Cryptocurrency (e.g. Bitcoin) explained

Bitcoin is simply a digital representation of cash, the stuff we used to exchange with shopkeepers before cards came along.
The problems with cards are many but the biggest one is that:
1. There is no degree of anonymity as associated with Cash
2. You never know for sure who you are accepting payment form and whether the payment will be clawed back.
The problems with money (Fiat Currency) were exposed by the recent financial crash
1. There is the risk of sending the same money to numerous people unless a central record is held. That central record, the banks is an inherent risk
2. Just like the kings of old scratching a little gold form every coin, bankers have numerous ways to achieve similar aims and they are smarter and more motivated than their regulators, so money is a terrible store of wealth. ( I would argue it always was, but that’s a different conversation.
3. Governments frequently interfere with currency and damage its value in all kinds of was. That’s really the same as the last argument but for one difference. Bitcoin is not attached to any nation state. It is early days though
People like bitcoin are creating an alternative currency to address the need for fairly anonymous cash-like transactions and a store of wealth that is immune to inflation that effects fiat currency. By the latter I mean things like quantitative easing whereby a government simply prints a lot more currency to speed up the economy. That means that, given no new value has been created, each unit of currency in that country is now worth less.
Bitcoin is immune to this sort of interference, though not guaranteed to be immune long-term.
Value of Bitcoin
The value of bitcoin is rather like a “Giffen good” in that the value is manipulated through maintaining scarcity. Only through Mining can the total volume of bitcoin be increased and the success of mining is carefully manipulated by making the mining task difficult and slow in relation to the available tools. Longer term who knows where this will go.
A distinction worth mentioning is that Fiat currency, for all its faults is created by lending and that lending is secured by assets, hence the Fiat currency does in fact have a base in real tangible assets though they are dependent on supply and demand for that value. Bitcoin has no such base in assets and is nothing other than a token whose value is only supported by supply and demand. That may be largely a mute point but nevertheless factual. It is important because fiat currency is ultimately driven by economic fundamentals even if this is disguised by noise, Cryptocurrency is a tulip festival i.e. a bubble, though we may be about to learn that good bubbles are better than bad currencies.
Bitcoin is Currency
So its just like a pound or dollar except it is in your bitcoin wallet not your pocket. You can send a bitcoin payment to friends or to businesses that accept bitcoin and you use it to make purchases. For example, you can have a Starbucks and pay via bitcoin. Some Bitcoin directories Airbitz – Open Bazaar Coinmap Purse.io – How to buy bitcoin online

Bitcoin is semi-anonymous
In everyday there is no reason why anyone other than you should know your identity if you don’t want them to, nor do they need to know it in order to be confident in receiving your payment. Your identity in bitcoin is a hashed string and you are authenticated via a digital signature. Although anyone can access and inspect the ledger, they only see these identity strings, not names and addresses.
In reality however, just like advertisers misusing cookies, a rogue or a security agency need only find a connection between your true identity and your bitcoin identity just once in order to generate a detailed trail of all your transactions. To avoid that would require enormous discipline and knowhow beyond even the average crook, so it is not a safe haven for criminals in the long term, but perfectly safe if you want privacy form family and others.

Bitcoin is Secure
Why is bitcoin secure? Well the business pays “Miners” to constantly check the integrity of the “blockchain”.

Now we need a diagram.

How bitcoin works

This is kept very simple because we are not about to build our own currency.
1. Unlike a bank, there is not a central ledger, but a great many copies that replicate themselves all around the internet. Even if a determined crook compromise one or two, all the others would still be intact and he would gain nothing.
1. The ledger contains a record of every transaction ever made.
2. Each transaction is called a “Block” and the ledger is called a” Block Chain”.
3. The Block Chain is encrypted so it can’t be tampered with.
4. People are encouraged to use their computers or to “Mine” bitcoin or to join large “Mining Pools”. Mining is really a clerical job of checking all the blockchain and ensuring the integrity.
Miners are paid for this work in Bitcoin via a small transaction fee levied by bitcoin and they are paid when they discover new bitcoins in the course of the work. This is set up like a gamification. The system measures a miners effort in units known as “work done” reminiscent of ancient Economic theory. This is the only way in which money supply can increase in bitcoin terms, since nobody is counting velocity and it is not supporting a real economy.

 

The “Explained series” is planned to build into a trustworthy collection of explanations and commentaries that can be trusted to tell the story straight without any bias and attempt to make the subjects accessible to the layman. The latter is not always easy as some of these terms refer to genuinely complex subject matter, while others are simply too vague to pin down (there’s another word for that).
If you want an answer on something and you can’t find it easily, please use the comments section to just ask and I will appreciate not having to research the next topic.

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