The Ultimate Beginners Guide to Cryptocurrency and Blockchain
The greatest things about my job is meeting new people and learning new things. Recently, I had the opportunity to do both while attending the Mortgage Association of New Jersey and Pennsylvania’s Regional Conference in Atlantic City.
One of the breakout sessions I enjoyed the most was one that discussed the boom in cryptocurrency. Although I was marginally familiar with cryptocurrency and its obligatory partner, blockchain technology, the panel discussion greatly piqued my interest.
Thus, I set out to establish a layman’s view of the relationship between the two, and this blog is the result.
What is cryptocurrency and why is everyone talking about it?
It’s easy to get tripped up over the technicalities of cryptocurrency, so let’s start with the basics. Cryptocurrency is digital money. Because it’s purely digital, there are no physical coins or bills tied to it. In
fact, cryptocurrencies are not tied to anything of value in the real world, and this makes the value fluctuate erratically. Unlike stocks, bonds, artwork, real estate, or precious metals, cryptocurrencies have no use or value outside of possession.
Bitcoins are valuable! In February of 2021, the price of a single bitcoin "briefly rose above $50,000," setting a record at the time, and as of November 9, 2021 the value soared to another record of $68,530.34 Why? There was speculation, but no single answer…perhaps other than pure fascination.
The popularity of cryptocurrency is underscored by the fact that Bitcoin ATMs have begun cropping up in communities, where cryptocurrency can be purchased with your debit card while filling your car with gas.
What are the basic forms of cryptocurrency?
When most people think of cryptocurrency, the term that normally comes ot mind is Bitcoin (BTC). Bitcoin is considered the cryptocurrency flagship - te coin that launched a thousand coins.
As seen on the popular cryptocurrency price tracker CoinMarketCap.com, there are over 2,500 cryptocurrencies, many of which use their own custom blockchain designed to their specifications (more on blockchain later).
Don’t worry, you don’t need to understand every form of cryptocurrency to understand the basics. For starters, here are a few of the most popular types:
Referred to as “digital gold” or the gold standard for cryptocurrency, Bitcoin, which debuted in 2009, has reigned king over every other cryptocurrency. With a market capitalization of over $900 billion, Bitcoin dominates the rest of the cryptocurrencies with the lion’s share of the total cryptocurrency market cap. Not surprisingly, investing in just one Bitcoin is an expensive endeavor compared to other investment vehicles.
Often referred to as the “silver to Bitcoin’s gold,” Litecoin was created as a fork (or split) from Bitcoin and released in 2011 as competition. Litecoin was made to process transactions faster and cheaper than Bitcoin. Currently (11/9/21), one Litecoin is equal to about $265.31.
Ethereum is another cryptocurrency powerhouse, but it isn’t meant to be a peer-to-peer payment system in the same way Bitcoin is. Ethereum was launched in 2015 as a decentralized software platform that powers smart contracts (programmatically enforced contracts) and distributed applications (“decentralized” apps or dApps, which we’ll discuss next). The value of Ethereum hit an all-time record on November 9, 2021 of $4,837.59 according to CoinMarketCap.
These decentralized applications are open source, autonomous, have 100% uptime, and leverage all the benefits of blockchain (no central server, extremely difficult to be hacked, etc.) Imagine the apps in the iTunes store are instead their own entities instead of being centralized through Apple — that’s similar to what a dApp is. There are nearly 3,000 dApps using Ethereum’s blockchain and the blockchain of a few Ethereum competitors such as EOS, NEO, and Qtum.
These are strings of code that automatically execute a certain task when specific conditions are met. A simplified example: Roger could set up a smart contract to “pay” David $40 if he sends 10 unique logo designs by December 8th, 2021.Once David completes this task, the smart contract automatically pays him the $40. If he doesn’t, then Roger is returned his $40.
How Cryptocurrency Functions
In order to understand cryptocurrency, it’s important to understand the following technologies, principles and terms, and how they inter-relate:
Cryptocurrency utilizes cryptography — the method of disguising and revealing information — to ensure the security of user information and “guarantee” that transactions are carried out safely.
A blockchain is a form of Distributed Ledger Technology (DLT), which is essentially a database spread over multiple operators (nodes, computing devices, etc.) This is the technology that powers an entire cryptocurrency. It’s essentially a digital ledger that verifies accounts, balances and transactions. There are many uses for blockchain beyond financial applications, such as supply chain management, tracking art ownership, and even managing digital collectibles.
A term related to blockchain that is often used in blockchain discussions. A node is the individual part of the larger data structure that is a blockchain. Without nodes, the entire system would fall apart. Cryptography and blockchain operate in tandem to help cryptocurrencies create new coins, enforce legitimate transactions, and create a secure system.
Cryptocurrency can be sent directly between two people without the need for a broker. These transfers are done with very low processing fees, making it possible for users to bypass hefty transaction costs common to traditional payment transfer services. In laymen’s terms, there’s no need for a PayPal, Zelle, or a bank.
OK, what is blockchain and why is everyone talking about it?
