Bitcoin Explained: How Cryptocurrencies are Changing the Future of Finance

whether you believe it's the future of money or simply a giant ponzi scheme it seems like everybody has a strong opinion on cryptocurrencies these days influential investors such as warren buffett and charlie munger have both stated that they'll never hold cryptocurrencies in their portfolios in stark contrast to somebody like elon musk who now holds about five billion dollars in bitcoin in this video we'll explore the rise of cryptocurrencies exploring what they are how they work and where they fit in the historical context of money we'll then take a look at the pros and cons of fully encrypted digital currency and predict what the future might hold let's dive in cryptocurrencies are fully digital assets secured by cryptography like traditional currencies cryptocurrencies can be used as a medium of exchange when buying goods and services but unlike traditional currencies cryptocurrencies rely on a network of participants whose account balances are tracked and verified through the use of a public ledger every transaction that takes place gets recorded on this ledger including information such as the public identifier of the person sending the cryptocurrency also known as their public key the public key of the person receiving the cryptocurrency as well as the amount of currency being traded as a result of this system participants identities are secured and anonymized even as transactions are made public to all in the network in many cases the ledger is distributed across a large number of computers through the use of a technology called blockchain blockchain is just the type of database in which data is stored in blocks that are connected in the chain by a cryptographic hashing each block in the blockchain contains three things the data itself a string of characters known as a hash and the hash of the previous block in the chain thus forming the chain a block's hash must satisfy certain special properties that make it especially difficult to reverse engineer and must be a function both of the data in the block as well as the hash of the previous block this feature of the hash is known as proof of work and it underlies much of the security behind cryptocurrencies each time a new block is added to the chain a new hash and so a new proof of work must be calculated and this can take up to 10 minutes to compute proof of work is also recalculated every time data in an existing block changes the computational complexity behind proof of work is a large reason why the blockchain is as secured as it is without it hackers would easily be able to tamper with the blockchain and in the case of cryptocurrencies that data is users wealth and so the consequences of tampering can be devastating as of early 2021 there are over 4 500 cryptocurrencies traded publicly amounting to a total value of just under 1.9 trillion us dollars the top three largest cryptocurrencies by market capitalization are bitcoin ethereum and tether and these currencies are traded on free public exchanges such as coinbase gemini and binance among others users store their cryptocurrencies in online accounts called wallets and these wallets contain additional cryptographic information such as user secure private keys but are not insured by any organization choosing an exchange usually boils down to things like transaction fees and which cryptocurrencies are supported on the exchange choosing a wallet involves similar criteria with a special focus on the user interface of the wallet now let's take a look at the pros and cons of cryptocurrencies and there are a bunch of each to start with the pros cryptocurrencies are unique in their level of accessibility and transparency using online exchanges such as coinbase anyone can create an account for free and begin trading currency all it takes to start is an internet connection in addition through the use of the public ledger everyone can see every transaction that has ever taken place contrast this to something like a hedge fund which are by design only accessible to already wealthy individuals and whose actions are almost never made public to society compared to that cryptocurrencies are very accessible to the average person another benefit of cryptocurrencies is privacy even though all transactions are recorded on the public ledger only users public keys are ever recorded and shared with the network other personal information such as your name your location or your social security number are never stored this means that participants in the network will be able to see all of your transactions but won't know that it's you who's making the transactions necessarily in a sense cryptocurrencies achieve the best of two worlds full transparency at the network level with significant privacy at the individual level an additional benefit of cryptocurrencies is a relative lack of friction as a decentralized peer-to-peer network transactions occur between individuals without the need for a centralized authority this avoids the inconvenience of things like authorization requirements and just generally removes the potential for a central third party to abuse their power additionally when compared with traditional brokerages cryptocurrency exchanges have eliminated banking fees and charge minimal transaction fees especially for international transactions this combination of peer-to-peer communication and low fees makes cryptocurrencies and especially attractive options for