What the Hell is Cryptocurrency? And Is There Really 'Gold' in Them Thair Hills?

Well, they say, study and write about things you need to learn about. So here goes.

Dec 13, 2024

Crypto for beginners. Or yeah, I’m interested and wanted to learn about this stuff. Image by Jeff x DALLE.3

Cryptocurrency!

It still sounds like sci-fi stuff. I’ve struggled to understand the principles behind cryptocurrency. I get how it works. I think. But is there any sustainable value? It seems to have that ‘Emperor’s New Clothes’ vibe. Or is it really just a vehicle for criminal organizations, fraudsters, and scammers to pass back and forth to each other like so many baseball cards.

There isn’t any significant intrinsic value in baseball cards. They’re just a piece of cardboard with a picture. Yet, they sell for thousands of dollars.

But Cryptocurrency isn’t a commodity or a product. So what the hell is it?

What’s the Deal with Crypto? And What is a Decentralized Network?

In the most simplistic terms, it’s a form of digital or virtual money that uses cryptography for security.

Crypto equals cryptography (a way to hide something in plain sight. Currency equals money. Cryptocurrency.

Unlike traditional currencies issued by governments (fiat money), cryptocurrencies operate on decentralized networks based on blockchain technology—a distributed ledger enforced by a network of computers. It’s digital money that is exchanged through computers and not through banks.

This decentralization means no single entity controls the currency. It isn’t controlled by a bank or a government. It aims to make transactions more transparent and less susceptible to fraud.

You can send it. You can receive it. You can use it to buy crap. In a fashion, it’s just digital money.

The decentralized network is a series of computers, similar to a peer-to-peer computer network. Transactions occur over the network of computers (nodes) that collectively maintain the blockchain, eliminating the need for a central authority.

No banks. No government issued currency. No centralized network where a single computer or computer network holds all the data in the system. The middle man - the banking system - has been eliminated and replaced by a series of computers.

Cryptocurrency has been created to be free from control by governments and central banks. The original goal was for cryptocurrency to be used as a new currency. You know, buying, selling, paying off your fantasy football losses on a day-to-day basis. But it has become more of an investment vehicle. Dramatic swings in the valuation of cryptos makes it difficult to spend on daily items you might need.

It has become the digital asset that is used for big transactions or investment speculation.

That’s cryptocurrency in a nutshell.

Key components of the decentralized network are:

Nodes: These are individual computers or devices cinnected in the blockchain network. Each node maintains a copy of the blockchain ledger, transactions, and plays a role in validating and relaying transactions. Nodes can be full (storing the entire blockchain) or lightweight (storing only parts of it).
Distributed Ledger: Think of this as a notebook or a ledger that writes down every transaction. And once it is written it can’t be erased or changed. It’s there for everyone to see because the same ledger is spread out over every node or computer. This is a synchronized database. No one can change or alter or cheat without everyone seeing. It’s shared across all nodes in the network, recording all transactions transparently and immutably. The decentralized nature of the ledger ensures that no single entity has control, enhancing security and trust.
Consensus Mechanisms: are the protocols, like Proof of Work (PoW), used to verify transactions. Proof-of-Work is a consensus mechanism used by many cryptocurrencies, including Bitcoin. It requires participants (miners) to solve complex mathematical puzzles to validate transactions and add them to the blockchain. It verifies and protects cryptocurrencies.

Blockchain: The Magic Behind the Curtain

A blockchain is a type of distributed ledger where data is stored in blocks that are linked together in chronological order using cryptographic hashes, forming a chain. Think of it as a digital spreadsheet that everyone in the network can see but no one can alter without consensus. Every transaction is recorded in a block. When a block is full, another is added, and linked chronologically, creating an unbreakable chain.

It’s a permanent record of events mapped in a chronological order.

Blocks can hold various numbers of transactions depending on the currency. Bitcoin blocks can hold up to 2,500 transactions. Of course, this can vary due to each transaction size.

Since the blockchain is distributed over the entire network, it is transparent. Everyone can see each transaction. This transparency makes blockchain revolutionary. They are perfect for applications that demand high security and immutability (can’t be changed).

Calling All Miners

Mining is the process of verifying and adding transactions to the blockchain by which new cryptocurrency coins are created and/or transactions are validated and added to a blockchain. It’s a core function in blockchain networks that use a Proof of Work (PoW) consensus mechanism. This PoW is what Bitcoin uses to verify it’s transactions.

