By now, you've probably all heard of Bitcoin, cryptocurrencies, and the blockchain. It's received a lot of press lately. we'll go over how these new systems compared to regular currencies and also briefly look at how they work. The Federal Reserve Chairwoman Janet Yellen getting grilled by Congress for the Federal Reserve being shady as usual. This kind of thing is normal, but in this situation something unusual happens. What closely? The blockchain and cryptocurrencies came in the wake of the frustration felt by the world after bad monetary policies from central banks, like the Federal Reserve's commercial banks and hedge funds also had a large part to play. That just had to be another way away where people had control over their own money again. Alright, so to begin, what are cryptocurrencies? Broadly speaking, it is a form of currency that is built on a global digital distributed Ledger called a blockchain. Bitcoin is is a cryptocurrency, as I say is the most famous. Cryptocurrency is not the only one, but it's becoming more and more popular. It was invented in 2008 for with the release of the White Paper by Satoshi Nakamoto, which is the inventor, but it's still like unknown. So we don't really know who is this characteristic of this cryptocurrency. So basically if I have to do an analogy, maybe for people, it's easier to understand it as the currency, so something that you use for paying services or goods. But it's very different because the first thing that seemed to happen when finding a Bitcoin is that it's the centralized. So it works with cryptography and in a network composed by different computer as nodes. And is the centralized meaning that there is no central bank or government behind or the the currency or like in charge of the monetary policy of this currency. All the transaction happened are verified through the network. Every transaction is registering a letter, a public Ledger which you can find online. It's very easy to to go through it, which is called the blockchain. So all the transaction are recorded there and you can see it. When we break things down, it's important to note that cryptocurrency is like Bitcoin, and Ethereum and others are distinctly different from the digital Fiat currency in your bank account. We'll take a look at the differences, using Bitcoin as an example. Bitcoin, unlike regular currency, has a cap supply of 21 million coins. In this way, it's similar to gold, another finite resource that can be used as money. As time goes on, the Bitcoin can be divided up into smaller and smaller units as the economy grows. With traditional digital Fiat currency, there is no telling how much money is circulating and no one knows if the central banks will decide to start printing more money. This can be a real problem, depending on how you view economics. This is what I mean. There are two main schools of economics, the Austrian school and the Keynesian school. The Austrian school thinks that money printing is a silent robbery by inflation, as it makes us poorer, because the more money there is, the less it's worth. The Keynesian school actually thinks inflation is a good thing. In our world, most of the central banks are run by Keynesians. And today, instead of focusing on GDP growth and wealth creation, they focus on inflation. They actually want a steady state inflation of 2% per year. In contrast, Bitcoin and other cryptocurrencies are deflationary because there's a fixed amount, making it worth more overtime instead of less. So why are these new digital currencies called cryptocurrencies? Simply put, it's because they use a form of mathematics called cryptography. This allows participants in the system to have a unique address called a wallet, kind of like a bank account. Only the individual has access to their wallet. This personal digital address or wallet mathematically proves that money sent or received to this wallet is actually going to the right person. A wallet can be mathematically checked for accuracy, but can't be altered or tampered in any way.
So what is a blockchain? In basic terms, a blockchain is a decentralized peer-to-peer system. In this system, millions of computers agree on a global record of the history of all transactions that have ever taken place in the system. This global record is called a Ledger. When you transfer some money or a service on the blockchain, everyone in the system knows about it. If it's easier, you can think of it like another peer-to-peer service like Limewire or torrents, where instead of transferring files, you're transferring a transaction entry into a very long notepad of all transactions, and the notepad can be seen by everyone. Because there are millions of computers keeping track of all the transactions, this makes it impossible to cheat and create multiple fraudulent bitcoins.
The computers that are looking after the ledgers and keep the system running are called miners. They use their computers to solve complex problems of how the transaction should be put together each time a problem is solved. It's called a block and each block holds 10 minutes worth of transactions and is put in a chain when it's completed. Hence the name blockchain.
The miners get rewarded in cryptocurrency for their efforts. This is how new Bitcoin is created. This is all modelled on how gold is mined out of the ground. Since the activity of mining actually costs electricity to do, Bitcoin is seen as an actual electronic unit of work by some analysts. We'll look at the blockchain in the future article, but this underlying technology will be one of the most influential inventions of this century.
Some analysts, are putting its significance above that of AI, hailing it as a second Internet but much smarter. The technology, likely to have the greatest impact on the next few decades, has arrived. And it's not social media, it's not big data, it's not robotics, it's not even AI. And you'll be surprised to learn that it's the underlying technology of digital currencies like Bitcoin. It's called the blockchain. To give you an idea, the Ethereum blockchain is theoretically capable of running entire companies and services like Airbnb automatically without human input, while also automatically optimizing company performance. The blockchain also behaves as an automatic auditor, and accuracy check throughout the whole system is just part of how the blockchain is designed.
