- High Market Cap
- Mid Market Cap
- Buy Tokens
- Digital Assets 101
- Hardware Wallets
Table Of Contents
The definition of a digital asset is “anything that exists in binary data which is self-contained, uniquely identifiable, and has a value or ability to use.” When the term originated in the mid-90s, digital assets were items such as videos, images, audio, and documentation. Since then, technological advances have given the term new life.
Blockchain technology didn’t change the meaning of digital assets, but it did make the term cover a broader range of items. Importantly, many digital assets have the potential to disrupt entire industries and even the global market moving forward. Today, inventions such as cryptocurrencies are part of the digital asset revolution.
Why Did Blockchain Create More Digital Assets?
To understand why digital assets evolved so much, you need to first study why blockchain technology creates new efficiency in the market, and even new markets. Simply put, a blockchain is nothing more than a giant network of computers that simultaneously verifies data on a digital ledger. This network enables data to be stored, unaltered, and verified via code.
The transparency blockchain technology brings to the world is unprecedented. This technology allows people, for the first time in history, to unequivocally prove certain aspects of a digital asset. You can prove items such as ownership, authenticity, transaction history, and location without the need to involve third-parties. As such, blockchain technology ushered back in the age of bilateral exchange.
The ability to erase the middleman comes from blockchain’s programmability. Blockchain digital assets utilize rules that are built into the code of the network, and, or, the token itself. Importantly, these standards receive continuous auditing via the network. This coding has advanced significantly since the emergence of blockchain tech. Today, advanced integrated protocols known as smart contracts are at the core of the digital asset revolution.
Bitcoin – The Code that Changed the World Forever
Bitcoin represented the biggest change to the meaning of the term digital asset to date. This coding was the first time someone attempted to combine cryptography and blockchain technology to create a digital asset successfully. In essence, the Bitcoin whitepaper was the beginning of the digitization of the economy. Discussing the impact of Bitcoin globally, Marc Lowell Andreessen, the father of the internet browser said: “We’ll all look back in 20 years and conclude that bitcoin was as an influential platform for innovation as the internet itself.”
2008 Financial Collapse
To understand the motivation behind the Bitcoin concept, you need to take a look at the economic state of the world in 2008. The international banking system was in the middle of a crisis. In multiple instances, governments and central banks altered regulations to further their debt holding capabilities. It was this perceived instability of fractional-reserve banking that led the anonymous founder of Bitcoin, Satoshi Nakamoto to seek to create a decentralized international economy. This new open market would be free from the stranglehold of government and borders.
Bitcoin – The Start of an Industry
As the Bitcoin concept began to gain international attention, so to did the coin’s value. In less than five years, other developers started to create their own coins. These coins such as Litecoin, Ethereum, and Monero all utilized blockchain technology to secure their value. Although these coins utilized similar technology, each digital asset had a different approach to the market.
For example, Litecoin sought to be the silver to Bitcoin’s gold, whereas Ethereum wanted to provide developers an alternative to Bitcoin’s scripting limitations. Monero took a totally different approach, creating a digital asset that focused primarily on privacy.
Digital Assets as an Asset Class
Today, blockchain technology allows us to tokenize nearly everything we own. Consequently, items that were once non-liquid such as debt can now be traded between anyone, anywhere, in person, or across the internet. This ability to tokenize any item creates entirely new digital asset classes in the market. These new asset classes continue to develop. As such, lawmakers continue to adjust regulations to account for the new efficiency that these services bring.
As the world of digital assets continues to grow, also has the desire for regulators and investors to categorize the different types of tokens in existence. Token taxonomy is the classification of digital assets on the blockchain. Importantly, token taxonomy will play a prominent role in the markets moving forward because the classification of a digital asset determines its issuance and trading capabilities. For example, security tokens must adhere to securities regulations. If not, there are legal repercussions. The three main types of token classifications are:
- Cryptocurrency – This type of digital asset includes traditional cryptocurrencies such as Bitcoin and Litecoin. These tokens usually function as a form of digital cash. As such, they are decentralized and offer a true peer-to-peer exchange protocol.
