Brett
Guest
What Is Cryptocurrency, and How Does It Work?
We answer some commonly asked questions about this hot, but little understood, asset
https://www.wsj.com/articles/what-is-cryptocurrency-how-does-it-work-11638386626
“Cryptocurrency” is a name given to a broad group of digital assets that started in 2009 with bitcoin. There are thousands, but only a dozen or so have any appreciable size and potential future.
There is a lot of hype around bitcoin. Some people claim it will become the world’s reserve currency. Some fashion it as the new gold. Some people simply think it will keep rising in value and make anybody who holds it rich. Some people think it’s a fad or Ponzi scheme.
Setting aside for a moment bitcoin’s fundamental value or use case, the primary reason it matters is this: Bitcoin allows any two people, anywhere in the world with an internet connection, to make a transfer of value in a few minutes without any middleman. With bitcoin, you could send $1 million to somebody, pay a small transaction fee, and have the exchange settled in 10 minutes or less. No banks, no foreign exchange.
How does cryptocurrency work?
The basic idea is that cryptocurrencies operate on software networks, where myriad computers run separate copies of the same program. The computers are linked, but no one computer controls the network. In bitcoin parlance, it’s a “decentralized” network.
These computer networks have two main functions: One is to process transactions, the other is to maintain the database that records and stores those transactions. In general, transactions are batched into “blocks,” which are then connected in chronological order in a long, unbroken “chain.” This is why the software became called “blockchain.”
Who controls the computers?
Anybody can download and run these software programs; they are “open source” programs. The database where transactions are recorded, usually called the ledger, is therefore visible publicly to anybody
This ensures that nobody on the network is counterfeiting the currency or double-spending the same bitcoins. The transaction history is collectively agreed upon by every computer, so it can’t be later changed. Transactions are permanent.
How did this all start?
On Oct. 31, 2008, somebody using the pseudonym Satoshi Nakamoto released a nine-page paper describing a new system of “electronic cash” called bitcoin.
What bitcoin promised was an alternative to the existing financial system, and it struck a nerve with a lot of people in the wake of the global financial crisis. “Bitcoin” became as much a social movement as a piece of technology. That’s one reason it has such a passionate following; crypto’s adherents believe they are willing a financial revolution into existence. Moreover, because bitcoin was released as open-source software, anybody can take the code and create their own version of it. They
How do I buy one?
Originally, the idea behind bitcoin was that you downloaded the software itself and ran your own version of it, “mining” new bitcoins yourself. You were your own banker, a “self-sovereign.”
In practice, however, that’s too unwieldy—and expensive—for most people. The most common way to buy bitcoin now is through a crypto exchange like Coinbase or Gemini, or a mobile broker like Robinhood, PayPal or WeBull. If you have a financial adviser, he or she might buy it directly for you, or put you into one of the new bitcoin exchange-traded funds. In the U.S. at least, these ETFs are based on bitcoin futures, not bitcoin itself. There are some bitcoin ETFs that trade outside the U.S.
What should I be on guard against?
A lot. Because crypto is such a new area, and has largely been unregulated or only lightly regulated, cons and frauds are rife. The Federal Trade Commission warns investors to steer clear of any opportunities that promise you can earn lots of money in a short time, or that ask you to recruit other investors, that offer guaranteed money or free money, or that make exorbitant claims short on details.
In general, it’s best to steer clear of any investment offer via social media, especially if it comes to you. I regularly get emails from readers who don’t heed this warning and got scammed. And do your research on any investment manager or offer. If you can’t learn
How do I make money?
Buying bitcoin is not like buying a stock or bond. When you hold bitcoin, you don’t own a piece of a company. You make money with bitcoin in one way: by selling it to somebody else for more than you bought it for.
There is one burgeoning part of the crypto market called “defi,” short for decentralized finance. These are banklike services that allow you to lend out or borrow against your crypto holdings. If you lend, you can earn interest that typically ranges from 5% to 20%. If you borrow, you can take the borrowed crypto and invest it elsewhere in the market, again hoping to sell it However, defi is a new field, with virtually no business standards. Almost once a week, there’s a loss of funds. Very often, some malicious coder finds a flaw in a defi program and drains accounts. Sometimes, bad software crashes and erases transaction histories. Sometimes, the platforms were set up just to steal money (a “rug pull”). The research firm Elliptic estimates that about $10 billion has been lost in 2021 on defi platforms. This is a buyer-beware environment.
