There are these new things in the world called crypto-currencies. You’ve definitely heard about them by now. The most famous and valuable of them (at least currently) is bitcoin. As a collective they are very dangerous. In fact, on the back of this newly found popularity and price, there has been an abundance of scams perpetrated on buyers caught up in hype and sizzle.
Definition: A cryptocurrency is a type of digital or virtual currency that uses cryptography for security. Unlike traditional currencies issued by governments and central banks, cryptocurrencies operate on decentralized platforms, typically based on blockchain technology.
Blockchain: This is the underlying technology for most cryptocurrencies. A blockchain is a distributed ledger that records all transactions across a network of computers. Once a transaction is added to the blockchain, it becomes immutable, meaning it cannot be altered.
Bitcoin (BTC): The first and most well-known cryptocurrency, created by an anonymous person or group of people using the pseudonym Satoshi Nakamoto in 2009.
Ethereum (ETH): A platform that allows developers to build and deploy smart contracts and decentralized applications (DApps). Its native cryptocurrency is called Ether.
Others include Ripple (XRP), Litecoin (LTC), Cardano (ADA), and many more.
Mining: This is the process by which new coins are introduced into the ecosystem. Miners use powerful computers to solve complex mathematical problems. Once solved, a new block is added to the blockchain, and the miner is rewarded with a certain amount of cryptocurrency.
Wallets: Cryptocurrencies are stored in digital wallets. These can be hardware-based (physical devices) or software-based (applications or online platforms). Wallets have both public keys (similar to an address that others can see) and private keys (which should be kept secret and are used to sign transactions and access one’s funds).
Use Cases: While many people invest in cryptocurrencies as a form of speculative investment, there are other use cases, including:
Remittances: Sending money across borders without the need for traditional banking systems.
Decentralized Finance (DeFi): Financial applications built on blockchain platforms that don’t rely on traditional financial intermediaries.
Privacy Transactions: Some cryptocurrencies, like Monero (XMR) and Zcash (ZEC), focus on providing private transactions.
Regulation and Concerns: The rise of cryptocurrencies has led to various concerns:
Regulatory: Many governments are still figuring out how to regulate cryptocurrencies, leading to a constantly evolving legal landscape.
Environmental: Mining, especially Bitcoin mining, can consume vast amounts of electricity, leading to concerns about its environmental impact.
Security: While the underlying blockchain is secure, exchanges and wallets can be vulnerable to hacks.
Volatility: Cryptocurrency prices can be highly volatile. This volatility can be attributed to factors like regulatory news, technological developments, market sentiment, and macroeconomic factors.
Future: The future of cryptocurrency remains uncertain. Some believe it represents the future of money and finance, while others are more skeptical, seeing it as a speculative bubble. However, the technology behind it, especially blockchain, has undeniable potential and is likely to influence various sectors beyond just finance.
The story of Bitcoin is both fascinating and somewhat mysterious. Here’s a brief overview of its history and significance:
The Bitcoin Story
Bitcoin’s story began in 2008 when an individual or group using the pseudonym “Satoshi Nakamoto” published a whitepaper titled “Bitcoin: A Peer-to-Peer Electronic Cash System.” This paper proposed a system for electronic transactions without relying on trust or a central authority.
On January 3, 2009, the first block of the Bitcoin blockchain, known as the “genesis block,” was mined by Satoshi. Embedded in the code of this block was a text reference to a headline from The Times newspaper: “Chancellor on brink of second bailout for banks,” hinting at Bitcoin’s creation as a response to the 2008 financial crisis.
Bitcoin’s creation was influenced by the cypherpunk movement, a community that advocates for the use of cryptography as a tool for social change and privacy. Many of the ideas behind Bitcoin, such as decentralized money, were discussed in cypherpunk mailing lists long before its creation. Bitcoin can be seen as a reaction against centralized financial systems and intermediaries, offering a decentralized alternative where transactions are transparent, irreversible, and not subject to government control.
In the early days, Bitcoin was primarily a project for enthusiasts. The first known commercial transaction using Bitcoin was in 2010 when a programmer named Laszlo Hanyecz paid 10,000 Bitcoins for two pizzas.
Over the years, as the idea of decentralized money gained traction, Bitcoin’s value and adoption grew. It began to be recognized not just as a digital currency but also as a store of value, often referred to as “digital gold.”
