Blocks & Blockchains
Blocks are packages of data. The critical part to remember here is that these blocks carry permanently recorded data. As transactions happen, information for each one is collected, then validated by the network. Eventually, the data will reach a predetermined size and then combined into a block.
As these blocks are created, they don’t continue to exist alone and separate. They become linked with other blocks; this is what is called a Blockchain. A blockchain itself is a file, a shared public journal or ledger of transactions, and acts as a historical record of those transactions – from the first block in the chain to the latest – continuously growing. A blockchain protocol runs on a P2P network of computers that all run the protocol and hold an identical copy of the ledger. While it is public and therefore everyone can inspect a blockchain, no single person can control it. It is cryptographically secured from being tampered with.
Cryptocurrency has been given a few names: digital tokens or just tokens, digital assets, digital currency, virtual currency, digital coins, etc. Essential though, cryptocurrencies are just a type of digital asset used as a medium of exchange. They are all stored in a blockchain, each blockchain having its own digital coin. The original and most known cryptocurrency is Bitcoin. Altcoins are all other. Examples are Ether, Litecoin, Monero, Dash, Zcash, etc. and each one has their own properties and functions.
Historically, traditional currencies are backed by a physical commodity like gold or silver. ‘Fiat’ currencies, like the U.S. dollar, are legal tenders declared by governments that are based on the relationship between supply and demand and the credit of the economy. It doesn’t have an intrinsic value itself as it is just paper money and physical coins made of low-value materials.
Because of blockchain technology and the way cryptocurrencies work, you are purchasing what could be considered a tech stock. The term cryptocurrency is from the combination of cryptography which is the practice of techniques for secure communication and currency which is money in any form. However, cryptocurrencies have more in common with stocks than they do with currencies.
The History of Blockchain Technology & Cryptocurrencies
Blockchains are a new technology that is made up of old technologies that have been in use for thousands of years. For example, using tokens, coins or bills that represent a value as a form of payment. Another essential part of this equation is cryptography and as mentioned previously is the practice of techniques for secure communication but under the eye of third parties. Blockchains themselves are ledgers. Ledgers have been in use for thousands communication but under the eye of third parties. Blockchains themselves are ledgers. Ledgers have been in use for thousands of years to record financial transactions.
The concept and the technology that is critical to the cryptocurrency market today were first introduced in the fall of 2008 in a whitepaper. It was initially part of a proposal for the now famous, Bitcoin, with the purpose of creating a peer to peer money transfer system without the need for banks.
In 2009, it was released as open-sourced software. As an interesting side note, the whitepaper was written under the name of Satoshi Nakamoto and to this date it is not known whom this person (or people are). The blockchain technology innovation allowed Bitcoin to be considered the first digital currency to solve the double spending problem. Double-spending occurs when someone can easily lie about receiving currency and spend it twice with a very low chance of being caught.
In 2010, ‘Nakamoto’ who had been working with other open sourced developers on Bitcoin decided to step away from the project. Control was handed over to trusted and prominent Bitcoin core developers.
2011 saw the introduction of ‘altcoins.’ These coins are considered to be any cryptocurrency other than Bitcoin and are created from ‘forks’ of Bitcoin. A fork is when the developers of a cryptocurrency decide to change the programming of a coin. Ideally, this is done to upgrade the code of a specific coin to help it flourish. In 2011, these forks were created to introduce cryptocurrency alternatives to Bitcoin. Since then hundreds of new cryptocurrencies have been developed and are gaining market speed very quickly.
The Future of Blockchain & Cryptocurrencies
Government and Bank Adoption
The concept of the blockchain was created to solve the problem of digital trust. Many in the cryptocurrency space feel that this technology will allow our world to operate entirely online. They believe this because blockchain technology provides the ability to record information in an area that can’t be removed and allows everyone to see changes that do occur. This makes the problem of deception and tampering more difficult. This is the one reason why many economic experts are beginning to speculate that world governments and big financial institutions will eventually create their own cryptocurrency or at least, incorporate aspects of the technology into fiat currencies.
While Bitcoin and the second closest rival Ethereum (which is the platform Ether is used on) have proven they have staying power, the market and technology are continuously experiencing innovation. Expect to see potentially unknown coins become stronger as there is room for more competition even with the hundreds of cryptocurrencies already on the market.
ICOs Will Change How Companies Raise Capital
An ICO (Initial Coin Offering) is an unregulated means of crowdfunding. ICOs are becoming an attractive option of raising capital for startups, or even for more established companies. For example, there wouldn’t be a need to personally find, meet and convince individual investors to invest in your business as anyone can participate as an ICO investor online.