- Utility Token – This type of digital asset operates within the ecosystem of a platform to derive value and complete various tasks. Importantly, it doesn’t represent any direct ownership or investment in a firm.
- Security Token – Security tokens are any token that by design represents a share of ownership or an investment in a company. Usually, these tokens are found in highly-regulated markets such as real estate, securities, or stock markets.
Tokenization – Changing Markets Forever
Digital assets such as security tokens continue to disrupt the real estate market. For example, platforms such as Red Swan allow property owners to tokenize their real estate. The firm recently partnered with Polymath to tokenize $2.2 billion in commercial property across the US. Tokenized properties offer some huge advantages over traditional real estate sales. For one, the entire sales process is faster and requires less involvement from third-party organizations. Also, tokenized properties can transfer ownership in seconds.
Digital Assets are Everywhere
Today, digital assets are everywhere we look. Every single currency, asset, supply chain, and even reward point has the potential for tokenization. As such, the term digital asset will continue to encompass a growing number of items. For now, tokenization appears to be the path towards the future.
|Open Account||Open Account||Open Account|
On Spread (Zero Commission)
Discount Code: EE59L0QP
Exclusive through Securities.io
David Hamilton is a full-time journalist and a long-time bitcoinist. He specializes in writing articles on the blockchain. His articles have been published in multiple bitcoin publications including Bitcoinlightning.com
You may like
MicroStrategy Cements Bitcoin ‘Whale’ Status, Dave Portnoy Makes an Exit, and Jim Cramer Warms Up to Digital Hedges
How Does Bitcoin Work? – An Easy Guide for Noobs
Wave Financial Makes First 1000 Barrel Purchase for ‘Kentucky Whisky 2020 Digital Fund’
INX Limited to Accept Cryptocurrencies as Payment as Security Token IPO Meets $7.5M Minimum
Zug, Switzerland ‘Crypto Valley’ Becomes Latest Region to Accept BTC & ETH as Tax Payments
Digital Securities Monthly Report – August 2020 Edition
Investing in NEO -Everything You Need to Know
Updated2 days ago
NEO is one of the top cryptocurrencies in the world. This coin managed to capture the imagination of the Asian markets, even during times of regulatory uncertainty. Today, the NEO ecosystem is more vibrant than ever thanks to the hard work of developers and participation from the community.
What is NEO?
NEO is a non-profit community-based blockchain project that entered the market to provide Dapp developers with an easy-to-utilize platform. Specifically, NEO is an open-source blockchain and cryptocurrency. According to the company’s whitepaper, NEO functions as a “distributed network for the smart economy.” Notably, NEO translates to new and young in Greek. The name is appropriate when you consider that the platform is seen by many as a newer and younger version of Ethereum.
NEO was China’s first blockchain project to receive a nod of approval from regulators. Interestingly, the Chinese government has embraced the project, even after shuttering exchanges in the country. The firm is one of only a select few cryptocurrencies allowed to operate in China at this time. This support and the nationalistic feeling behind the project have led many to call the project “Chinese Ethereum.”
What Problems Does NEO Correct
NEO seeks to tackle a multitude of issues facing the market. Primarily, NEO is meant to act as a more flexible alternative to Ethereum. The company utilizes a philosophy that evaluates design choices on a multivariate spectrum. In this way, Neo can adjust its market approach accordingly.
For example, NEO developers can decide based on each particular use case what level of decentralization/centralization is most appropriate for a project. They can also make similar judgments on other important issues such as the level of on-chain/off-chain governance. These options provide NEO with more use case scenarios for large scale adoption in both the commercial and governmental sectors
How NEO Works
The NEO blockchain can accommodate a wide variety of digital assets. For example, the network features full support for blockchain assets, digital identity, and smart contracts. The platform can support decentralized apps (dApp) of all types, tokenization of real-world assets, and initial coin offerings.
NEO is a public platform that also leverages the Onchain network to create an optimal governance scenario. The interoperability of the networks extends the platform’s reach to new heights. It also combines these project’s communities to leverage developments across the network.
