Cryptocurrencies such as Bitcoin have been getting media coverage lately, whether prominent businesspeople such as Elon Musk and Mark Cuban are considering accepting them or the Chinese government is cracking down on them. Many people have strong opinions on the topic one way or the other, but their debates are often too technical for a layperson to follow.

What is bitcoin?  What are cryptocurrencies?  

Whether you think Bitcoin is poised to revolutionize global trade or will be remembered as a flash in the pan, we want to share some basic information about bitcoin and the cryptocurrency market before we delve into how it impacts and intersects with energy consumption and pricing.

Bitcoin and other crypto tokens are virtual assets, meaning that they only exist online. As such, you cannot feel these assets in your hand the same way you can an American dollar or a gold coin. That said, people are increasingly becoming more comfortable with non-tangible assets. Online banking has become ubiquitous, and most people don’t drive to their local branch to verify that the money in their online account is physically available to them.

Likewise, video games such as Fortnite and Warcraft make millions of dollars selling digital assets that are comparable to Bitcoin in all but name.

When was cryptocurrency invented and by whom?

Bitcoin is recognized as the first crypto token, going online in 2009 after “Satoshi Nakamoto” published a whitepaper describing how it works. The name is in quotation marks because it’s a pseudonym for a person or persons who have never been publicly identified. Nakamoto was active in public forums when Bitcoin was getting off of the ground, but there hasn’t been a peep from them in years. Subsequent tokens generally build on Bitcoin’s original design and have clearly identified founders, with new tokens launching regularly to this day.

What can Bitcoin be used for?

Most cryptocurrencies are billed as virtual money, allowing you to exchange them for goods and services with any vendor who accepts a given coin as payment. While all American merchants accept U.S. dollars, no crypto token has the same universal trust. However, the number of people and places that accept crypto is increasing, with large companies like Tesla supporting it and Singapore’s government recognizing it as an official currency.

How does cryptocurrency work?

All crypto transactions are permanently recorded on the corresponding blockchain, a decentralized public ledger. Basically, transactions are stored on “blocks” of computer memory that can be infinitely “chained” to new blocks when they run out of memory. Each token has its own blockchain, so Bitcoin transactions are not stored in the same place as altcoins such as Ethereum or Litecoin. Different blockchains have different functionalities, but most of them work the same way. Consider Bitcoin as an example.

Every transaction on the Bitcoin blockchain consists of three pieces of information: Input, Output, and Amount. The Amount is fairly self-explanatory, representing how much money was transferred. Likewise, the Output is simply which Bitcoin wallet (or account) is receiving funds. However, the Input is a little tricky. It is not the account that provided the funds, but the wallet or wallets that originally gave those funds to the account that’s now sending them elsewhere. For instance, if AJ gave Adam 100 Bitcoin that he is now giving to Jay, AJ’s Bitcoin address is listed as the Input of Adam’s transaction.

This might seem strange, but it’s really just a security feature. The structure allows volunteer miners to use powerful computers to make sure that all tokens are legitimate and in the account they are supposed to be in. Any issues are flagged, preventing the spread of unauthorized Bitcoin while also allowing suspicious tokens to be traced back to their origin point. Miners are compensated through processing fees to ensure that transactions are verified promptly. Several variables determine processing costs and speed. Generally speaking, miners charge more and take longer when a blockchain is busy.

Why is the price of cryptocurrency so volatile?

Traditional fiat currencies like the dollar and Euro are backed by their corresponding governments, and those governments can take action to reduce or speed up inflation by manipulating interest rates (restricting the available money supply) or printing more money. Crypto is decentralized by nature, meaning that there is nothing like the American Federal Reserve that can do the same thing. As a result, the fickle forces of supply and demand are the sole determinant of each token’s value.

Every crypto has a “circulating supply” (meaning how much of it is currently in the virtual economy) and a total supply hard-coded into its blockchain’s programming, so supply is a variable known to everyone. Bitcoin is always one of the most expensive tokens because its supply is limited to 21 million BTC, a relatively low figure that creates scarcity. In contrast, Ripple has a supply of 100,000,000,000 XRP, ensuring that there’s enough for everyone. The price of each XRP token seldom exceeds a dollar as a result.

Demand tends to be dictated by news in the sector. For example, the price spiked when Elon Musk announced that Tesla would start accepting Bitcoin because it suddenly had a new use case. The price slid when China announced intentions to crack down on crypto miners because investors feared the resulting lack of mining resources. Predicting this news before it happens is virtually impossible, especially since a group of people can collaborate to influence the price of tokens without any particular reason.

Is crypto safe and secure?

Cryptocurrency accounts consist of two strings of characters. One of them is recorded on the blockchain, acting as a user name. Since anyone can access the blockchain’s records at any time, this info is public knowledge. The other is a private key, or password. You must enter this key every time you make a crypto transaction, meaning that your account is compromised if other people know it.

Hackers frequently try to hack crypto with mixed success. Since miners are constantly verifying the authenticity of every circulating token, any hacker would need to do so in such a way that all blocks were affected simultaneously. To date, that’s proven impossible. However, exchanges (or crypto brokers) often store tons of cryptocurrency in one place, giving hackers easy access to hundreds of millions of dollars in virtual assets. Mt. Gulg is one prominent example of an exchange that went bankrupt after losing $473 million in virtual assets in 2014. Crypto investments are generally not insured, so investors lost everything.

Furthermore, scammers frequently take advantage of the relative lack of knowledge of the space to rip people off. For example, a popular exchange called Bitconnect was outed as a Ponzi scheme in January of 2018. Likewise, so-called “experts” may try to use their platforms to build demand for a token they purchased cheaply, turning a profit at the expense of those who followed their advice.