Cryptocurrencies are one of the hottest topics of 2017 in both finance and technology, but what are they? Cryptocurrencies, like Bitcoin, are a form of decentralized digital cash and can be used to purchase anything from a pizza to a car. There is no central regulating body to govern a cryptocurrency. Every single transaction or record made must be verified and confirmed by everyone else. For the user, this means transactions are fast, secure, anonymous, and irreversible. While there are many pros and cons to this system it is undoubtedly a marvel of technology.
Cryptocurrencies were invented by the mysterious Satoshi Nakamoto, with the release of Bitcoin in January of 2009. Since then, cryptocurrencies have had a wild rise in popularity for a number reasons. To some they are seen as an untouchable store of value not unlike gold, while others believe a decentralized currency is the way of the future. However, the new startup trend in Silicon Valley is the blockchain technology behind it. Blockchains are a way to safely and securely store or transfer information. In the case of bitcoin, every transaction is stored in the blockchain and every peer on the network can view this blockchain. It is impossible for a hacker to attack a single location and corrupt or change any information in the blockchain, because it is verified simultaneously and continuously by everyone. To understand how this works, we need to dig into the name itself. The ‘crypto’ in cryptocurrency comes from cryptography, the art of writing or solving codes. For a Bitcoin transaction to be confirmed, it must be validated by an algorithm. This validation is completed by ‘nodes’, which is the technical term for computers connected to the network. These computers, which have been coined the term “miners”, are solving complex cryptographic puzzles to ensure the validity of the blockchain. In exchange for their processing power, they are rewarded in Bitcoins. This technology is regarded for its applications as a secure way to transfer documents, contracts, or any other sensitive information.
When compared to the stock market, the cryptocurrency market draws many similarities and differences. But one of the key differences is what creates the value or market capitalization. When valuing a stock, one can look at countless factors to determine the underlying market value of a business. Cryptocurrencies lack this concrete or tangible aspect, so their market capitalization comes from elsewhere. Obviously, prices are decided when supply and demand meet. If supply comes from “mining” bitcoins, what is driving demand? This could come from valuing the blockchain technology, hoping for a wider adoption, and speculation. This gives BTC a total market capitalization, total bitcoins multiplied by price, of over $30 billion today.
Will they change the world? Probably not, but the principles and technology behind cryptocurrencies are well founded and act as a looking glass into what the internet of the future might look like.
-Andrew Ryan, Intern 2017