Onchain was founded in 2014 in China. This private blockchain company is best known for its focus on government and large enterprises. The platform is well-known for its Decentralized Network Architecture (DNA) tech. This protocol simplifies the creation of public and private blockchains.
NEO utilizes a two-tiered system to provide the network with more flexibility for users and developers. The ecosystem relies on both NEO and GAS tokens. In total, the firm will issue 100 million of each token. There are currently 70,538,831 NEO in circulation.
NEO is the cryptocurrency of the NEO blockchain. This crypto represents a share of ownership in the NEO blockchain. This crypto also plays a role in governance. It allows the community to create blocks and manage the network. Interestingly, NEO has indivisible units and cannot be divided like other coins such as Ethereum. The reasoning behind this decision is that each coin is meant to act as a single share in the NEO blockchain. Just like stocks, these coins cannot break down into smaller units.
GAS is the utility token for the NEO network. This token was formerly known as ANC- Antcoins. In the ecosystem, GAS functions like Ether in the Ethereum network. Developers use GAS for transactions in the network. Additionally, users receive rewards in GAS tokens.
GAS generates at a rate of eight GAS per block. The network automatically reduces the number of rewards per block after two million confirmed blocks. Users have options with GAS. You can trade GAS for other cryptocurrencies such as Bitcoin, Litecoin, or Ethereum. You can also convert your GAS to NEO directly. In this way, GAS pricing remains decoupled.
Coding Smart Contracts
NEO provides developers access to a powerful virtual machine that simplifies the most critical components of smart contract programming. For example, developers don’t need to learn a new coding language to use the platform. The network allows smart contracts in C#, Java, Python, plus a wide variety of other coding languages. In this way, the network can accommodate developers from across the industry.
NEO introduces the world to the Delegated Byzantine Fault Tolerance (dBFT) consensus mechanism. In this mechanism, there are certain nodes known as Bookkeepers. These digital accountants do the actual block verifications. The data is broadcast on the blockchain. Only when two-thirds of the nodes on the network agree with a bookkeeper’s version of the blockchain is consensus achieved.
The dBFT consensus mechanism is fast, really fast. It can handle more than 1,000 transactions per second. In comparison, Bitcoin handles around six transactions per second (tps). Ethereum can handle a whopping 12 tps. Impressively, NEO seeks to push its tps rate to new heights with their next upgraded. The goal of the update is to take the network to an insane 10,000 transactions per second.
In May 2020 the developers behind NEO proposed a major upgrade to the network. The upgrade would introduce a new governance model. The new strategy enables coin holders to vote for a committee of 21 governing members. These members hold the responsibility of representing the community. They gain the ability to vote on various modifiable parameters of the blockchain and other changes to the network’s coding.
The proposal suggests that people that vote for these members receive extra GAS rewards. This reward is a means of thanking members for their participation in the governance process. The proposal states that out of the 21 chosen governing members, seven will also become consensus nodes.
As a consensus node, their responsibilities will extend to validating blocks. Additionally, these seven members gain veto powers. To make a veto decision, the consensus nodes must obtain two-thirds support from the community.
History of NEO
NEO entered the market as Antshares back in February 2014. This firm is the brainchild of two longtime blockchain enthusiasts, Erik Zhang and Da Hongfei. During this time, the actual cryptocurrency went under Antshares (ANS). In 2014, the two developers expanded their vision with the creation of Onchain.
In April 2016, NEO releases its whitepaper officially. The paper highlighted the benefits and technical aspects of the delegated Byzantine Fault Tolerance. At the time, this was the first Chinese born consensus mechanism. As such, it received heavy media coverage in the region.
In August 2016, NEO entered the market via an ICO. The event was a major success with the project securing over $4.5 million in funding. These funds went to the further expansion of NEO’s strategy in the region. In September of the same year, Onchain established a Technology Strategic Partnership with Microsoft. The agreement inked cooperation on multiple projects.
In June 2017, Antshares rebranded to NEO officially. The crypto also received its first US-based support this year. Specifically, the coin saw a listing on Bittrex. The next year, the digital ID platform VALID announced a strategic partnership with the firm.
