My Guide to Cryptocurrency
(This is by no way a comprehensive guide. However, this is meant to exhibit my understanding of the research so far. I will be continuing this as I try to go through each cryptcurrency in existence right now and elucidate what the differences are and what the meaning behind their valuation is. If anyone has any comments or contributions, I welcome you to do so!)
For the most part, no one really understands what cryptocurrency is. They mostly use it as a store of value but exactly how it works and why it’s so valuable or what makes one more valuable than the other is a mystery to most people. For the most part people follow the hype train when investing. And because you can invest in crypto directly (instead of going through a mutual fund or brokerage)[KK1] , it’s far more appealing. This is in most part due to the fact that the service fees are mostly hidden, and people don’t realize what it’s costing them to invest.
But the main thing about crypto is that it’s based off the rumor mill. Yeah there are exchanges being set up and other things that can drive up the value of a coin, but from my understanding, there isn’t much concrete about the entire investment valuation other than what others say a certain cryptocurrency is worth. With that being said, here are the cryptocurrencies on the market currently and what they each mean.
The original gangsta or “OG” cryptocurrency, bitcoin began its existence in 2008 and started trading in 2009. Based on open-source software [KK2] and decentralized banking, it can be sent peer-to-peer without an intermediary. For proper comparison, think sending your friend $1,000 without having to go through a wire transfer. Transactions are confirmed by network nodes [KK3] and recorded in a publicly distributed ledger[KK4] (known as blockchain)
Bitcoins can either be purchased through a digital wallet (Coinbase and Crypto.com are two of the most popular ones right now) or can be given as a reward through mining[KK5] .
Because of its decentralized and untraceable nature, it is very popular for those who wish to rebel against the established financial system as well as those who wish to participate in elicit purchasing such as drugs or weapons.
Because of its longevity, original popularity for the above-mentioned reasons, and growing public recognition through the news and other media outlets, bitcoin has ballooned into a cryptocurrency valued at multiple thousands per coin. Bitcoin is currently at a little over $56,000 per coin. Because of this, people are beginning to see crypto as less of an exchangeable currency but more as an investment opportunity or a store of value [KK6] in which they can hedge against inflation and potentially make multiple times more than what they put in and become super wealthy. With that being said, you don’t need to have multiple hundreds of thousands just to buy a few bitcoins. You can actually purchase pieces of bitcoins for however much money you want to put in. I currently have $200 of bitcoin, which means I own 0.00347052 of a bitcoin. The nice thing is that I’ll never own any more or less of that coin unless I decide to put more money in. So whether or not a single bitcoin hits $100,000 or it tanks to zero, I’ll always have that .00347 of bitcoin. In which case it will either be worth $347 [KK7] or nothing.
Source: Bitcoin — Wikipedia
Initially introduced as a joke mocking bitcoin and it’s wild speculations, Dogecoin was introduced in 2013. While one Dogecoin currently trades at around 50 cents a piece, it’s a far cry from where it started trading at on January 1st of 2021: $0.005. Which marks about a 10,000% increase over the course of 5 months. While this illustrates the volatility of the market (since it’s conception to January 2021 it only rose from .001 to .005 cents over the course of 8 years), it still perfectly illustrates exactly how popular cryptocurrency has become, almost mirroring levels of interest in bitcoin with a more affordable, accessible, and “fun” option.
Dogecoin differs from bitcoin in that it’s founders wished to distance it from the often unappealing reputation that bitcoin had for being an intermedium for elicit transactions. They also use scrypt [KK8] for proof-of-work [KK9] rather than SHA-256 bitcom [KK10] used for bitcoin.
Overall Dogecoin doesn’t have much of a use other than just being a fun thing that two designers from IBM and Adobe created to make a joke. Its value lies purely in speculation and in recognizability from the Doge meme of 2013. However, it does take a more approachable take to cryptocurrency investing and offers a cleaner sense to the palate for those wishing to invest but not wishing to be associated with any of the illegal activities that bitcoin was charged with financing in the past.
Like Bitcoin, Ethereum is open-source and blockchain based. Where it differs is that Ethereum allows developers and node owners to build their own applications which their clients can then use to independently interact with their balances directly.
Ethereum was created as an attempt to circumvent the current financial process, allowing users of Ethereum to make large scale transactions without having to get permission from a bank, an exchange, or a brokerage. Imagine buying a house and using your car as collateral knowing that you’ll be able to find a job and make the payments. A bank won’t allow you to buy that house until it guarantees that you actually have a job in writing from the person you will be employed by. At the same time, the bank isn’t going to let you “buy against” or use your car as collateral for the purchase because you need the car to get to work and it’s considered and essential living item. With Ethereum, you can simply use the token to buy the asset you want without having to go through the entire brokerage process and trying to convince a bank that you’re good for the purchase.
Ethereum also allows for the creation of NFTs which can be attached to images or video or digital property which by attaching Ethereum to them, makes them unique and one of a kind. For example, you can attach a clip of Lebron James dunking a basketball to some Ethereum and that image becomes unique, even if there are a dozen other videos online of him making that same dunk. With that being said, because your image is unique, it’s like owning an original Van Gogh or Monet. While there may be several copies or remakes out there, yours is unique because you own the unique Ethereum attached to that clip. Just like if you own the original painting, you own the original canvas, the original paint, and the original hand that made the first ever version of the painting you own.