In this way, trust is actually built into the system. It all sounds crazy, but as far as I've looked into it, I think it will have an incredible impact on our world. Ok, so with that out of the way, what are some advantages of cryptocurrencies?
Because cryptos are decentralized currency, no central entity regulates or controls it. There is no middleman, be it a bank, government, or any other company. With normal currencies, when you have a middleman, they usually aggregate power and aid in wealth inequality. This happens all the time. Today, for example, a lot of the wealth created goes to those closest to the financial industry, banks and those in the derivative markets, etc. Another advantage to being decentralized is that it's harder to hack. Banks and other centralized powers are an easy target for hackers and have been hacked in the past. The blockchain, on the other hand, is impossible to hack because to hack just one block, you must hack all the previous blocks in that system's history, plus all the millions of computers at the same time around the world. Impossible with today's technology. But you may be thinking, I've heard of Bitcoin being hacked on the news the hacking was actually at the exchanges websites where you can buy or sell cryptocurrencies. This was the interface between the blockchain and the normal Internet. The actual blockchain has never been hacked.
Another advantage is that there's a low barrier to entry. Anyone can join. You don't need a bank account or permission from a government or any other entity, or even have to pay a fee. All you need is an Internet connection and the software. This is great for a few reasons. It means that individuals in financially oppressed countries such as China and crisis countries such as Venezuela, can get their money out without being tracked.
In contrast, in today's currency system, it's hard to get your money out in these situations. For example, the Chinese government has been cracking down on capital flight, so worried investors in China are buying international property at any price, just as a way to store their currency. Of course, this causes other problems, like property bubbles in the countries that they're buying property. In addition to this, transferring cryptos internationally is faster than traditional methods, taking 10 minutes instead of days. Because actually what is this positive about the blockchain? It's it's very efficient. So in terms of costs and how the transaction, the transaction are much faster than like if I want to send you some money to you, it will take from your to Australia. I don't, yeah, a couple of days, probably maybe 1-2 days if you're very lucky and it works very well, there is just like 10 minutes. So of course it's it's much more efficient. So that's why I also like commercial banks and financial institution are exploring blockchain for other purposes. So there are all these discussions going on in Fintech.
Another interesting advantage is because the blockchain is transparent and everyone in the system knows which transactions are going to what wallet. Cryptocurrencies can help stop corruption in developing nations. So in conclusion, it's clear that blockchain based currencies have some attractive advantages over our regular financial system. A lot of governments have taken interest and China has actually announced that they're going to be testing their own blockchain based currency. I must add that I'm not a fan of a centralized government having control over a cryptocurrency. Many banks and companies are also implementing the blockchain. The city of Zork in Switzerland is actually implementing a blockchain based ID system, and there's many, many more stories around the world of blockchain being implemented. With this all being said, this area is just so new that no one knows for sure what the downsides could be yet. Just as an example, Bitcoin may fail due to some unforeseen problem, but I think eventually there's going to be a cryptocurrency that's going to get it right. Whether you think this is a good or bad thing, there's no denying that the blockchain and cryptocurrencies are definitely going to shake things up.
I'll be hoping to do a lot more videos on this topic and go into more detail about what's happening with this revolution around the world. But before I go, I guess there's a lot of you that will be asking the question should you invest in Bitcoin and other cryptocurrencies? Well, the answer depends on you. What are you actually looking for? Are you in it for the long term? Are you actually treating cryptocurrencies as a store of value in case of a crisis much like gold? With this strategy, people usually just buy when the price goes down, but always accumulate more and never sell until years later when they want to get out. Another group of people are the speculators. Speculators are the ones that just want to make quick cash.
This is probably the hardest strategy because cryptocurrencies are actually a real free market, not influenced by financial instruments, so it is going to be a wild ride to do the successfully. You'd have to read all the news about the cryptocurrencies that you are investing in and know about the technical details such as hard forks. You'd really have to proceed with caution with this, because people that don't know what they're doing are bound to buy and sell at the wrong time. Are you in another category where you're in a crisis country and just need some financial freedom? Obviously I'm not a financial advisor, so I can't tell you what category you belong to or how to invest, but I can leave some resources for you to get started in the website. But anyway, there'll be much more on the cautionary side of crypto investing.
I agreed that there is an element of high PR, and it's going to be like another dot com era where there will be a frenzy of investing a market crash and only the real cryptocurrencies will survive, much like the Googles and Amazons with the.com era. So I guess that's it. Thanks for reading this blog. Hope you got something out of it.
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