This year saw the announcement of a major upgrade. The NEO3 upgrade is set to be the company’s largest to date. In addition to the introduction of the new governance models, the upgrade will bring more interoperability into the sector. Specifically, the platform will gain more cross-chain capabilities. Currently, developers are experimenting with these protocols. They have set up Testnets with Bitcoin, Ethereum, and Ontology.
The upgrade will also simplify the tokenization process. Specifically, developers want to make it easier to create and issue Non-fungible tokens. Non-fungible tokens are unique digital representations of an asset. Some examples of non-fungible tokens include the tokenization of:
- Security Tokens
- Event Tickets
- Other Physical Assets
How to Buy NEO
NEO is not hard to find in the market. Most major exchanges have NEO/Bitcoin trading pairs. To utilize these platforms you will just need to register for an account. Once your account is live, load it with fiat currency or Bitcoin directly. From there, you just need to locate the NEO/BTC trading pair. The entire process is quick and easy once you complete your registration.
How to Store NEO
There are a few ways to store your NEO. The important thing to remember is that you only want to store your crypto in a wallet that allows you to earn your GAS rewards. The NEON wallet is one of the best options for investors seeking to earn their rewards.
Impressively, you can also earn GAS rewards using a hardware wallet. The Ledger Nano S is able to connect to your NEON wallet directly. You can then send, receive, and get your rewards from one safe wallet platform Notably, NEON is not the core wallet for the network but it has received unmatched community support and has the blessings of the developers.
Given NEO’s unique stance in the Asian markets, it’s hard to imagine anything but success for this platform. These developers continually upgrade the network with NEO3 set to release in the coming months. For now, NEO shares a top spot in the crypto market as one of the premier Dapp development platforms available.
How to Short Bitcoin (BTC) – An Easy to Follow Guide
Updated6 days ago
Learning how to short Bitcoin (BTC) is an essential skill to learn if you intend to become a professional crypto trader. Notably, shorting is an advanced investment strategy that comes with a high level of risk. However, if you master the skill, you gain the ability to acquire massive returns during times of market value decline.
What is Short Selling?
Short selling is an investment method that allows you to benefit from drops in the price of a particular asset. When an investor speculates on the decline in a tradable asset such as Bitcoin, stocks, or other securities prices, they can gain profits using shorts. In a short sale scenario, you bet against the price of the asset in question.
Why Would You Want to Short Bitcoin?
While in the long term it’s easy to see that Bitcoin continues to see price appreciation, there are endless reasons to short this cryptocurrency. The market is volatile and rather than letting your holdings sit during times of market value decline, you can sure up your holdings using shorts.
How Bitcoin Shorting Works
To understand shorting, let’s first look at the industry that created this method, stocks. In the stock market, short selling is a popular investment strategy. To accomplish a short, an investor borrows a certain amount of the stock they believe will decline in value. As soon as the investor receives these stocks, they sell them at the current market value. Once the price of the assets drops, the investor then can buy the stocks back and return it to the lender.
While the asset is different, shorting Bitcoin works in much the same manner. A crypto trader will borrow Bitcoin prior to a foreseen market drop. As soon as the investor receives their Bitcoin, the assets are sold. After the value of Bitcoin completes its dip, the investor repurchases Bitcoin with the original sales funds.
Because the price of Bitcoin is cheaper than when you borrowed it, you can repay your loan and keep the difference in the repayment and your total trading actions. Here is a specific example of shorting in action.
Jeremy borrows 5 Bitcoin’s at $12,000 apiece. He immediately sells these coins for $60,000.00. A few days pass. On the third day, Jeremy’s hunch proved correct. The price of Bitcoin did a major correction to $10,000.00.
Jeremy then repurchases Bitcoins using the $60,000 he held from the initial sale of his holdings. Since the price of Bitcoin dropped $2,000 apiece, Jeremy receives six Bitcoins for his purchase. He then returns the five Bitcoins to the lender. The last Bitcoin is his profit.
