An Introduction to Cryptocurrencies

A big part of my financial strategy revolves around cryptocurrencies, the beauty being that I can profit both in the sort term and long term from them as an investment, while also supporting a technology that can impact the very structure of our economy. And in a world with “smart” everything, its pivotal that you all understand the smart money of the future.

What is a Cryptocurrency?

A cryptocurrency is any form of currency whose transactions are cryptographically validated by a decentralised network. More simply put, it is a type of money that derives its “authority” as real money from a mathematically proven history of transactions rather than the arbitrary say-so of a centralised authority. This kind of money gives power to everyday citizens to control our currency and not be left at the mercy of the whims of a Federal Reserve or Central Bank.

The first technology to use this concept on a large scale was the famous Bitcoin. Since its transactions were validated by math and not bankers, there was no way for the government or anyone else to track who owned which Bitcoin when. This anonymity revolutionised online economics and naturally lead to a black market, while also having legitimate uses. After the government’s crack down on the largest Bitcoin vendor, the Silk Road, Bitcoin went largely clean and is used for legal purposes in the vast majority of transactions.

The mechanics of Bitcoin involves two groups: the miners and the users. Miners are the people who connect their computer to the Bitcoin network to validate transactions. Since these transactions must be mathematically unable to forge, validating transactions requires an enormous amount of computing power. When the network was small and there were few miners competing among each other to validate a “block” of transactions before other miners did, many people just mined with laptops. But as more transactions flowed in and more miners entered the game, people switched from graphics cards to specially built mining cards and eventually were forced into pooling their resources among miner allies. Miners get rewarded 25 Bitcoin for validating a transaction, a vast sum that now ends up getting split among 1000 or so pool mates.

This serves the dual purpose of introducing new Bitcoin to the system as well as validating transactions. Miners tend to sell their rewards off for fiat currency or other cryptocurrency and the newly mined Bitcoin enter the system of users, being traded and used for purchase.

As an open source project, Bitcoin opened a world of opportunity for developers to create new coins based off of Bitcoin. This lead to a whole world of altcoins all claiming to make improvements off of Bitcoin’s model. These improvements include new validation algorithms, new ways to distribute coins and coins revolving around drawing support to special causes. I hope to take you through all these altcoins over time, but for now I hope you have a solid understanding of cryptocurrencies and Bitcoin. Until next time, keep on earning amigos!

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