TUESDAY, FEBRUARY 22, 2022 (or as some are writing it: 2/22/22!!) CRYPTOCURRENCY
Okay, two comments before writing today: (1) cryptocurrency (aka Bitcoin and others) is a phenomenon that I can’t ignore any longer, and (2) I know next to nothing about it (so I will be using a lot of internet materials!!
I’m going to use a Federal Reserve “White Paper” for reference and other sources:
Bitcoin originated with the white paper that was published in 2008. The creators’ original motivation behind Bitcoin was to develop a cash-like payment system that permitted electronic transactions but also included many of the advantageous characteristics of physical cash. To understand the specific features of physical monetary units and the desire to develop digital cash, we will begin our analysis by considering a simple cash transaction.
“Cryptocurrencies are digital assets created using computer networking software that enables secure trading and ownership. Bitcoin and most other cryptocurrencies are supported by a technology known as a blockchain, which maintains a tamper-resistant record of transactions and keeps track of who owns what.”
“They generally only exist electronically. There is no physical coin or bill unless you use a service that allows you to cash in cryptocurrency for a physical token.”
“Bitcoin is considered hack-proof because the Bitcoin blockchain is constantly reviewed by the entire network. Thus, attacks on the blockchain itself are very unlikely.”
Thanks to its decentralized, distributed nature, blockchain technology is well suited to fend off hacker attacks
One of these doomsday scenarios would be known as a 51% attack
Bitcoin itself has not been hacked since its inception
Interfaces, such as wallets, where cryptocurrencies are handled are still vulnerable to attacks
Conversely, people and websites have been hacked as they are much easier targets”
(Karen) - So Bitcoin (as a cryptocurrency) is hack-proof. The ownership of a quantity of Bitcoin is known ownership and ownership history
All Bitcoin transactions are public, traceable, and permanently stored in the Bitcoin network. ... Anyone can see the balance and all transactions of any address. Since users usually have to reveal their identity in order to receive services or goods, Bitcoin addresses cannot remain fully anonymous.
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So, unlike traditional currency/money - where possession determines ownership (aka - I have $47 dollars in my billfold - but if theft occurs the thief has the money but I don’t know who took it).
If John Doe owns some amount of Bitcoin, it is in a registry. If Jane Smith suddenly owns that amount of Bitcoin it must be recorded as being transferred or John Doe purchased something of value from Jane with the Bitcoin.
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It seems as though Bitcoin (and cryptocurrencies) must be ‘mined’ - but unlike mining iron ore or gold.
“Bitcoin mining is the process by which new bitcoins are entered into circulation. It is also the way the network confirms new transactions and is a critical component of the blockchain ledger's maintenance and development. "Mining" is performed using sophisticated hardware that solves an extremely complex computational math problem. The first computer to find the solution to the problem receives the next block of bitcoins and the process begins again.
Cryptocurrency mining is painstaking, costly, and only sporadically rewarding. Nonetheless, mining has a magnetic appeal for many investors who are interested in cryptocurrency because of the fact that miners receive rewards for their work with crypto tokens. This may be because entrepreneurial types see mining as pennies from heaven, like California gold prospectors in 1849. And if you are technologically inclined, why not do it?
Mining takes a lot of computing power.
In addition to lining the pockets of miners and supporting the Bitcoin ecosystem, mining serves another vital purpose: It is the only way to release new cryptocurrency into circulation. In other words, miners are basically "minting" currency. For example, as of February 2022, there were just under 19 million bitcoins in circulation, out of an ultimate total of 21 million.
“How much energy does mining take? The Digiconomist's Bitcoin Energy Consumption Index estimated that one Bitcoin transaction takes 1,544 kWh to complete, or the equivalent of approximately 53 days of power for the average US household.
Bitcoin takes a lot of energy:
“The report states that each Bitcoin transaction consumes 1,173-kilowatt hours of electricity. That's the volume of energy that could "power the typical American home for six weeks," the authors add. The Bitcoin mining that enables a purchase, sale, or transfer, it posits, uses a slug of electricity that costs $176.'
Karen says - okay, so I want to use the value in my Bitcoin to buy a cup of coffee. Let’s say the coffee is $3 - to ensure that authenticity is maintained, that transaction would take about $179 (the 176 plus the $3 for the coffee).
Should you invest in Bitcoin?
“Bitcoin is arguably one of the most liquid investment assets due to the worldwide establishment of trading platforms, exchanges, and online brokerages. You can easily trade bitcoin for cash or assets like gold instantly with incredibly low fees. The high liquidity associated with bitcoin makes it a great investment vessel if you’re looking for short-term profit. Digital currencies may also be a long-term investment due to their high market demand.
Lower inflation risk. Unlike world currencies — which are regulated by their governments — bitcoin is immune to inflation. The blockchain system is infinite and there’s no need to worry about your cryptos losing their value.
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Karen adds - okay, I’ve spent some time looking at cryptocurrencies (mostly Bitcoin) and I have more of an idea. Will I invest in Bitcoin (or other)? Maybe down the line. It seems to be speculative.
So, I can “own” something that I really can’t see (a cryptocurrency) that has value - that is maintained by high usage of electricity. I can save it, or sell it at a profit or loss. In theory, buying a stock is similar - owning a part of a company and I can sell it for a profit or loss.
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I shall return to this someday!! (Who knows - maybe I’ll own 1/100th of a cryptocurrency by then!!!!)
Karen
February 22, 2022 (or 2/22/22)
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