Jeremy can sell this Bitcoin and keep the $10,000, or he can use his earnings to make other investments. Had he not shorted the market, he would only show losses in his portfolio. Even if he had traded his assets out to stable coins, he would only make the difference in price from his original holdings and the value drop. Instead, he 5x his ROI using this advanced trading method.
How to Short Bitcoin?
Shorting Bitcoin is easier than ever today. The first step is to locate a reliable platform that permits leveraged trading. These platforms specialize in high-risk shorting investment loans.
Importantly, you will need to pay back any loan you take, plus fees. If you borrow ten Bitcoin, you’ll need to have those coins back when it’s time to repay your loan. To ensure that you fulfill your promise, these platforms require users to put up a deposit, or margin.
Your margin requirements act as a form of collateral or security. These holdings back your position with the goal to ensure the shares will be repaid at the agreed-upon future date. If your short starts to go awry, your lender can, and most likely, will call your margin in. Most platforms only need to provide you with a quick notice to do this. For these reasons, it’s imperative you read all the fine details of your Bitcoin short agreement.
Ways to Short Bitcoin
Today, there is a variety of ways to short Bitcoin. Each of these techniques provides its own advantages and disadvantages. You must consider the entire situation before you decide on what strategy best suits your needs.
Short Sell – Contract for Difference (CFD)
One of the most popular ways to short Bitcoin is through the use of CFDs. CFDs allow you to short Bitcoin without purchasing any coins directly. Instead, you sign a CFD and agree to just pay the difference between the price of the asset at the time of your loan and your contract rate. CFDs are popular because they are more convenient and cost-efficient because there is no need to make additional purchases.
How to Short CFD
eToro is the premier exchange for cryptocurrency CFD trading services. You will need to create an account to get started. Luckily, the process is simple. Notably, you must verify your identity and account via an email before you can use the platform.
Once you are all set up, shorting is simple. All you need to do is open a trade on the BTC/USD instrument. Next, you need to select “Sell” from the options. You will be brought to a screen that will allow you to set up all of the details of your CFD. It doesn’t get easier than that. Best of all, eToro features an advanced interface that is easy to navigate. Form here, you can stay up-to-date on all the market’s developments.
There are many exchanges in the market today that offer shorting services. Most of these platforms allow you to leverage your shorting strategy. Leveraged shorting is the act of borrowing more Bitcoin from the exchange than you hold prior to your sell-off.
Leveraged trading is one of the riskiest strategies in the market. It takes a firm understanding of the market conditions and your investment. Additionally, you really need impeccable timing to be successful with this strategy. If the exchange feels as if your investments are going to sour, they will close your trade early, keep your margin, and make you repay your loan.
Understanding When to Short
There are certain times when shorting Bitcoin is more complicated than others. For example, shorting Bitcoin against long-term uptrends can be tricky, to say the least. Bitcoin has a way to slowly rise in value. Reversely, this digital asset can shed thousands of dollars in market value in minutes. These scenarios put into perspective why shorting can be difficult for new investors to complete successfully.
Understanding the Mentality of the Market
It’s also important to consider the mentality of other traders in the market. If you short Bitcoin, and suddenly the price starts to shoot up quickly, you will need to rush to repurchase your assets. Unfortunately, every other investor who made the same decision will seek to accomplish the same task.
This sudden drive to repurchase Bitcoin drives the market value up sharply. When this scenario plays out, it’s what is known as a short squeeze. Short squeezes add to your losses in this position. To avoid this scenario, you must be vigilant in your market assessments.
Past Bitcoin Sell-offs
The Bitcoin market has nine years of trading data to back it up now. A quick glimpse at the past of Bitcoin and you can easily see scenarios that initiated major sell-offs. The more you understand these scenarios, the easier it will be to identify the next major sell-off in the market. Here are some of the main reasons Bitcoin prices stuttered in the past.
Since the crypto market is still in its early stages, there is still a lot of regulatory uncertainty surrounding this industry. In the event that a major country bans or enacts some anti-Bitcoin stance, the market will adjust accordingly.
