Digital currency has been around for many years but it is only during the past 7-8 years that crypto currency has emerged and is the new kid on the block with Bitcoin being the leader, Ethereum following and about 1500 others trailing behind. But what IS bitcoin and what on earth is Blockchain?
Let’s work through this together and gain a better understanding of these new currencies. We will start with fiat currency.
Fiat currency is of course is what we all know such as Dollars, Pounds, Euros, Yen, Yuan and so forth. This is the cash we use to buy goods and services and pay our bills and what we all traditionally know as money or hard currency. Money, or currency, is basically an idea backed by confidence. The more confident we are about a particular currency the more value we place in it. The value of a currency changes day by day and this is what currency traders’ work on, how the confidence level of a particular currency changes in relationship to the confidence level of another currency.
Digital currency (digital money or electronic money or electronic currency) is a type of currency available only in digital form, not in physical (such as banknotes and coins). It exhibits properties similar to physical currencies, but allows for instantaneous transactions and borderless transfer-of-ownership. Think in terms of credit cards and money in the bank. These are digital currencies and they can be transferred from one individual, or business or bank to another.
95 percent of all currency in the world is actually digital, held as what is called M2 or M3 (Definition of M0, M1, M2, M3, M4. Different measures of money supply. … M2 includes M1 plus short-term time deposits in banks and 24-hour money market funds. M3 includes M2 plus longer-term time deposits and money market funds with more than 24-hour maturity.) in the global financial system and not held in physical form. This is your dollars, yen, yuan, pounds or whatever country currency is being used and is called digital currency because no actual cash changes hands with the transactions or trading of currencies. It is increasingly being accounted for and traded on the Internet, where it can be exchanged at an ever lower cost.
Virtual currency is a little different in that it is an online currency only and is not exchanged or traded outside of the internet. This type of currency is mostly used as exchange for physical items such as
T-shirts, hats, mugs and other items, also some services can be obtained with virtual currencies. Virtual currencies originated from gaming systems and are still used in the arena. Where the confusion can lie is where a virtual currency, such as Bitcoin, starts to be used to purchase items or service such as in Japan where one can use Bitcoin to buy merchandise in a store or a meal in a restaurant. This tends to make them now digital currencies since they have a specific value against the fiat currency normally or previously used. This applies now to person to person exchanges and so the demarcation between the two tends to disappear. If one accepts the European Central Bank’s October 2012 report on emerging currencies, one can assume that the distinction between a digital and a virtual currency is found only in an exchange or interchange between entities such as people or companies.
Crypto Currency – Bitcoin
The two terms Digital and crypto are often interchanged but there are some significant differences between digital and crypto currencies. Firstly crypto currency, whether Bitcoin or some other is like any other currency, an idea built on confidence. The dramatic rise of Bitcoin since its inception is testament to that. There is a lot of confidence in Bitcoin. Remarkably more so than in the dollar, since the dollar is reducing in value as evidenced by the need to use more to purchase the same value of goods or services. If one has confidence in any medium of exchange then it can be used as a medium of exchange otherwise it will not and will have no value. So strictly speaking it is a digital currency
Bitcoin is an electronic virtual currency created by a complex mathematical formula (actually called a cryptographic algorithm such as Sha-256, Script for example). Cryptocurrency can be both a digital and a virtual currency then, whose creation is based on a cryptographic algorithm. A computer solves cryptographic algorithms using hardware and electricity to get the representation of one unit of value, typically called a “coin”. Bitcoin, Etherum and other coins are all produced the same way. Their value, again, depends on how much confidence is placed in them.; It takes a lot of computer power and energy (electricity) to create a bitcoin so it is not something a person can do on their home computer. Bitcoins are created in large warehouses or factories if you like, with hundreds of computers using massive amounts of energy. For example, there is one in Iceland that has an energy bill of a million dollars a month. So In answer to the question, where do Bitcoins come from, no one actually ‘mints’ bitcoins. A bitcoin is created or ‘mined’ as it is called, when a certain amount of energy is used to solve a complex equation. A bitcoin does cost some value then to create. It is not free. This essentially applies to all types of crypto currencies.
According to Wikipedia, “A cryptocurrency (or crypto currency) is a digital asset designed to work as a medium of exchange using cryptography to secure the transactions and to control the creation of additional units of the currency. Cryptocurrencies are classified as a subset of digital currencies and are also classified as a subset of alternative currencies and virtual currencies.”
“Bitcoin was the first decentralized cryptocurrency, and was created in 2009 by developer Satoshi Nakamoto who issued a white paper, Bitcoin: A Peer-to-Peer Electronic Cash System. Bitcoin and its derivatives use decentralized control as opposed to centralized electronic money/centralized banking systems.”
What is a Blockchain?
A blockchain is a concept that is difficult for many people to understand possibly because it is new concept and quite different to the way people understand databases, financial transactions and records (a ledger is a balanced record of transactions performed). Firstly a blockchain is a chain of blocks of data. The data is like a ledger but in computer language.
A good analogy of a blockchain is like a book with each block being a page. The pages run in sequence and are connected by the end and beginning words on each page. This makes up the book. One can liken each page to being a block on the chain with each block connected to the previous block by the end and beginning code in the block. Now the decentralization part is the genius of this. Whereas a book once printed is not updated and, importantly, not added to subsequently, a block chain can be. It’s like adding a page to the end of the book and this page added simultaneously to all the copies of the book all at once at the same time. That is basically how block chain works. The book just gets longer and longer each time a page is added and that is a permanent record with everyone’s copy of the book growing at the same time.
The decentralization part is the fact that there are untold copies of the book spread around but the important thing is that each time a ‘page’ is added to the book it is done immediately in every copy owned anywhere.
Crypto Keys and Wallets
Most people are familiar with and use username and password technology and the two-step verification code but this is a system that can be exploited by hackers so instead blockchain uses an encryption technology instead. This works by each person having both a public and a private ‘key.’ These keys are usually about 30 plus characters long and composed of numbers and letters. A “public key” (a long, randomly-generated string of numbers and letters) is basically the users address or username address on the blockchain. All bitcoins that are sent across the network to an individual’s public key are recorded as belonging to that individual. However these bitcoins are inaccessible except by the use of a private key that is somewhat like a password and gives the owner access to their bitcoins. Of course one needs to carefully save and keep secure one’s private key just as one does with any password. Your bitcoins are ‘contained’ within your wallet. This is like the wallet in your back pocket except that it is digital and encrypted so only you know who owns the wallet and how much value there is in it in Bitcoins or any other currency for that matter. Although there are different types of wallets they are all generally anonymous.