Regulations Will Be Created
Right now, the cryptocurrency market is in an awkward growth stage and governments, banks and other officials are still trying to figure out how to handle this technology. Elena Kvochko, Chief Information Officer of the Security Division at Barclays, said that her bank had talks with regulators about Bitcoin, blockchains, and their ilk. The officials appear to be open to the idea as long as “know your customer” laws are obeyed, and countries are already coming with ways of accommodating the new technology.
The Market Will Become More Stable
Cryptocurrency prices can and do fluctuate, sometimes drastically. Bitcoin, the oldest of all the coins, has gradually become more stable over the years and so there is a reason to believe the rest of the market will as well. The case for this depends on whether a strong argument can be made that beats using traditional money. The hope is that as more and more of the world begins to interact with each other online, cryptocurrencies will be more of an attractive option because of their many benefifits.
Cryptocurrencies Will Force Payment Processors to Improve
Payment processors such as Visa or Mastercard charge fees whenever you use your cards. It has been pointed out by Nicko van Someren, Chief Technology Officer of the Linux Foundation, that the charge exceeds the cost to clear or settle transactions. Should the world increase its adoption of cryptocurrencies, this could force these payment processors to become more competitive. These companies, as well as banks, would need to adjust their pricing closer to the real cost of handling transactions.
The Fundamentals of Cryptocurrency Trading
They are Irreversible – No Matter What
Once a transaction has been confirmed, it can’t be changed; this is a crucial point to remember. If you sent your funds by accident, to the wrong person or worse, someone who has scammed you – there is no way to get them back.
Transactions happen fast – within minutes. No need to wait hours or even days. No matter where you are in the world, no matter how close or far you are to the person you are sending cryptocurrency to. Fast transactions combined with irreversibility means you need to pay attention to what you are doing.
Nobody Knows It’s You
Back when cryptocurrency first started out, privacy and being anonymous was essential to early traders. Today, it’s still common for traders to create aliases so that all the transactions, accounts, and stored data you have can’t be tied to your real-world identity. This might sound a bit paranoid, but the system is set up to prevent identity theft. For example, credits cards use a ‘pull method.’ When you use your credit card to pay for something, you are giving that merchant the right to access your full credit. The merchant pulls the money from your credit card account. Cryptocurrency “pushes” the transaction instead, meaning you send the exact amount what you want to the recipient and they don’t get access to any additional information.
Your Funds are Safer Than in a Bank
There is a very strong measure in place where your cryptocurrency funds are locked in. It’s called a public key cryptography system which means only the owner of the private key can send the money. Remember the previous point – it’s a “push” transaction, not a “pull.”
Easy to Get Started
It is incredibly easy to get set up and start trading. You need some software, somewhere to store your money and a little knowledge. We will cover what you need in a later chapter. There are no special regulations or certifications. You don’t have to report to anyone or ask permission. No one is watching you. It’s just you and trading. Controlled Supply Could Boost Value Over Time The amount of most cryptocurrencies decreases over time. This is done by a special piece of source code that specifies how much can exist. This makes cryptocurrencies more like precious metals or limited non-renewable resources. Unlike traditional forms of money, where it is possible just to make more, that is impossible to do with cryptocurrencies.
Banks Can’t Touch You
For those who worry about bank policies leading to future economic instability then trading in cryptocurrencies is a desirable option. Cryptocurrency trading happens entirely outside of any direct control of national banks. This also means that a bank can’t freeze or seize your bank account for whatever reason. They can’t reverse transactions. They can’t touch your money. How is this possible? This is the case because the cryptocurrency ledger lives on a decentralized network with identical copies existing in numerous locations globally.
Self-Interested Quality Control
Mining happens when transactions are verified and added to the blockchain. Mining is done by real people who use special software to ensure that all the transactions in a blockchain are indeed verified. They get compensated for this work. It is in their own self-interest financially to keep accurate, up-to-date transaction records. This process secures the integrity of the whole system and the value of the currency itself.
Cryptocurrencies have numerous security features that ensure there are no acts of duplicating the digital funds. This eliminates the need for transactions fees to support third-party payment processors like a credit card company or PayPal who would typically charge to check those transactions. Miners take over this work and are compensated with new currency units and sometimes optional transaction fees.
