The following is a new, regular column to the Herald-Review to feature information technology use and computer programs. Questions from readers on future topics are welcome by emailing email@example.com (Attn: Technology Voice)
Currencies world-wide are built on a system of trust that the paper and metal you have in your possession are worth what they say printed on them. The value of a $20 bill versus a $1 bill from the point of view of the medium is similar. Only because the Department of Treasury says one is worth more than the other does the value change. There has not been a gold standard in the US since 1933 so there are no tangible assets backing up our currencies. The value of your piece of paper is based on a mutual trust between you, the person you are exchanging goods or servers for and the government who backs the financial value of the piece of paper.
The same logic holds true with Cryptocurrencies. If the value put on a cryptocurrency is shared between the two people, they too can be used in exchanges. If I say my work fixing your plumbing is worth 1 bitcoin, and you agree that 1 bitcoin is reasonable for the work I am providing, an exchange can be made. This may make sense toward the end of 2013 when a single bitcoin was worth around $200. At the time I write this article, I would be getting a heck of a good deal for my work since a single bitcoin is worth well above $50,000.
Bitcoin is stored on a blockchain often called an immutable ledger. Immutable in that nothing on the blockchain itself can be modified once inserted, and a ledger in that it is storing transactions of bitcoin between different people in what are called cryptocurrency wallets. From the previous article, we understand it is pretty much impossible with today’s technology to modify any single record on a blockchain without invalidating its own fingerprint along with the fingerprint on all future blocks. In the same way, it is impossible to make a change to one bitcoin transaction without invalidating the fingerprint of every transaction that comes after it.
The Blockchain for bitcoin contains every transaction from the day it started. The blockchain itself is over 300GB today (about 150 Dual-Layer DVDs or 6 Dual-Layer Blu-Ray Discs) and stored and worked on by thousands if not millions of computers world-wide simultaneously. The ledger is not owned by a single person or entity, rather it is shared by anyone.
Bitcoin and cryptocurrencies share many common benefits:
• There is nothing to print, mint or distribute. There are no tangible assets to create, maintain, and keep track of.
• There is no ‘middle man’ for transactions themselves and therefore reduces or eliminates the fees often charged by them. Cryptocurrency exchanges may charge small fees to convert from US Currency to Cryptocurrencies.
• Cryptocurrencies are a more confidential transaction. People can securely perform transactions without any knowledge of who the other person.
• Cryptocurrencies are available to everyone anywhere online without the need for banks.
• Cryptocurrencies are universal and decentralized. There are no exchange rates since one bitcoin is the same in the United States as it is in Zimbabwe.
• Transferring funds is extremely fast and secure no matter where in the world the parties are.
There are also some common drawbacks to cryptocurrencies.
• Due to the confidentiality of them, they are often used for black market transactions and facilitate illegal activities.
• They are difficult to track for tax purposes.
• The market is so volatile people can lose and gain significant amounts of money in minutes. The market is active 24 hours a day and 7 days a week. Unlike the stock market, significant loss and gains can occur while you sleep.
• If you choose to keep your own crypto wallet; you can permanently lose access to your money. You can find many stores of individuals losing access to hundreds of millions in crypto currencies simply because they lost their password or the USB thumb drive they stored their wallet on.
These are just some examples. If you are interested in cryptocurrencies, please do your own research. This article is not financial advice. Whether or not cryptocurrencies have a place in your financial portfolio is a discussion for you and your financial advisor. Chris Carlson is not a registered investment, legal, or tax advisor or a broker/dealer. Information contained in this article is not a substitute for financial advice from a professional who understands your financial situation.
Christopher Carlson, MA, MBA is a Grand Rapids native. He leads the critical database team for Optum, a part of UnitedHealth Group. He has an undergraduate degree from Minnesota State University, Mankato as well as graduate degrees from St. John’s University and St. Mary’s University of Minnesota. He resides in Grand Rapids with his beautiful wife and wonderful daughter.