The overall process works something like this:

user initiates transaction and sends cryptocurrency to the network
computers on the network (nodes) validate the user has needed funds
sort valid transactions into a block
use consensus mechanism to validate - solving complex problem or puzzle - compute, compute, compute.
Once problem is solved it is broadcast to all the nodes to verify the solution and ensure all transactions within the block are valid
Once verified the block is added to the chain and the miner is paid. Usually they are rewarded new cryptocurrency. The more they solve, the more they earn.

Mining requires specialized hardware and advanced computers to complete the task. It is energy intensive. It takes a lot of computing power and time. Bitcoin mining alone consume more energy on an annual basis than some countries.

What is Bitcoin? Bitcoin is the world’s first and largest cryptocurrency. It works on the world’s first public blockchain technology. It lets you send and receive value to anyone in the world using a computer and an internet connection. It is the world’s first globally accepted public money.

What is a Cryptocurrency Wallet?

Well, it’s not a wallet. Since your crypto is always on the blockchain, a cryptocurrency wallet doesn’t hold any coin. It holds your keys. It takes two keys to crypto; a public key and a private key. The public key is similar to a bank account number. You can give out your public key to anyone that needs to send you money. Think of your private key as a password. This private key proves that you own the crypto. It’s called a private key because anyone that has it can access your crypto. Keep it secret. It takes both keys to enact a transaction. The private key ensures ownership and authorizes transactions. The public key ensures trust by allowing the full network to verify each action.

What is Ethereum? Ethereum is the second largest cryptocurrency. Ethereum also introduced smart (blockchain) contracts that are self-executing agreements. This enabled the rise of decentralized finance functions and non-fungible tokens (NFTs). Ethereum uses a Proof of Stake (PoS) process instead of a PoW as a consensus mechanism. In a PoS system validators are selected based upon their number of coins versus nodes. This eliminates the need for miners and reduces energy usage.

Should You Invest in Crypto?

This is beyond my pay grade.

Many people have made millions and even billions in the crypto market. It is like a modern day gold rush; some strike it rich but most lose everything. Today, 1 in 5 humans have invested in and used crypto. Still, the total market value dropped from $3 trillion in 2021 to about $1 trillion in 2022 and jumped again to $3.8 trillion in 2024. That’s a lot of lost value. Lots of volatility. It hurt lots of small investors.

I have invested but in a small way. It’s just enough to keep me interested and learning. I can lose my investment and not bat an eye.

Here’s what I will say about it. Study. Study. Study. If you can’t give a basic explanation on crypto, and why you think it will have a positive impact on the world, you’re not ready to invest.

I’m not into speculative investments. I take my risks when I build companies. Right now, crypto is speculative. The value is impacted by government policies, celebrity endorsements, and often times the charisma of a founder. It’s difficult to predict.

I do believe that crypto is here to stay. It will adapt. It will be adopted for more everyday use. Financial transaction, value transfers, contracts, and even art are being impacted by blockchain technology. The technology will be pushed out into other areas of our lives. So learn it now. And if you decide to invest, I recommend start with the big guys. If you don’t know who the ‘big guys’ are go back and study some more.

The safest investment in crypto may be an investment in the time it takes to learn it.

Let’s Do a Quick Pros and Cons

Pros:

Decentralization: No central authority controlling your money. This also means there is no single point of failure. No waiting on a system failure or computer upgrade. No concern with hacking and loss of data. No middle men. And the utopian vision is that it will create transactions and connections that transcend nationalistic and monopolistic powers
Transparency: Blockchain ensures secure and tamper-proof transactions.
Global Access: Send money anywhere, anytime.
Innovation: Opens up new possibilities, from DeFi to NFTs.

Cons:

Volatility: Prices can be wildly unpredictable.
Complexity: Learning the ropes takes time and effort.
Scams: The unregulated nature makes it a breeding ground for fraud. It gets called everything from a ponzi scheme to the most successful scam in the history of finance. Today there are thousands of cryptos with new ones being created every day. Many are just designed to grab your cash. In fact some of the biggest failures/scams/collapses have been the most high profile. Terra was touted as the next best cryptocurrency. Celsius proclaimed itself as a crypto bank (seems antithetical to the whole concept and purpose of crypto). And of course FTX which proclaimed itself as ‘the’ crypto trading platform. All collapsed with varying levels of mismanagement and fraud.
Environmental Concerns: Mining consumes massive amounts of energy.

That’s the beginner’s scoop. I hope it has helped.

Keep studying.

Read. Learn. Write.

What’d I get right? What’d I get wrong?

Brain-Slap

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