[KK2]Open-source software: Pretty much piece of software where the original creator of the source code used to create the software grants rights to others to use and change the software based on their own desires and then subsequently distribute their own copies of the software. Example could be using an original source-code to create a desktop different from the standard apple or mac desktop and then distributing that code to others to use and change on their own computer. Think about it as the difference between buying a video game and using it in the gameplay dictated by the developers or rather being given an open-world in which the player can make their own objectives (compare “Uncharted” vs. “Grand Theft Auto”).
[KK3]Network Node: a physical device which allows for the transmission of information from one point to another or as an endpoint. Think of it almost like an electronic train going through stations. It is through network nodes that you can route information. For example, if you send an email to your friend in America from South Africa, you can choose to route it through a server (or node) in Germany before it makes it way to America. In this way, unless it’s publicly stated, the server only the server in Germany can see where the email is coming from and where the e-mail is going to. The start point (South Africa) is hidden from the endpoint (America) because America is technically receiving the email from Germany.
[KK4]Publicly Distributed Ledgers: pretty much a total accounting of a transaction or series of transactions spread out across multiple nodes or servers (see above). When a transaction happens, a “vote” is automatically taken across all nodes in existence as to which one is the correct version of the transaction. Whichever one wins then subsequently gets recorded in the ledger. The ledger is then distributed and copied to each of the nodes in the system and the process begins all over again. For example: you buy a piece of expensive art online for 100 bitcoins. For there, everyone hosting the nodes in charge of transaction for bitcoins (let’s say there are five computers) then takes a vote and agrees that yes, your 100 bitcoins will be transferred to another user for this one painting. The record of that transaction is then copied to all five computers and the next transaction can begin. These nodes and computers may be private or public. In bitcoin’s case, they’re private.
[KK5]Mining: pretty much someone else contributing a node to the system and then being rewarded coins for their contribution. At the beginning, the creator of the original node owns all the bitcoins. But then when another node is established, the creator gives bitcoins to whoever established and it hosting the new node. This process repeats for any number of times. Coins are then sent out and distributed through a wallet in which people who don’t own nodes but still wish to use the currency can obtain the cryptocoins and store them digitally.
[KK6]Store of Value: a store of value is a system in which a person can guarantee that the money they put in will keep its value over time. For example in 1955, a McDonalds hamburger cost 15 cents. Now a McDonalds hamburger costs $1.50. This is due to inflation or meat costs or a variety of other factors. If you put your money in a store of value (like a stock or a bond or now a cryptocurrency) then that same 15 cents that you invested that would be enough to buy you a hamburger in 1955 would buy you that same hamburger today, even if the cost has ballooned by 1000 percent. That’s because now the worth of your account would be $1.50. The hope for a lot of people is that your account would surpass the inflation or whatever is causing prices to rise and now maybe your account is worth $3.00 or $4.50, enough to buy you two or three hamburgers from your original one hamburger-worth investment all those years ago.
[KK7]One of the bigger problems here is that value is still expressed in dollars. You don’t go to the grocery store and see something as worth .5 bitcoins or 3 bitcoins. On those pricetags you see dollars. And the world trades in dollars. Because dollars are based on a nation’s economy and output, not on speculation and what others say it’s worth, but rather what an entire world says it’s worth based on very tangible evidence. And that’s the reason why all these cryptocurrencies are a nice flight of fancy but most likely won’t uproot the current financial systems. It’s like the pirate colony that tried to establish itself but ultimately couldn’t stand up to the world powers.
[KK8]Scrypt (pronounced “ess crypt”): This is a “key derivation function that is used as an encryption algorithm with the key goal of it being harder to hack because each “key” of the algorithm is kept secret and based on a master set of keys which each require their own secret password, mainkey, or passphrase. Pretty much just imagine each letter of the password to your computer being linked to a separate system elsewhere where each number/letter/symbol you type is code for another password and each letter in that subsequent password has another password, repeating on end until the developer decides to stop. The main goal here is that finding all those passwords and then storing them takes up a lot of memory, which most hackers don’t have. Thus providing you with security by utilizing a resource inaccessible to those wishing to do you harm.
[KK9]Proof of work: This is pretty much a system in which one member of a party (the provers) prove to the other members in the party (the verifiers) that a certain amount of work has been done. In crypto-terms, miners use proof of work to mine more coins, each of which takes a certain amount of time to produce. By proving the amount of time taken to produce the coins then the prover can prove to the verifiers that their submission is legitimate and the verifiers agree to recognize what was being produced as legitimate. For example, think about minting a gold coin. With the standard equipment required to mint each coin, everyone knows that it takes one hour to produce 100 coins. But if someone comes along as says that they produced 200 coins in that same hour, then their legitimacy would be questioned. If it turns out to be fake (and in this case, since it’s all done electronically then there’s no way to fake it, everyone has access to the same computers and the same processes as prescribed by the “open source” method), then the coins that the one individual produced are summarily rejected and most likely the member is kicked out of the group.
[KK10]SHA-256 or Secure Hash Algorithm 2 specifically the 32-bit function in which case hash functions are linked to eight, 32-bit words. There’s a whole lot of mumbo-jumbo and technical speak here but the notes to take away are that this algorithm was developed and used by the NSA. However, successful attacks at figuring out the algorithm often occur once the attacker is able to figure out about 75 percent of the encryption algorithm, in which case they then have access to as whatever they want from your computer. At the same time, this still take a lot of time and computing power to keep on trying to break the algorithm. Much like a battering ram to a castle wall, it may get through eventually. But you still need soldiers to man the ram, pull it back, and block the ram from being destroyed by the wall defenders.