WHAT IS BITCOIN?

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This blog is dedicated to Jeff who wants to know more about cryptocurrencies.

Only stable economies will result in stable currencies over the long run regardless of what countries do in the short run. If a country experiences persistent high inflation rates and is unstable, foreigners will flee that currency for safer and more stable currencies, gold, silver, or a cryptocurrency, like bitcoin. Money can be anything that signifies someone’s credit and other persons’ debit in a financial transaction. This is why bitcoin is money. How do bitcoins come into existence? People “mine” bitcoins using computers to solve complex math puzzles. The system reward miners in bitcoin. According to Cambridge Bitcoin Electricity Consumption Index, bitcoin’s annual carbon footprint is equivalent to Argentina’s carbon footprint and the electricity expended is greater than what Ireland consumes. Currently, a winner is rewarded with 25 bitcoins roughly every ten minutes. The system stores Bitcoins in a “digital wallet,” which exists in the cloud. The wallet is a virtual bank account that allows users to send or receive bitcoins, pay for goods, or save money. Cryptocurrencies may hedge against inflation, depressions, or a tyrannical government.

Governments are coming out with their digital currencies. But these digital (virtual) currencies are not crypto. Cryptocurrency is any form of money that only exists digitally, that has no central issuing or regulating authority but instead uses a decentralized system to record transactions and manage the issuance of new units. Cryptocurrencies rely on cryptography to prevent counterfeiting and fraudulent transactions. Cryptography is any mathematical technique used to encrypt and decrypt data when transmitted or stored electronically. Shareware programs manage cryptocurrencies on the blockchain in which anyone can participate. Blockchain is a shared, immutable ledger that facilitates the process of recording transactions and tracking assets in a business network. You can view the different cryptocurrencies as being in different rooms. You can be in the Bitcoin room with other people using Bitcoin or in the Ethereum room with everyone using Ethereum.

Unlike national currencies that monetary authorities can bring into existence willy-nilly, there is a limit to the units of cryptocurrencies that can come into existence at any point in time. The danger to our freedom is when a central authority controls a digital currency and brings us all into the same virtual room. In this case, if we fail to cooperate, the authorities can prevent us from buying and selling. Because national currencies have a centralized platform, they pose a danger to our liberty. In the not-so-distant future, central banks, such as the Federal Reserve, will take over the duties of commercial banks. When this happens, the Fed can delete our bank account for any reason. Because there is no central authority with cryptocurrencies, the system secures our freedom. There are close to 1,400 cryptocurrencies globally, and all of them have versions of blockchain technology. 

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Published by Kenneth E. Long

Author, college professor of economics, swimming and tennis enthusiast

3 thoughts on “WHAT IS BITCOIN?

  1. Thank you Ken, I tend to believe there are similar high risks with all forms of currency, national or crypto. So in the meantime, I will default to “better the devil you know, vs the devil you don’t know.”

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