These days, apart from all the pessimism that we find everywhere, there is something else that is also relatively consistent. No, I am not talking about the blonde person’s rhetoric tweets! Cryptocurrency, and the by-product of it, Bitcoin. So, if you are as unfamiliar about all this as I was then this article will help you understand basics.
Let’s all try to comprehend what cryptocurrency is and why and how are people making money out of it. Like, plainly.
Let’s first state what a currency really is. For all of us, currency is in the shape of bank notes and coins that we see every day. We use them to purchase whatever tangible or intangible items we can. Before the use of banknotes or gold that was used as a form of currency. A simple barter structure was in place and it capitalized on the fact that a certain amount of effort goes into producing something and to get something in return for that, the person who you are exchanging with needs to understand the value of what you have and trade with you something they have.
Now something that is produced as a result of a lot of effort has more worth than something that is produced easily. So, let’s say a chicken’s egg would not get you a square meter of silk. Why? Because of the amount of effort that went into producing both of them.
Skipping thousands of years ahead: all countries have their own currencies in place and then there is this foreign exchange structure that consents you to trade one currency with the other.
One currency might be traded with the other, say USD to GBP. Why is this? Because USA and UK recognize each other and they will agree to trade with each other. Imagine me forming a new country and printing my own currency called XYZ Dollars. Will you accept them? Will you give me a carton of eggs in exchange for these XYZ currency? This will be like monopoly money.
The amount of work you do in the US will get you different amount of dollars than, let’s say, if you did the same in UK. Why is that so? Because of the value of the particular currency. The amount of work you do to earn 1 denomination of that currency and you reproduce it to your currency’s worth in respect to that market leader worldwide would be very different.
In 2009, some guy named Satoshi Nakamoto in Japan created a distributed form of currency which was not maintained by any bank, regulated by an authority, saved up in banks by any treasury but rather dealt between people directly. People were keeping it and trading in it. You weren’t declaring it to any authority. Nobody knew how much you had. Hence, you didn’t need to pay any tax on it. Their worth was due to the cryptography involved, and people recognizing the value of effort that goes into solving a cryptogram.
In other words, we are relocating the processing power of some processors, and indirect electricity to code into currency. This energy worth is measured in dollars (world’s leading currency) which we know in today’s world as Bitcoin.
For bitcoin the amount of energy consumed in a single transaction can power up one house for a month.
Bitcoin uses electricity to make verification trades expensive. This makes transactions costly and free from frauds. The algorithm that does the verification needs massive processing power which is supplied by electricity.
Bitcoin mining is the process of minting new units of Bitcoin. It uses electricity as much as the whole of Denmark uses in a year. Bitcoin mining needs computing power to solve mathematical problems and the problems keep getting more complicated as more computers join the network.
So as more people mine the Bitcoin, the more energy will be required to create new units.
The question that should be asked is if the world can really afford the Bitcoin?