As Bitcoin gained popularity, it also attracted the attention of regulators worldwide. Different countries have taken various stances, from outright bans to full acceptance. The Bitcoin network faced challenges in scaling to accommodate a growing number of transactions, leading to debates within the community and resulting in several “forks” (like Bitcoin Cash). While the Bitcoin blockchain itself has proven secure, many exchanges and wallets have been hacked over the years, leading to significant losses for users.
After introducing Bitcoin and working with the early community to develop and improve it, Satoshi Nakamoto gradually reduced their involvement and eventually stopped communicating around 2010-2011. Their identity remains one of the greatest mysteries in the tech world.
Beyond its value and use as a currency, Bitcoin introduced the world to the concept of blockchain, which has since found applications in various fields beyond just finance. Bitcoin has also paved the way for thousands of other cryptocurrencies, each with its own unique features and purposes. There are thousands of cryptos: Ethereum. Ripple. Litecoin. Dash. NEM. Monero. Zcash. All are running on the blockchain thesis thanks to Bitcoin, which could likely be Bitcoin’s most remembered legacy.
Along Comes Ethereum
Ethereum, like Bitcoin, has a compelling story that has had a significant impact on the world of blockchain and cryptocurrencies. Here’s a brief overview of its history and significance. Ethereum was conceptualized by a young programmer named Vitalik Buterin in late 2013. Dissatisfied with the limitations of Bitcoin’s scripting language and its ability to execute more complex decentralized applications, Buterin proposed a new platform with a general scripting language.
Vitalik Buterin released the Ethereum whitepaper, detailing a blockchain that could execute Turing-complete smart contracts, essentially self-executing contracts with the terms of the agreement directly written into code. In mid-2014, Ethereum launched a public crowdsale to fund its development, which was one of the earliest and most successful ICOs. Participants purchased Ether (ETH), Ethereum’s native cryptocurrency.
With the funds raised, development proceeded under the Ethereum Foundation, with key figures including Vitalik Buterin, Gavin Wood (who wrote the Ethereum Yellow Paper detailing the Ethereum Virtual Machine), Joseph Lubin, and others. Ethereum went live on July 30, 2015, with its first version called “Frontier.” This marked the beginning of the Ethereum blockchain, allowing developers to build and deploy smart contracts and decentralized applications (DApps).
In 2016, a decentralized autonomous organization (DAO) was built on Ethereum as a venture capital fund. It raised a significant amount of Ether in a crowdsale. However, a vulnerability in the DAO’s code was exploited, and a significant portion of the invested Ether was siphoned off. This event led to a heated debate in the Ethereum community about how to proceed. The majority of the community decided to perform a hard fork to revert the malicious transactions and return the stolen funds. This resulted in two chains: Ethereum (ETH) and Ethereum Classic (ETC), with the latter continuing the original chain without the reversal.
Ethereum has undergone multiple upgrades or “hard forks” to improve the network. Notable upgrades include “Homestead” (2016), “Metropolis-Byzantium” (2017), “Metropolis-Constantinople” (2019), and others. The Ethereum community has been working on Ethereum 2.0, a significant upgrade to address scalability and security issues. This involves transitioning from a proof-of-work (PoW) consensus mechanism to proof-of-stake (PoS) with the introduction of the Beacon Chain and shard chains.
Significance of Ethereum
- Smart Contracts: Ethereum popularized the concept of smart contracts, allowing for programmable, self-executing contracts without intermediaries.
- Decentralized Finance (DeFi): Ethereum has been the primary platform for the DeFi movement, enabling decentralized lending, borrowing, and exchanges.
- Non-Fungible Tokens (NFTs): Ethereum has also been pivotal in the rise of NFTs, unique digital assets representing ownership of a specific item or piece of content.
Fraud, Securities, or Decentralized?
The SEC’s general stance is that whether a cryptocurrency is considered a security depends on its specific characteristics and use cases. If a cryptocurrency is used in a way that it represents an investment in a project with the expectation of a future profit, primarily derived from the efforts of others, it might be classified as a security under the Howey Test, a standard used in the U.S.
In most countries, the power to create money is vested in the government, usually through its central bank. This is because money is a form of legal tender, which means that it must be accepted as payment for goods and services. The government has a monopoly on the creation of legal tender because it is the only entity that can ensure that the money is backed by the full faith and credit of the state.
However, now that society (save a few nations) has adopted cryptocurrency, namely bitcoin and ethereum, for use as money on the internet, nations are rushing to create their own digital currencies – CBDC. Only time will tell if Bitcoin and Ethereum are classed securities or allowed to freely trade as assets that people use for payments.