Simply put, the Blockchain is a shared single version of the truth of anything digital, and it’s defining the way we transact. It is a database technology, a DLT that maintains an ever growing list of data records, which are decentralized and impossible to tamper with. (Whew!)
Blockchain has the potential to change the way we buy and sell, interact with government and verify the authenticity of everything from property titles to organic vegetables. It combines the openness of the internet with the security of cryptography to give everyone a faster, safer way to verify key information and establish trust.
Amazingly, blockchain is designed to store information in a way that makes it virtually impossible to add, remove or change data without being detected by other users.[TB4]
The data records, which can be a Bitcoin transaction, a smart contract or anything else for that matter, are combined in so-called blocks. In order to add these blocks to the distributed ledger, the data needs to be validated by 51% of all the computers within the network that have access to the Blockchain.
This validation is done via cryptography, which means that a mathematical equation has to be solved. Solving the mathematical equation is difficult and requires a lot of computing power. However, once it is solved it is immediately clear that the answer is correct.
This can be compared to a crossword puzzle, which can be very difficult to solve, but once completed you immediately know that it is done correctly.
Once the validation is done, the Block receives a timestamp and a so-called hash. This hash is then used to create the next block in the chain. If even one bit in the block changes, the hash will change completely and as a result, all subsequent blocks in the chain will be altered. Because the change has to be validated by 51% of all the nodes in the network, it is virtually impossible, and frankly, not worth the effort to change any data.
The result is that peer-to-peer transactions are enabled, eliminating the need for a centralized certifying authority, such as a bank, which usually takes a commission to carry out the work. If third parties are no longer necessary and organizations or consumers can perform instantaneous transactions peer-to-peer, that’s a paradigm shift, and is why the Blockchain is so ground-breaking.
Why are cryptocurrency and blockchain so perfect together?
Today, important transactions are typically verified by a central authority – like a government or a credit card clearinghouse. Blockchain applications could replace these centralized systems with decentralized ones where verification comes from the consensus of multiple users.
Here’s an example -- currencies have traditionally faced two problems:
1) They require a central authority to regulate their value, production, and authenticity, and
2) They fall victim to fraudulent creation
Bitcoin, one of the many forms of cryptocurrency, was invented to combat these two problems, and the blockchain system, featuring high-level encryption provides the necessary security.
Decentralization, as it relates to Bitcoin, means that authoritative power is distributed among all the peers on a network, and there is no individual point of failure. For example, in order to “hack” Bitcoin, someone would need to hack into at least 51% of the large network of computers responsible for running Bitcoin, which is considered an impossible task.
Because Bitcoin is automated and highly encrypted, the system doesn’t require a central authority to regulate it (in fact, it can’t be regulated) and transactions cannot be fraudulent.
Key Industries that benefit from Blockchain, and how cryptocurrency enables their progress.
The following four industries have the strongest blockchain use cases as the technology currently stands:
The financial industry can use blockchain to redesign costly legacy workflows, improve liquidity, and free up capital. The technology can also help reduce infrastructure costs, increase transparency, reduce fraud, and improve execution and settlement times. Multiple governments in small nations are also examining blockchain's potential use for replacing national currency.
2. Retail and Manufacturing
Blockchain can offer the retail and manufacturing industries better supply chain management, smart contract platforms, digital currencies and tighter cybersecurity. For example, growers, suppliers, processors, distributors, retailers and consumers could potentially gain permissioned access about the origin and state of food in their transactions, and more easily trace contaminated foods to their source.
Blockchain could allow healthcare providers to have enhanced real-time accurate access to patients’ healthcare records, grant people access or revoke a person's access from healthcare records, and assure that data is always anchored, encrypted and, thus protected.
Blockchain could increase the transparency and traceability of how money is spent in government. It could also track asset registration, such as vehicles, and reduce fraud and operation costs.
Cryptocurrency, a rapidly expanding facet of today‘s global commerce, not only functions via blockchain technology, it is 100% dependent on it. As countries around the world depend on one another more and more, the existence of a universal currency makes increasing sense, and its security is assured by blockchain technology. If countries already struggle to get along politically, how can they work together financially? Cryptocurrency appears to be a promising answer.
Are blockchains ready for business? Experts are cautiously optimistic: Even the most established blockchain – the one used for Bitcoin – can only process five to eight transactions a second. Emerging blockchain software companies are working on solutions that could be competitive with credit card networks that already process nearly 10,000 times that volume.
In the world of banking, finance and government, the transparency of blockchain has real benefits for regulatory matters, but it’s still a new technology with no standardized implementation. Lawmakers will need time to resolve questions about liability and other legal issues.
For individuals, cryptocurrency offers an attractive, albeit controversial, alternate investment vehicle, seemingly rendered secure by blockchain technology, an attractive feature to wary investors.
Dr. Mark van Rijmenam, Strategist/Author, “What is the Blockchain and Why is it so Important?”
Micah Souza, Wealthfit Contributor
Alison DeNisco Rayome, Innovation Magazine
Jim Schneider, Researcher, Goldman Sachs