the Great Recession of 2008, on the month of January 2009. A developer or a group of developers under the pseudonym Satoshi Nakamoto introduced a new technology, “Blockchain” to ensure decentralization of financial system, contrary to the centralization in the current fiat financial system.

Nakamoto introduced this technology through the first ever Cryptocurrency, “Bitcoin” and like any technology, both blockchain and Bitcoin was met with skepticism and was under constant comparison with the current financial system.

During the launch of the coin, Nakamoto introduced it as a peer-to-peer transaction medium, which would enable a seamless transaction to its user that too without the backing of physical currency like currency notes or coins. Thus, in the initial stages, those people who supported the technology and saw a future for it tried to bring some real-world applications to the coin and technology.

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Such an attempt led to the Bitcoin pizza story, where some initial adopters of the coin bought 2 large pizzas for 10,000 bitcoins (Valued at more than 190 million US dollars during the peak of Dec 2017). However, all this and a lot more were done to increase the usage and popularity of the coin but still, Bitcoin eluded the mass adoption. Even though the idea of digital payment system free from fiat currency was golden the path towards it was not so much but it had the backing of one of the greatest technology inventions of recent times.

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Blockchain Technology

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The technology behind every Cryptocurrency out there is the same, blockchain. A blockchain is like an ever-running train and one by one each coach will be appended to the train in equal intervals of time. Whether or not the previous coach was full, the new passengers will only board the latest coach which got appended (The passengers never get down :D). Also, the run of the train and all the appended coaches are visible to every person around the world.

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Here the coaches signify the blocks in the blockchain, the time after which a coach gets appended signifies the Blocktime, the passengers signify the transactions and as the whole train is visible to every person, no manipulations can be done to the structure of the train, which is the most advantageous property of the blockchain technology the open ledger policy, which is achieved through a Block explorer that lists each and every transaction that ever happened on the Blockchain.

Now let’s introduce a scenario to this train run, say that the Government rewards the first person who spots the latest appended coach during the appending procedure, this act of spotting signifies Mining of the coin and the reward signifies Blockreward. Hence, only if someone mines the next block, the blockchain essentially moves forward. Also keeping in mind that the train is in constant motion and as is visible to everyone, no one can alter the structure or passengers of the train, ensuring credibility and decentralization.

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Features of a Coin

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Now let’s introduce some technicality to this, the act of finding a block is not as easy as it sounds. For this, a person needs a powerful processor and the processor solves complex mathematical calculations resulting in the mining of the block and as a coin’s value increases it becomes more and more difficult for a single processor to mine the block and this is where multiple processors come in to play.

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The features Blocktime, Blockreward and the mining of a new block are specific to each coin and vary widely, and as an example, the features of Bitcoin are:

Blocktime – 10 Minutes

Blockreward – 12.5 (Currently, this also decreases or increases over time according to the coin’s settings)

Method of Block Generation – Proof of Work (POW)

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Growth

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The growth of Bitcoin or cryptocurrencies has been staggering, to say the least. In the last 10 years, the whole market of cryptocurrencies has appreciated by values of 1000 folds, which was the prime factor that drove people into this space. But during this time, it has not only just increased in value but has also improved the technology to a great extent. For instance, the initially introduced Proof of Work or POW method for block generation in Bitcoin has since come under criticism for its immensely large consumption of power, for e.g. all the bitcoin mining activities combined is consuming 2% of the global power.

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The coins which are relatively new have since migrated to newer economic friendly block generation methods like Proof of Stake or POS.

The last two years have been significant in terms of Cryptocurrency as the year 2017 saw the great increase in value and popularity. Whereas the year 2018 saw a depreciation of the value of assets but major technological and juridical improvements, hence these two years are regarded as the coming of age for Cryptocurrencies.

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Conclusion

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The technology of blockchain and the market for cryptocurrencies, both have lots of room for improvement. The implementation of blockchain technology outside digital assets are also being explored by both private and public agencies. There are still a lot more that needs to be understood about Cryptocurrency starting from wallets, trading, exchanges and of course the risks involved, which can be set for another day. As always, don’t take this or any other article on cryptocurrency as financial advice, rather do your own research when investing your hard-earned money, because cryptocurrencies are both famous and notorious for its volatility.