Cryptocurrency - What it is, and why you should care

About a month ago I wrote a post called 'Bitcoin going Banana's'. At the time, I pointed out I had made $10AUD turn into $150AUD with Ethereum - an alternative, but superior cryptocurrency (or 'Altcoin'). Earlier today I posted on facebook that the same $10AUD Ethereum is now $280AUD and not 12 hours later that same $10AUD is now worth $315AUD. I haven't lifted a finger.

And it's not slowing down.

After re-reading my own Bitcoin Going Banana's blog I decided I hadn't done enough to really explain cryptocurrency, and the sudden surge across the board of cryptocurrencies - the foremost being Bitcoin and Ethereum. Let me try and rectify that.

Cryptocurrencies are digital currencies that are forged from networks of user-based machines performing complex algorithms. Lost you already? Don't fret - it's complicated, but well worth knowing. Let's try another way, and we'll use Bitcoin as an example.

Bitcoin is a currency itself, much like the Australian Dollar is a currency. Except where Australian Dollars are for use in Australia only and are subject to exchange fee's when trying to use this currency overseas, Bitcoin is a global, digital currency. 

 Bitcoin price over the past year

Bitcoin price over the past year

So how do bitcoins (the currency in trade in the Bitcoin system - note the capital B versus small b) get counted or created? By machines. Every single transaction that is ever made in the bitcoin system, past or present, is kept in a digital log. Like a giant bank statement, except that this bank statement has billions of transactions and millions are getting added on every day. I'm going to leave the technical stuff there for a minute, and post it in a 'tech' section below.

Ultimately - currency is only one small way in which Ether can and will be utilised. Most businesses will run on internal Ethereum blockchains in time - for everything from dollar value to shareholder stakes and even KPI earnings for employee's - all of which can have intrinsic value in the real world too. 

What you should really know is that Singapore, China and Japan have all legalised cryptocurrencies recently and this is a huge reason for the sudden surge of cryptocurrency value as currencies are becoming legitimised and widely used. Microsoft, JPMorgan, Intel and a few other giants are just some of the companies who are forming 'the Ethereum Alliance' - an organisation formed to suss out potential untapped uses of such a concept as Ethereum. 

 Magic trick: turning $10.40 into $315.79 with nil effort.

Magic trick: turning $10.40 into $315.79 with nil effort.

Vladimir Putin just met with the founder of Ethereum, given credence to the rumour that Russia is likely to start using Ethereum as a valid currency. 

The point is - Ethereum is not going away, and it's still in its absolute infancy. 

So why is it not in a 'Bubble'? Because bubble's are when the intrinsic value of an item, be it digital or physical, increases without the item itself actually changing. For example, every country in the world has a 'gold' reserve that is meant to give some sort of benchmark for the value of a currency. Gold itself can go up and down in value in each currency based on market reflection, without the chemical composition of 'gold' or value in what it can do changing. After all, gold is gold - it's just a pretty metal. The same can be said of houses or land. A companies share market 'Value' can drop $100bn in a day without anything whatsoever in the company itself in terms of cash flow, projected earnings or product acquisition - merely on the perception of worth by shareholders or stakeholders.

Thus we have the difference. Ethereum actually gains value as more and more people use it. It's not tied to a physical or digital asset and therefore its intrinsic value is not limited by the artificial inflation of perceived worth to an item or service - it is independent of that. As more people use Ether on a day to day basis, the value of ether will rise, and ether itself is not the item in which that value is decided - merely the popularity of it's inception. 

On the flip side there's a very, very strong argument to be made that as the popularity of Ethereum eventually becomes mainstream, it will erode the value of the real dollar to the point of worthless - but incredibly this is not a bad thing. It will be the absolute derivative of current societal trends; more autonomous delegation of value to the masses, and by default a deflation of wealth gap between those in power and those being trod on.

If you want details on how to invest in Ethereum, subscribe to my email service and I will send you a detailed, step by step guide on how to buy Ether in Australia using coinbase, as well as other valuable tips and tricks that I haven't mentioned to utilise this cryptocurrency boom.

 

The TECH STUFF

A lengthy but good explanation of Ethereum is here, but I'll try and shorten it a little bit: 

Every time a transaction takes place from merchant to buyer, a unique and encrypted transaction ID is created. Then, thousands of machines calculate and reconfirm that the transaction that took place from merchant to buyer was in fact correct and true. This is called 'mining', and these days there are extremely powerful dedicated computers that are constantly mining, just rapidly combing through millions of transactions and confirming them over and over. Anybody can be a miner - it's not a central authority. 

The beauty of the system is that these miners get rewarded for their services in the form of created bitcoins, and simultaneously absolutely anybody can be assured that any and all of their transactions ever done in bitcoins are recorded on this giant log, or ledger. This ledger is called a "blockchain". 

But how is value calculated in Bitcoin? Unlike current 'real' currency, there are no gold reserves or coins and notes that integer value to the currency of bitcoin. At any given moment, a Bitcoin can be worth $4000AUD, and the next moment it can be worth $4010AUD. The beauty of it is, this value is not tied to any central authority, but rather is tied directly to the communal worth of Bitcoin. For a slightly more detailed account of how this value can affect merchants and buyers, see my past blog post

Now let's expand out from Bitcoin, and acknowledge that Bitcoin is simply one cryptocurrency, albeit the first and most common to date. Ethereum is a bit different, and simply superior. How is it superior? In a word: synergy.

You see, Ether is the fuel behind Ethereum, yet with Ethereum you can create a currency for anything. The primary differentiation between Ethereum is that Ethereum currencies are each 'smart contracts'. So, a transaction can take place in exactly the same way a Bitcoin transaction can: Merchant creates a contract that says 'Item A is worth $100USD', and therefore depending on the market value of Ether, at any given point in time that item is worth whatever the value of Ether that is equivalent to $100USD whenever that item is sold. The buyer provides the equivalent Ether, thus the contract on both ends is satisfied, so the buyer has successfully transacted $100USD worth of Ether to the merchant. In turn the Merchant (should) supply the goods or services.

However Ether goes a step further and allows for conditions on each 'smart contract' to come into play. For example - you can create a kickstart where everybody can put forward 'tokens' or 'smart contracts' provided the amount is reached. If the amount required to satisfy the kickstarter contract is not reached, everybody who put forward Ether to contribute to the kickstarter is automatically refunded all of their Ether. Nobody and nothing can come in the way of this transaction. It is incorruptible, infallible and unhackable. 

An important aspect of these smart contracts is that there is no limit to variables and conditions that are met, but once in play, terms and conditions can not be altered. This is extremely important and hugely beneficial, and why it is so significantly important to the lives of all of us right now. The fact that conditions are set, transparent, and incorruptible yields significant advantage over any central organisation where individuals stand to profit if something goes wrong (or right). 

Think: Autonomous, democratic governing on a points or currency based system where political bull**** is not a factor, and issues will be decided by a transparent yet anonymous voting system. Or going in on an investment or kick-starter where you don't have to trust or know anybody else to know that if it's successful, you will reap the rewards and if it is not, you won't lose a thing.