CryptoCurrency Explained – Cryptocurrencies like Bitcoin are often described as complicated and technical. They’re not: the core concept is simple.
If you have 60 seconds to spare read the explanation below and ‘own’ that concept forever.
CryptoCurrency Explained in 60 seconds
First of all we start with an analogy. Until just over 100 years ago the people of Yap, a Pacific island, used large stone disks as coins. The picture on this page shows some.
Yappians used these stones for large expenses such as dowries. Because the stones were large the islanders didn’t bother moving them about. They just transferred ownership. People knew who the current owner was because it was public knowledge.
This made it difficult to commit fraud.
- You couldn’t spend someone else’s stone, because everyone knew who owned the stone.
- You couldn’t spend the same stone twice because everyone would know.
- You couldn’t fake the currency, because to do that you’d need to carve a new stone – which anyone could do anyway.
It was a great system. It just didn’t scale up well.
But cryptocurrency works in exactly the same way, and does scale up.
Here’s why they’re the same.
Bitcoins don’t move around. They stay fixed on a public ledger, the “block chain”. Anyone can check ownership by checking this ledger.
This makes it difficult to commit fraud:
- You can’t spend someone elses bitcoin, because everyone knows who owns them (from the ledger.)
- You can’t spend the same coin twice, because the network keeps the ledger up to date and there’s only one ledger. If you did try to spend it twice, everyone would know.
- You can’t fake the currency, because to create a bitcoin you need to break a difficult maths problem. A new problem is set every 10 minutes, and the winner gets a brand new bitcoin as a ‘prize’. There’s no way to fake the answer – you’re either right or you’re not, so there’s no way to fake a bitcoin.
Openness is at the heart of both the Yap stones and cryptocurrencies. Everything is there for anyone to scrutinise, and so anyone can check if a payment comes from the rightful owner. There’s no need for trust between two people in a transaction, because the system removes the possibility of fraud.
That’s it, that’s the core of cryptocurrency explained in 60 seconds. Of course there’s a great deal more to it. If you’d like to follow the technology as it develops, drop by my google+ page or linkedin page and say hi.
Now, if you’ve got another 60 seconds, here are the answers to some burning questions you may have.
Bitcoin and other major cryptocurrencies have seen their recent resurgence falter.
Riecoin distributed miner claims world record for prime sextuplet generation
Why the future depends on bull whales
We’re just now coming out of a period of deflated BTC prices. Having declined somewhat steadily since the start of June, we’ve seen a reversal that’s put 50USD on the price of a bitcoin in under two weeks.
This period of decline has led to a very low volume period for most Altcoins. Despite a few stellar performances, notably from Darkcoin, the low price of BTC has drawn in buyers who have long been waiting to buy in to the relative quality of BTC. A low BTC leads then to low interest in Altcoins, with low interest resulting in high volitility.
The danger in this situation is the ease by which low volume altcoins can be hit for prolonged periods by large sell orders. When this happens traders interested in long positions run from altcoins, and head for BTC. Altcoins then tend to die of neglect shortly after.
Bear whales and bull whales
There’s second significant affect at work over the last 6 months – the battle of the Bear Whales and the Bull Whales.
Bear whales are holders of large stakes of currency eager to divest and with few scruples about how best to do this for the market. Bear whales can wipe out gains and scare off new entrants, despite claims that they can be fought off.
However, the counter to being a bear whale – being a bull whale – takes courage. These are holders of altcoins who continue to hold despite attractive exits for themselves. Rather than shift the large volumes they hold, and simply go to a beach somewhere to sleep it off, they hold the line and keep volumes, market caps and prices high enough to attract long holds.
The future viability of cryptocurrency depends far more on the number of bull whales than bear whales. Bear whales can only exit once, but a bull needs to stay bullish over a prolonged period of time. That takes courage and vision.
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