I did not buy Bitcoin (or other cryptocurrencies) as early as I should have. But, as I recently decided to share on Facebook recently, I’ve been buying in throughout 2020 and have reached a point where between 10 and 15% of my total assets are in cryptocurrency. That is a number that I plan to increase over time through a mix of regular contributions with each pay check, and the inevitable appreciation of cryptocurrencies relative to the US Dollar.
I’m sharing this upfront so that you know that I am invested: I am long Bitcoin, Ethereum, and several other cryptocurrencies. But my goal today isn’t necessarily to convince you to buy (even though you should), it is to try to explain what cryptocurrency is and why it is the way of the future.
This image in front of our now Treasury Secretary may become one of the most famous visuals in history.
Okay, we’re going to have to go through a few definitions in order to get us to that point. Let’s start with a blockchain. This is new technology that enforces data to be immutable (unchangeable) and cryptographically secure (meaning that a hacker cannot simply edit data on the blockchain).
Blockchains are also distributed, meaning that no single computer or source controls the blockchain. Bitcoin’s blockchain is stored on thousands of computers worldwide, which all work to update and maintain it. The code for blockchain includes incentives for each computer to act “ethically” and not try to cheat the system. Particularly, it sends data to several nodes, which must form a consensus for a transaction to process.
Okay, so now, a cryptocurrency is a digital currency that utilizes blockchain technology to create a . By default then it is cryptographically secure and distributed/decentralized. Bitcoin is one of these cryptocurrencies – the first and most well-known at this point. In addition to the aforementioned features, Bitcoin was setup to fundamentally limit the total number of Bitcoin to be 21 million. These coins are released slowly as a reward to those “mining” Bitcoin, which means that they are using (substantial) computer power to verify that transactions on Bitcoin’s blockchain are legitimate.
One last thing: all of Bitcoin’s code is open-source, and thus publicly available. You can take a look here. That code is managed through a typical software development process: people propose changes and then those changes are reviewed and approved if they won’t break anything.
So what has that led to? As of this writing, the value of a single Bitcoin has hit $40,819 and the market cap for Bitcoin is over $800 billion dollars! If Bitcoin were a company, it’d be one of the ten most valuable companies worldwide.
Bitcoin’s price since 2014 – admittedly choppy
So how is Bitcoin stored? Just like regular money, it is stored in a wallet! Of course, Bitcoin wallets are digital, but they work on cryptography: your wallet has an address, which can be public so that people know where to send money, but any transactions are validated using your private key, which should not be shared with anyone! While a wallet’s private key is a string of letters and numbers, you can think of it just like the key to your house or a safe: all the same concepts apply, except that one is digital.
There are a number of arguments for and against cryptocurrencies being the future of money, and even more if you consider which cryptocurrency will be most prominent. While the above is a factual description, this portion will focus on why cryptocurrency will prevail.
I’ll focus on the US government here, though the same could be said for other governments and their currencies. But here is how our government has acted as the steward of the US Dollar in recent years:
Gamestop stock may not be going to the moon. But US Debt certainly is!
Despite having 2020 on the chart, it is already out of date. Current national debt is $27.9 Trillion!