2014 will be a year of revolution, not politically but economically. Sweeping reforms are coming that will forever alter the way our financial system works. In order to understand how cryptocurrency will be so revolutionary, you need to understand who it was made by, why it was made and how it works.<\/p>\n
Cryptocurrency<\/a> – \u201cis a\u00a0medium of exchange<\/a>\u00a0designed around securely exchanging information which is a process made possible by certain principles of\u00a0cryptography<\/a>.<\/em>\u201d (cryptography means keeping information safe by making it into a code)<\/p>\n Imagine there were a group of ten nomadic tribes in a valley with a lot of hills. One day they discover a hundred precious stones all with \u00a0unique symbols written on them. To decide how best to regulate trade and prevent theft and fraud, the tribes decide to make it law that whenever a stone is traded between villages, both of the tribes must record it on this huge wooden board placed where the stones were first found with the stone\u2019s unique symbol telling the other villages that that stone has been traded. They do this when no one is looking and keep their stones hidden from each other. If a stone changes hands without it being recorded on the board, then you know it was a theft or fraud.<\/p>\n Leaving the analogy: the tribes\u00a0are now computers, the smoke signals are the internet, and the precious stones are Bitcoins<\/a>. Bitcoin<\/a> is only one of many hundreds, even thousands, cryptocurrencies out there. Cryptocurrency has three main advantages over national currencies like the US Dollar.<\/i><\/p>\n 1. It is decentralized; the currency is regulated by the market and community, not by a central bank like our Federal Reserve.<\/p>\n 2. It is anonymous; users can spend their money on whatever they want without fear\u00a0of being tracked by the government.<\/p>\n 3. It is digital; you do not need to carry them around with you (even though you can).<\/p>\n Bitcoin<\/b> \u2013 is just one of many cryptocurrencies (AKA altcoins, alternative currencies, etc). It was the first and most famous, mainly for its mob associations in the Silk Road<\/a>. It was created by an individual or group of individuals known as Satoshi Nakamoto<\/a> (Personally, I think it\u2019s a small team). It has the greatest market capitalization (as in the quantity of Bitcoins times the value of each Bitcoin given in dollars) of all cryptocurrencies.<\/p>\n Here<\/a> is a visualization of the market capitalizations of all the cryptocurrencies.<\/p>\n Most cryptocurrencies have nothing unique to them. Some may even be scams, but far more are simply unimaginative wannabes. They are developed by anyone from a leading company to a hacker in his parent\u2019s garage (although you can easily tell). The top fifty cryptocurrencies <\/a>are usually the only ones with anything creative or innovative about them. But to reach the top you cannot merely have creative mechanics or features to your coin, you must have a community. Coins that want to be in the big boys club must reach out to a group of people online who identify with something about the coin. Often it is as simple as having a \u201ccool\u201d name, like the amusingly blatant Potcoin. A community of people who support and use the coin means that it will have consistent trading and mining and will maintain its value. But don\u2019t take that to mean that you don\u2019t need a well-constructed coin itself. Several times has a coin emerged with a huge opening to a lot of fans before suffering from a massive technical failure and breaking down (looking at you Ripplecoin). This is why we should think of cryptocurrencies as investments like high-volatility bonds than actual mediums of exchange for the time being. Volatility will fall with mainstream adoption and market maturation just like with stocks and bonds.<\/p>\n The competition between altcoins is cutthroat. If your coin\/exchange\/mining pool gets a bad name as a scam then it will be plastered all over the main cryptocurrency forums (don\u2019t knock forums, these are more influential than maintream media news stations in the crypto community) and your coin\/exchange\/pool will be ruined. If a coin\/exchange\/pool comes up just like yours but with that little extra awesome thing about it (I mean literally ANYTHING) then your users can easily notice the rival and switch to it. In order to stay profitable a coin\/exchange\/pool must not only have value innovation when it release but must continue to create more value and innovation for the user.