Cryptocurrency is the name of the game, having reached a total of almost 14,000 dollars at the time this article was written. What exactly is Bitcoin though, other than a conversation starter with people to let them know that you are saavy and with the times? It goes into some interesting new technology called “blockchain” and the concept of Bitcoin can have an incredible impact on our economy, and not in a good way. Cryptocurrency can get complicated, so our main focus will be on the heavy hitter, Bitcoin.
THE TECH STUFF
Cryptocurrency is a way to exchange digital currency that is formed and verified through cryptography. Makes sense. Cryptography plus currency. Cryptography is a way to encrypt different messages or transactions using mathematical formulas to ensure a secure communication stream. Just keep reading and this will all make sense at the end of the article. I promise!
Bitcoin was invented by an anonymous person/group by the name of Satoshi Nakamoto in January 2009. This origin, based off of a white paper made by the same person/group, started the beginning of a cryptocurrency that relied on a peer to peer network to make a decentralized entity. A bank is considered a centralized entity, that assigns value to money and moderates transactions. In a decentralized, peer to peer network, the power of moderation and tracking comes down to the people.
People are the managers of Bitcoin, as they maintain the order and tracking of the transactions, also called the ledger. The ledger is kept through a concept called the blockchain, which you might have heard multiple times already in business or tech news. More information can come from a simple Google Search, but I will give you a skinny for now so we can continue the conversation. Blockchain technology can be used to keep track of transaction or information based on adding one additional block to the chain of blocks already created. Since the blockchain is kept among a peer to peer network, it is not centralized, so it cannot be corrupted or hacked through one single source. It takes security and spreads it among all of the users in the system.
Ok great! We know some underlying information so we can start to get into the process. When someone wants to trade Bitcoin among the network for goods or services, they submit three things: their account #, the account # of the person they are sending it to, and how many Bitcoins are to be sent. The submission, or message for simplicity sakes, is protected through a public key cryptography. Everyone has two keys: a private key and a public key. The keys are used in conjunction with each other to both encrypt (public key) and decrypt (private key) information so the only people that are privy to the information are the users in the message. With the authentication in place, messages can be freely sent back in forth, creating the Bitcoin economy. However, this raises a new problem: if people are making transactions over and over at high rates, what is added to the blockchain?
Timing is crucial in the Bitcoin economy, as it is a peer to peer network managed by the blockchain. At a centralized bank, the timing of transactions is easily monitored by one entity. If the bank sees you have 10 dollars, and you make two transaction of 10 dollars, it will honor the first one and cancel the second one. Due to the blockchain being managed by everyone, the additions of new transactions in the ledger have to be encrypted and managed closely to not cause duplication or unfair pulling of funds. This is achieve through SHA256, or Secure Hash Algorithm, another form of cryptography. The importance of this type of cryptography is that you can only encrypt the message one way. This is insanely important because if you can only encrypt and not decrypt, no one can override the encryption that you did. This is how blockchain allows for a stable, non-hackable ledger. Things can be added and saved, and not duplicated, changed or erased through SHA256. The SHA256 encryption segments are created by users of the network, and is what drives the Bitcoin economy by rewarding users with Bitcoins.
The main way of earning Bitcoin is to successfully solve the current SHA256 encryption that is supplied by the blockchain. The reward for each successful encryption solution is a certain amount of Bitcoins to the user, which is the main way that Bitcoins are released into the market. This is called “mining” and “miners” are considered the people that set up computers to solve the encryption problems. Huge computation power is needed to solve these SHA256 problems, so people build there own mining stations and tap into their electricity bill for a chance to have a fraction of a Bitcoin. Originally, they would get around 12 Bitcoins, which would go for fractions of pennys. Now though, less than a decade later, we are looking at a single Bitcoin being valued at great than $13,000! What a turnaround. Now that we know how to make Bitcoins out of nothing, what does this mean for the global economy outside of that peer to peer network
THE IMPACT SIDE
First off: Bitcoin will not replace any “real-world” monies, so we are safe there. That doesn’t mean that Bitcoin won’t be more widely used though, as the want for currency to be discrete and private among these political climates becomes more and more of a request.
With Bitcoin being valued so highly nowadays, you have to believe that there is going to be some splash of secondary impact due to its high value per unit. This comes from people buying Lambos or yachts with the random Bitcoins they mined half a decade ago. That part is simple as it creates money and adds more economic drive across the nation. The action might not be recognizably quantifiable, but the impact would be there.
Here is another one for you: environmental impact. People have to go through that time intensive coding using self made computers. That turns into massive amounts of energy used across the world. Digiconomist has tracked the number of terawatts used to mine Bitcoin over the past few years, with the estimation on December 10th being about 32 terawatts. In 2013, we as a species consumed 18.1 terawatts in 2013 according to International Energy Statistics. Our world cannot handle this kind of impact over and over. Though our own currency creation for fiat currency probably produces the same amount of energy or roughly the same, the addition of this new currency creation is going to be unacceptable in the next coming years as we try to build a more sustainable planet.
More impacts are surely due over the coming weeks, as Bitcoin IPOs and patented technology get more fleshed out. However, it is a sure statement that Bitcoin, at its level now, will influence the way we think about currency in the long run and what we can do to help usher it in in the least impactful way possible. Do you see Bitcoin having additional impacts on our planet or economy? Let’s start the conversation below in the comments!