Easy to Use
Using cryptocurrencies globally is easy. They are not tied to ever-changing rates or transaction fees. These funds can be exchanged and utilized internationally without experiencing the usual problems using different forms of currency between countries
What Can You Do with Cryptocurrencies
You can purchase goods, services or trade for another type of money. Some colleges now accept Bitcoins as tuition fee payments. In 2013, The University of Nicosia, a private school in Cyprus, became the first university to accept Bitcoins. In 2014, New York-based, King’s College became the first US school to accept the digital currency. Grocery stores, cafes, retail stores, travel agencies, insurance providers, even luxury car dealerships have all reported that they allow cryptocurrencies as forms of payment. Bitcoin ATMs are also being installed in popular urban centers. Other options to spend cryptocurrencies will be developed as the adoption rate increases around the world and cryptocurrencies become more mainstream.
Top 10 Cryptocurrencies
Bitcoin is the first decentralized ledger currency, founded in 2009. Bitcoin was initially created to facilitate easier global transactions with low transaction fees that can be transferred almost instantly and were not controlled by any central financial authority
The concern of scaling has always been an issue. For example, a transaction can take about 10 minutes to process, and as the network of users grow the wait times get longer, in comparison, Visa can process 1700 transactions per second.
Today, Bitcoin has become the most popular cryptocurrency with the highest market value. Bitcoin is leading the way for more mainstream vendors to adopt this form of currency for everyday type of purchases
Ether is the coin used by the Ethereum platform and is very different to Bitcoin and other altcoins. In fact, initially it wasn’t designed to be a currency, it was designed to support smart contracts. The idea was that Ethereum miners would provide companies their processing power so that these companies wouldn’t need to invest in additional servers. In this scenario, Ether is used to be a form of payment on a platform.
The initial release date for Ripple was in 2012, and it was created for peer to peer debit transfers. It is the third most popular cryptocurrency in terms of market value as of the September 2017. Bitcoin’s primary purpose is to be a payment method while Ether is meant to be used for smart contracts. Ripple also has a different use. It has become a decentralized solution for financial institutions and acts as both a cryptocurrency and a digital payment network. This situation developed because a wide range of financial institutions began to take notice that the technology eliminates delays, confirms that a settlement has taken place in real time (about 4 seconds), and can sustain 1000 transactions per seconds while Bitcoin is only averaging 3 to 4.
On August 1st, 2017 Bitcoin forked, and created Bitcoin Cash. This fork was started by Bitcoin miners and developers who were concerned about Bitcoins ability to scale. Bitcoin Cash implemented an increased block size as well as other measures to speed up the verification process regardless of the number of miners supporting it. While these changes have raised concerned about security, it has not prevented this cryptocurrency from quickly rising up the market ranks.
Litecoin was released on October 7th, 2011 by Charlie Lee, a former Google employee. It was a fork from Bitcoin and in many ways technically nearly identical. This peer to peer cryptocurrency that is also open source and completely decentralized was created to solve some of Bitcoin’s problems. Litecoin has faster transaction confirmation times, better storage efficiency and almost zero payment costs.
In January 2014, Dash was released as XCoin and a little more than a month later the name was changed to Darkcoin. In March of 2015, it was renamed again to Dash – a blend between ‘Digital’ and ‘Cash”. Dash is a bitcoin-based currency that features instant transactions, private transactions and is decentralized. Its goal is to become the most user-friendly and on-chain-scalable cryptocurrency in the world
Back in its first inception of NEM, the goal was to create a community-oriented cryptocurrency from scratch. This was a big undertaking and had its challenges. Eventually, a stable version of NEM launched on March 31, 2015. NEM’s platform has many beneficial services such as like payments, asset making, and messaging.
IOTA is considered to be the first blockchain free cryptocurrency and instead uses what is known as the Tangle ledger. It has some very unusual characteristics such as not being able to be mined, the number of coins issues is strictly defined, and it is impossible to issue new coins above the preset ones. However, the developers have said this new technology has solved the common problems of Blockchain such as centralization of control, obsolete cryptography, inability to conduct micropayments, partition intolerance, scalability limits, high requirements for hardware as well as others.
Neo is often to referred to as “Chinese Ethereum” and is the first decentralized, open-source cryptocurrency in China. In late September 2017, China announced a ban on ICOs which affected Neo but the price eventually corrected itself.
Monero (originally BitMonero) was created in April 2014 and focuses on privacy, decentralization, and scalability. It runs on runs on Windows, Mac, Linux, Android, and FreeBSD. Monero developers believe it is superior to Bitcoin because of its mining algorithm, adaptive block limit, strong privacy controls and the quality of their overall development and research teams