<\/p>\n Mining<\/b> – mining is how coins are introduced to the market. In incredibly simplified terms, people with computers download a program that solves very very complex algorithms to generate a unique solution. Each solution is recorded in computer-speak, forming a new cryptocurrency coin. To reclarify: this is almost an oversimplification of the process. This can work in two ways: Proof-of-Work<\/a>, and Proof-of-Stake<\/a>. In PoW, you get more blocks containing coins the more work you have done mining that coin in the past. In PoS, you get more blocks containing coins the more total coins you own (so if you continue to own 1% of all the coins then you will continue to receive 1% of coins that are mined) Some cryptocurrencies have a hybrid of both, in which people can mine for coins via PoW or receive them via PoS. Each has its own advantages and disadvantages. \u00a0If you want to challenge your reading comprehension and computer science skills try reading the articles on both linked above.<\/p>\n PoS (Proof of Stake<\/a>) was first proposed on Bitcointalk here<\/a>.<\/p>\n You may think it\u2019s kind of unfair and weird that someone can just go Just because something doesn\u2019t require physical labor doesn\u2019t mean it Think of each cryptocurrency as its own precious substance like gold Blocks\/ Blockchains<\/b>\u00a0–\u00a0<\/b>here<\/a> One of the most important things about cryptocurrency is that it is Cryptocurrencies\u2019 decentralized system contrasts greatly with Want to see a debunking of all those scary things you hear about Bitcoin and cryptocurrency in general? Here<\/a>.<\/p>\n Written by Mars<\/p>\n
\nout and mine cryptocurrency coins \u201cfor free\u201d using just a computer, that
\nmakes the coin \u201cnot backed by anything.\u201d This belief is full of logical
\nfallacies. Firstly, the miner must spend money to get computers,
\ninternet access, etc in order to even do the process. Then he must spend
\ntime, effort, expertise and electricity generating the coin. Then he
\nmay sell it. Sounds easy? Wrong. You can similarly trivialize the
\nprocess of mining gold, or silver, or any other precious metal. All you
\nhave to do is spend some money to buy a pick, a shovel and a pan then go
\nout to a river in Oregon and squat in it.<\/p>\n
\nisn\u2019t hard, or worthless. Not everyone can or wants to mine, that alone
\nrestricts the supply. In addition, the more miners there are, the
\nhigher the difficulty rate<\/a> goes. The difficulty rate<\/a>
\ndecides how many coins are given out in a given time to a given miner;
\nthe higher it is, the less coins the miners get. This also helps to
\nrestrict mining. Today the difficulty rate of Bitcoin is so high that
\nthey are completely mined by big companies with\u00a0powerful non-personal
\ncomputers.<\/p>\n
\nor diamonds. Gold isn\u2019t \u201cbacked by anything\u201d either. Your US Dollar is
\nonly backed by your neighbors\u2019 home mortgages and the debt our banks owe
\nto other banks. Both cryptocurrencies and precious metals can be mined
\n\u201cfor free,\u201d but that doesn\u2019t mean it is not hard to do so. They may not
\nbe \u201cbacked by anything\u201d other than human desire, but that doesn\u2019t mean
\nthey are devoid of value.<\/p>\n
\nyou can see a infographic explaining how the blockchain system within
\nBitcoin works. The blockchain is basically a record of everyone who has
\nowned each Bitcoin, which Bitcoins they owned, and when. It is a perfect
\nledger of all transactions. You may say, \u201cbut wait what about
\nanonymity?\u201d Just about to get there. The ledger doesn\u2019t record your
\nname, your social security number, your fingerprint etc just your wallet
\naddress. This is not the same as your IP address<\/a>.
\nWhenever you want you can go online and download a free unique wallet
\nwith its own address (given anonymously) from the website of each
\ncryptocurrency. This will sit, just like any other file, in your
\ncomputer. While you cannot exactly open it and read or copy the data
\nwithin (and thus expose Bitcoin to fraud) you can rest easy knowing your
\nmoney is at least digitally in front of you. If you just did something
\nlike buying ten porn magazine subscriptions, you can go download another
\nunique wallet and toss the old one. This ledger is pretty much useless
\nfor tracking all the transactions, but it does help if one wants to
\ninvestigate huge sales that happen all at once.<\/p>\n
\nnot controlled by any government. The most they can do is ban or
\nrestrict it in some way by law, which drives down the price of the coin.
\nHowever, this is imprecise and as more countries and companies adopt
\nthe technology, not only will the impact of these laws be lessened but
\ngovernments will be face more obvious economic incentives not to. The
\nfearful prohibitions (which don\u2019t even work as evidenced by at least two
\nof the top ten crypto exchanges being Chinese at all times) are not
\nevidence of cryptocurrency\u2019s instability. Rather, they are proof of the
\nlengths governments which heavily manipulate their currency and repress
\ntheir people will go to keep this technology out.<\/p>\n
\nnational currencies or fiat currencies like the dollar or euro. The
\nfederal government has a great deal of control over the US Dollar. I\u2019m
\nnot going to go into the federal reserve<\/a>
\nhere because I\u2019m sure many non-Libertarians roll their eyes when they
\nsee us go into that stuff and it\u2019s too much for this article. But you
\ncan check it out\u00a0here<\/a>:<\/p>\n