A Beginner’s Guide to Cryptocurrency and the Blockchain

In case you haven't been paying attention for the last decade, cryptocurrency (and in particular Bitcoin) has exploded as a digital, disruptive currency that dominates the lion's share of the "alternative currencies" market. Bitcoin was the first, but numerous others have followed, such as Dogecoin, Litecoin, and of course, STEEM. Crucial to any understanding of cryptocurrency, however, is an understanding of the blockchain.

What Is the Blockchain?

At its simplest, the blockchain is a ledger. It is a historical record of transactions. Every transaction that becomes a part of the blockchain must be confirmed, and once it is, it is immutable. Everywhere that a cryptocurrency is "mined" (more on that later), there is a database of transactions which is updated each time the blockchain is updated.

This way, the information on transactions is distributed, which is the fundamental difference between cryptocurrencies and the blockchain on one hand and traditional currencies and physical ledgers (or digital versions of physical ledgers, such as spreadsheets). A distributed ledger cannot be altered, since it exists in numerous locations at once, providing a level of security and trustworthiness not found in other financial transactions.

An additional difference is that blockchain data is inherently public. Since anyone mining a cryptocurrency is a so-called "node" in the blockchain, the information present in it is accessible to any miner. This is because as soon as a node links into the existing blockchain network, it receives a copy of it in its current state, and then updates accordingly with the whole. This makes it a system that is far more transparent than a fiat currency system.

How Are Cryptocurrencies Mined?

The answer to this is in the name. Cryptocurrencies use cryptography to provide value and thus generate their "coins." Taking Bitcoin as an example, a Bitcoin miner will set up a computer (or a network of computers) to begin generating blocks for the blockchain, and thus generating Bitcoins. However, before a block can be added, a cryptographic puzzle (requiring computational power as a resource) must be solved. Thus, the computers must do work in order to generate Bitcoins.

Such a system disallows one large, centralized computer from mining all of the Bitcoins and devaluing the currency, since the difficulty of cryptography scales with computational power. By setting a hard limit on exactly how many blocks can be added to the chain in a given amount of time, the currency is lent some measure of stability.

How Do Cryptocurrencies and Blockchain Technology Work In Finance?

Since their first use was for finance, cryptocurrencies and blockchain technology seem as though they are somehow inherently related to the industry. This isn't technically true, however. Conceivably, the blockchain and its distributed data methods can be used for anything; we simply value its uses in finance far more than we do any other field - so far.

The transactional properties of the blockchain lend themselves directly to the finance sector, which is why cryptocurrency was so quickly borne of this technology. The Bitcoin "wallet" allows miners and owners of Bitcoins to use them to make purchases and trade for another currency online. This is currently the standard use for Bitcoins, though in theory it should be able to stand as a currency on its own, without the need to be assigned a dollar value and traded for it.

As a currency, Bitcoin transactions (and all cryptocurrency transactions) are intrinsically immutable. Once the transaction is made, there is no reversing it. This is due to the distributed nature of the blockchain; as soon as a transaction is confirmed, it is confirmed everywhere, and there is nothing anyone can do to reverse it. This makes Bitcoin transactions somewhat more of a commitment than those made with traditional currency; there are no refunds.

Who Can Trade Cryptocurrencies?

Anyone in the world can feasibly begin mining and trading in cryptocurrencies today, so long as they have access to any kind of computer (including a smartphone or tablet). There are no barriers to entry into the cryptocurrency market. Simply install the appropriate software (i.e., Bitcoin mining software) and run it. You're now a Bitcoin miner.

As soon as you begin trading, Bitcoins will be mined and received on what are called "addresses," tied only to your node in the blockchain, not to your identity nor to any kind of bank account. This so-called address is somewhat analogous to an IP address for accessing the internet, in that it is simply an assigned string of seemingly random characters.

The security of your Bitcoins is guaranteed by its very premise: cryptography. Since the whole basis for generating Bitcoins is cryptographic security itself, the currency is locked into a massive cryptographic system. Arguably, cryptocurrency is the most secure form of currency in the world today. This makes it highly appealing to the individual and to the finance sector alike.

Will The Technology Last?

This question is more difficult to answer. Certainly, blockchain technology is already more or less ubiquitous in the finance and tech sectors, and won't be going away anytime soon. Whether cryptocurrencies, in particular, will be able to establish themselves as a viable alternative to traditional currency is more opaque. Bitcoin is by and large the only one that has achieved any level of worldwide renown or market penetration, and even still it is remarkably volatile in terms of perceived value.

Other cryptocurrencies are still being actively mined and traded, however, and the competition is only growing more fierce. There are over 700 active cryptocurrencies as of this writing. It is likely that within the next few years this technology will reach its make-or-break point, when companies will begin either turning profits or collapsing - or both.

In any case, this emerging industry represents an enormous new world for both finance and technology in general. The blockchain is likely one of the most transformative paradigms to come about since the internet itself, or perhaps the GUI (Graphical User Interface) for computers. There is opportunity for huge amounts of money to be made and lost in the coming years, as there already has been since Bitcoin was first launched in 2009.

Whether anything more than another stock symbol is to come of it will depend on developers and consumers together. With the right set of uses found for it, it could easily become revolutionary to the world, essentially crowdsourcing the economy itself. Only time will tell.