We answer some commonly asked questions about this hot, but little understood, asset
https://www.wsj.com/articles/what-is-cryptocurrency-how-does-it-work-11638386626
“Cryptocurrency” is a name given to a broad group of digital assets that started in 2009 with bitcoin. There are thousands, but only a dozen or so have any appreciable size and potential future.
There is a lot of hype around bitcoin. Some people claim it will become the world’s reserve currency. Some fashion it as the new gold. Some people simply think it will keep rising in value and make anybody who holds it rich. Some people think it’s a fad or Ponzi scheme.
Setting aside for a moment bitcoin’s fundamental value or use case, the primary reason it matters is this: Bitcoin allows any two people, anywhere in the world with an internet connection, to make a transfer of value in a few minutes without any middleman. With bitcoin, you could send $1 million to somebody, pay a small transaction fee, and have the exchange settled in 10 minutes or less. No banks, no foreign exchange.
How does cryptocurrency work?
The basic idea is that cryptocurrencies operate on software networks, where myriad computers run separate copies of the same program. The computers are linked, but no one computer controls the network. In bitcoin parlance, it’s a “decentralized” network.
These computer networks have two main functions: One is to process transactions, the other is to maintain the database that records and stores those transactions. In general, transactions are batched into “blocks,” which are then connected in chronological order in a long, unbroken “chain.” This is why the software became called “blockchain.”
Who controls the computers?
Anybody can download and run these software programs; they are “open source” programs. The database where transactions are recorded, usually called the ledger, is therefore visible publicly to anybody
This ensures that nobody on the network is counterfeiting the currency or double-spending the same bitcoins. The transaction history is collectively agreed upon by every computer, so it can’t be later changed. Transactions are permanent.
How did this all start?
On Oct. 31, 2008, somebody using the pseudonym Satoshi Nakamoto released a nine-page paper describing a new system of “electronic cash” called bitcoin.
What bitcoin promised was an alternative to the existing financial system, and it struck a nerve with a lot of people in the wake of the global financial crisis. “Bitcoin” became as much a social movement as a piece of technology. That’s one reason it has such a passionate following; crypto’s adherents believe they are willing a financial revolution into existence. Moreover, because bitcoin was released as open-source software, anybody can take the code and create their own version of it. They
How do I buy one?
Originally, the idea behind bitcoin was that you downloaded the software itself and ran your own version of it, “mining” new bitcoins yourself. You were your own banker, a “self-sovereign.”
In practice, however, that’s too unwieldy—and expensive—for most people. The most common way to buy bitcoin now is through a crypto exchange like Coinbase or Gemini, or a mobile broker like Robinhood, PayPal or WeBull. If you have a financial adviser, he or she might buy it directly for you, or put you into one of the new bitcoin exchange-traded funds. In the U.S. at least, these ETFs are based on bitcoin futures, not bitcoin itself. There are some bitcoin ETFs that trade outside the U.S.
What should I be on guard against?
A lot. Because crypto is such a new area, and has largely been unregulated or only lightly regulated, cons and frauds are rife. The Federal Trade Commission warns investors to steer clear of any opportunities that promise you can earn lots of money in a short time, or that ask you to recruit other investors, that offer guaranteed money or free money, or that make exorbitant claims short on details.
In general, it’s best to steer clear of any investment offer via social media, especially if it comes to you. I regularly get emails from readers who don’t heed this warning and got scammed. And do your research on any investment manager or offer. If you can’t learn
How do I make money?
Buying bitcoin is not like buying a stock or bond. When you hold bitcoin, you don’t own a piece of a company. You make money with bitcoin in one way: by selling it to somebody else for more than you bought it for.
There is one burgeoning part of the crypto market called “defi,” short for decentralized finance. These are banklike services that allow you to lend out or borrow against your crypto holdings. If you lend, you can earn interest that typically ranges from 5% to 20%. If you borrow, you can take the borrowed crypto and invest it elsewhere in the market, again hoping to sell it However, defi is a new field, with virtually no business standards. Almost once a week, there’s a loss of funds. Very often, some malicious coder finds a flaw in a defi program and drains accounts. Sometimes, bad software crashes and erases transaction histories. Sometimes, the platforms were set up just to steal money (a “rug pull”). The research firm Elliptic estimates that about $10 billion has been lost in 2021 on defi platforms. This is a buyer-beware environment.
