What a whirlwind it has been these last few weeks in the world of cryptocurrency. Bitcoin hit the milestone of $10k/1 BTC (and growing!), LiteCoin soared from ~$60/1 LTC to an ATH (all time high) of ~$371 in a matter of weeks, and Ether (ETH) nearly doubled in value in less than a month. It certainly has not been dull since the last issue of Crypto Craze. As for me, I’ve been shopping around and soaking up as much information as I can with other, lesser known alt-coins and seeing some potential in every direction. Now, it should be stated before I continue to churn out these Crypto Craze issues, I am NOT an expert on cryptocurrency, investing, or finances. These guides should not be taken as investment advice.
But let’s get down to it!
Last time we glazed over the genesis of Bitcoin and the early days of cryptocurrency. In recent weeks, with the surge in price, Bitcoin is becoming more and more of a household name. But how does it work? What separates Bitcoin from traditional fiat currencies? How are transactions completed? Well, dear friends, that brings us to Part Two: Party on the Blockchain.
In order to grasp the theory behind blockchain tech and protocol, we will take a look at a traditional transaction as we know it today in a hypothetical scenario.
Let’s say Don has this really nice 15” MacBook Pro for sale that Connor has been eyeballing for some time. Connor could pay with cash or check, but as we all know- most transactions are completed via Credit or Debit card these days. Traditionally, Connor would slide his card, wait a few moments for the transaction to clear by his financial institution, and a few moments later he has a nice new MacBook Pro to enjoy on Christmas morning. Simple right?
But why don’t we take a step back to examine what actually takes place when you swipe that card. A typical Visa transaction involves four parties: the merchant, the acquirer (the financial institution that enables payments to the merchant), the issuer (the card holder’s bank), and the individual cardholder. When the card is swiped, the authorization has to travel through several different parties in order for payment to pass through. While generally this is not time consuming, we are all familiar with credit card issues such as extended hold times, contested charges, foreign transaction fees, late fees, interested charges, and potentially adverse effects on your credit score.
Now the same hypothetical scenario, but instead of using a credit card, we’ll use some Bitcoin.
Don wants to sell me a 15” MacBook Pro for 1 Bitcoin, (currently valued in the ballpark of $15k. That’d be one sweet machine!). Instead of swiping the credit card and involving a third-party financial institution, I decide I’m going to pay him in Bitcoin. In order to do this, Don would need a digital Bitcoin wallet of his own (we’ll touch on wallets soon). A wallet is an online, offline, or physical storage unit for storing cryptocurrency and it has both a ‘Send’ and ‘Receive’ address. In order for me to give Don the agreed upon amount of 1 BTC, he would need to supply me with his ‘Receive’ address which is typically a long strand of alphanumeric digits that is unique to his ‘Receive’ wallet. When Don gives me his ‘Receive’ address, I would then open my own digital wallet, navigate to my own ‘Send’ address, punch in Don’s ‘Receive’ address, designate the amount of 1 BTC and hit confirm the transaction. Note: almost every exchange or wallet you will find applies this same operation for BTC, albeit the user-interface will differ between them.
(EXTREME word of CAUTION to anyone interested in delving into trading coins- NEVER under any circumstances make your ‘Send’ address known to anyone other than yourself. Treat this as your bank account number. If your ‘Send’ address were to fall into malicious hands, there is nothing to protect your coins. And yes, coin theft is a very real threat, but if you treat your digital wallet as you would a bank account number or SSN, you will decrease your chances of coin theft.)
Once the transaction has been completed, the funds will be deposited into the recipient’s wallet. And in order for it to be finalized, the transaction must be ‘confirmed’ by various nodes and it is then posted on the blockchain ledger for all to see! But I’m sure many of you are wondering HOW this transaction is completed and confirmed. Have no fear! We’ll do a deep dive of the ins-and-outs of the Bitcoin ledger on the next edition of Crypto Craze.