Like a lot of people I have been trying to wrap my head around crypto currencies like Bitcoin and terms like Blockchain. I think the concept is perhaps more easily grasped by people who've grown up in the Internet age than for a dinosaur like me whose first introduction to a machine for doing simple arithmetic was an abacus in grade school.
No I don't mean Biblical times, I'm not THAT OLD. There were adding machines around when I was a kid, but they were expensive and cumbersome and they didn't run on battery power.
In trying to understand Bitcoin, Ethereum and the rest, I think its helpful if you take into consideration the history of money. Understanding the evolution of currency won't help with the more technical aspects, but I think it helps explain why digital currencies have caught fire.
In broad strokes money has evolved from coins, to paper, to digital transactions and now to digitized cryptocurrencies. And with each step in this evolution there have been dinosaurs who prefer the older and, (for them) more trusted forms.
When paper money was widely introduced in the 15h and 16th centuries I have no doubt there were some who preferred dealing with a coin containing some precious metal like silver or gold, something with hard and tangible value. But over time paper money came to be accepted.
Paper money for hundreds of years was backed by precious metals, at one time there were "silver certificates" in circulation, pieces of paper backed by precious metals. Then the so called "gold standard" was abandoned in most of the developed world and was replaced with what essentially are "fiat currencies".
In a nutshell "fiat" means that the value of money is based on perception, or belief. In turn that affects the normal market dynamics of supply and demand. Why is the US Dollar worth more than the Canadian Dollar? Because there is more demand for US Greenbacks than for Canadian Loonies. And now we live in a world where physical money is used less and less, replaced by debit cards, credit cards and people using their cell phones with services like Apple Pay.
That's a lot of preamble, but it shows money's evolution:
- From something of hard and tangible value, a coin made of gold, silver, copper.
- To a piece of paper leveraged against metals like gold and silver.
- To simply a piece of paper leveraged against nothing.
- To a world where people transact thousands of dollars worth of monetary exchanges without ever once exchanging any physical currency.
And now we have crypto currencies that literally do not exist in tangible form, they're digital.
Alright alright....I can just hear my loyal readers (all three of them) saying: "Thanks for the history lesson professor, you've told us what crypto currencies are not, now can you tell us what they are".
I can try, but understand I don't proclaim myself to be an expert, however I do think I have a decent enough handle on Bitcoin.
As I concluded at the end of that ham fisted history lesson, Bitcoin and the like are digital. So it might help to understand them in terms of something else that is digital that pretty much everyone understand, digital pictures. When you look at a picture on your smart phone you're looking at something that doesn't exist in physical form, its something that is written in digital code.
Okay okay....I know what you're gonna say. "Yeah the picture might be digital genius, but I can print it and hold the actual picture in my hand"!! "How do I do that with Bitcoin"???
The short answer is, you can't. Well, maybe.....but you might have to chop down a few redwoods for all the paper you're going to consume. That's because each Bitcoin is line after line, after line after line after line, of encrypted code.
That's what the blockchain is. Everyone who touches the coin, every transaction and movement is included. That's why the so called "mining" of Bitcoin is so expensive, it takes massive computing power and tons of electricity to extract these "coins".
Bitcoin miners all around the world, working as individuals or in teams are trying to unlock bitcoin by solving incredibly difficult puzzles. I am not a computer programmer, so my explanation is going to fall short of a full and satisfactory explanation. For those who want to understand beyond my layman's explanation, I'll direct you to investopedia's explanation here:
I am going to add just a bit more, about something else that is essential in the CryptoCurrency equation, something else that is intangible. That other thing is TRUST.
For older individuals like myself trusting digital currency is a hurdle. I grew up getting an allowance, at the risk of dating myself I will tell you how much I got. Once a week my father would give me a quarter, 25 cents. He didn't use a smart phone, and there was no electronic transfer of 25 cents into my account. I would hold out my hand and be given a physical coin.
Things have evolved since then, I still like having actual physical money in my wallet, but I'm comfortable now paying my bills, my mortgage, and lots of other transactions without ever once touching any actual money. Each month I transact thousands of dollars in economic activity without once having to hand over something that is physically real.
The blockchain is what provides this trust for users of CryptoCurrencies like Bitcoin. I do consider it a leap though for older individuals like myself. But in another 10 or 20 years? When debit cards were first introduced a lot of people said they wouldn't use them, and some still don't. But the world is forever changing and evolving and I'm coming to the conclusion that things like Bitcoin are going to be adopted widely.
I'll have more to say on this later, especially about the market for stocks that are jumping on the CryptoCurrency BlockChain bandwagon.
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