people who are say living in a developing country with less than spectacular banking infrastructure it also removes the potential for a central bank to implement any kind of monetary policy for economic or political reasons and finally a benefit of cryptocurrencies which distinguishes them from traditional fiat currencies is a fixed supply almost every cryptocurrency is released at a fixed amount at the time of its launch which controls the growth of its money supply over the long run as an example bitcoin was released back in 2009 with 21 million bitcoins worldwide and analysts expect that all 21 million will eventually be mined by the year 2140 fixed supply will force the value of cryptocurrencies to rise as more remind and demand increases in the long run cryptocurrencies could serve as a useful hedge against inflation in traditional fiat currencies even though cryptocurrencies have a number of positive characteristics there are notable challenges ahead the first is that as of right now cryptocurrencies are not widely adopted and are still viewed by many as a purely speculative asset it's fair to say that there's significant uncertainty about whether or not they'll even achieve widespread adoption in the future and that makes them a risky play to add on to that risk cryptocurrencies have experienced extreme market volatility in the past few years and very likely will continue to show that volatility in the years to come this uncertainty makes many newcomers to the space query as they question whether or not cryptocurrencies are even worth the gamble coincidentally another disadvantage of cryptocurrencies is the exact same as one of their core advantages that's privacy because the privacy and security of cryptocurrency transactions is so high it's very difficult for governments to track down users by their account or wallet ids and monitor their behavior as a result criminals have begun to exploit this system by paying for illegal goods and services in cryptocurrencies besides the obvious negative implications for society this trend hurts cryptocurrencies because it a generates an unfavorable reputation and b makes them a prime target for regulation increased regulation may have to be the solution to this unsavory trend but that introduces the possibility of a central governing authority and finally a third con of cryptocurrencies is their environmental impact mining cryptocurrencies requires a ton of computational power and electricity so it's highly energy intensive in fact a recent article revealed that bitcoin mining alone accounts for 0.4 percent of the world's total electricity consumption that equates to an annual carbon footprint of just under 35 megatons of carbon dioxide per year which is comparable to that of denmark a follow-up report published by the nature climate change stated that bitcoin alone could produce enough co2 emissions to push global warming above two degrees celsius in under three decades and this is just one of thousands of cryptocurrencies out there right now while scientists debate the specifics of cryptocurrency's impact on the environment they have to achieve consensus on the fact that cryptocurrencies will induce massive costs on the environment in the decades to come historians generally agree that humans first started using fungible currency 3000 years ago in the form of bronze and copper coins before that humans generally relied on a system of bartering and exchanging cattle in the 8th century ad paper currency was introduced for the first time in china though it was prone to periods of very high inflation it took the europeans until the 17th century to start using paper money and by the turn of the 20th century paper currencies were used both in europe and the u.s tied directly to the value of gold but then the great depression in world war ii happened and through the bretton woods agreement a new financial world order was born by 1976 the u.s formally dropped any mention of the gold standard thus finally transitioning to a fully fiat currency in 2009 satoshi nakamoto published a white paper introducing the concept of bitcoin and fully decentralized cryptocurrencies more broadly to the world for the first time and most recently in early 2021 the chinese government has even floated the idea of introducing a fully digital state currency so what do we make of all of this well from a historical perspective the timeline seems about right for innovation in the financial space the world is only becoming more digital so it shouldn't come as a surprise to anyone that fully digital currencies are rising in popularity decentralized cryptocurrencies introduced a host of fascinating new economics to the world of finance and have the potential to serve advantage and disadvantaged people worldwide alike but they have a dark side wild volatility criminal activity and abusive energy consumption all make cryptocurrencies a target ripe for regulation even still it seems like public sentiment is shifting in favor of them as younger digitally native generations begin to take over the financial industry whether or not cryptocurrencies wherever fully replace traditional fiat currencies is hard to say but they will likely have a place in the global economy in the decades to come it'd be prudent for every investor to seriously consider allocating some portion of their portfolio to crypto in the long run it just might pan out but in the meantime expect a bumpy ride you

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