Major Exchange Hacks – Short Bitcoin
History has shown that major exchange hacks can tank Bitcoin prices in minutes. One famous example of this scenario playing out was during the Mt.Gox hack. At the time, Mt.Gox was the largest Bitcoin exchange in the world. Its hacking sent Bitcoin prices spiraling downwards for months.
Hard forks occur when the community behind a crypto project is split on a certain upgrade. In a hard fork, some of the miners refuse to change over to the new protocol. This creates two separate blockchains from the moment of the fork moving forward. Consequently, hard forks also create a rift in a coins support community.
Bitcoin prices saw a decline when the community split over transaction block sizes. The row eventually led to the creation of Bitcoin Cash. Today, both coins have a strong following in the market.
There is another update related scenario that can drop the price of a digital asset. When important upgrades see considerable delays, it can cause a loss of faith by investors. This loss of faith demonstrates itself in negative price movements.
Bitcoin saw some significant price drawbacks when developers postponed the SegWit update. SegWit reduced the size of transactions in an attempt to combat market congestion on Bitcoin’s blockchain. At the time, the network’s congestion was unbearable. Consequently, every delay was met with negative price movements.
Developers Exiting the Project
Another major development that can hurt a coin’s price is the exiting of a key member from the platform. Blockchain developers are in high demand. The top programmers are respected throughout the entire industry. When one leaves a project, it can symbolize the beginning of the end for a coin. It can also represent a shift in the coin’s primary functionality moving forward. Either way, investors don’t like to see these guys go.
Future Risk Scenarios
There are also future scenarios that could occur that would affect Bitcoin’s price negatively. For example, if the cryptographic hashing algorithm of Bitcoin is broken, the coin will become unsecured and its market value will plummet. Along the same line of thought, major coding exploitations could also cause investors to lose faith in this cryptocurrency.
Regulatory changes in the market are perhaps the biggest threats to Bitcoin prices. In the past, major countries, such as China have put heavy pressure on the market. In 2017, China banned all exchanges and ICOs in the country. These actions dropped Bitcoin’s price sharply following the news.
Bitcoins anonymous creator Satoshi Nakamoto has remained in the shadows for the last couple of years. In the early days of Bitcoin, Nakamoto mined over one million coins. These coins have sat in his wallets since day one. If these coins were to enter the market, the price of Bitcoin would see a huge correction to reflect the added supply.
Risks of Shorting Bitcoin
Short sales are considered a risky trading strategy because they limit gains even as they magnify losses. Shorting is especially risky if the lender calls in the assets before prices have a chance to drop. There are some techniques you can employ to simplify the process, however, none are full proof.
Let’s examine the same example from before using the $12,000 Bitcoins that dropped down to $10,000. In the first scenario the short completed according to plan, the price of Bitcoin dropped and the investor repaid their debts to the lender. Now let’s see what would happen if the price of Bitcoin didn’t drop.
Maximum Risk Exposure
Let’s say that the price of Bitcoin jumped up to $13,000 instead of dropping. In this situation, the lender would call in their loan. The lender would close your trade and keep your margin. Additionally, you would owe $65,000 worth of Bitcoin instead of the original $60,000 worth of Bitcoin you borrowed.
Shorting Bitcoin – Summary
Shorting is a great way to make some extra profits. However, if you are new to trading, or are unfamiliar with the market, shorting is one of the fastest ways to lose your booty. For these reasons, each investor needs to do some soul searching prior to jumping into the shorting market. That being said, shorting is a powerful tool that provides investors with huge ROIs when completed correctly.
How Does Bitcoin Work? – An Easy Guide for Noobs
Updated3 days ago
As Bitcoin approaches its 10 years anniversary, the world’s first and most successful cryptocurrency is still a mystery to many people in the market. Even as Bitcoin has made its way into the vocabulary of the masses, the average person still wonders “how does Bitcoin work and what makes this computer money so valuable?”
The Current State of Affairs
The crypto market continues to expand to new heights. Every week new blockchains, tokens, coins, and exchanges enter the market. Each of these products provides users with a valuable service. However, all of these technologies owe a nod of appreciation to the world’s original cryptocurrency – Bitcoin.
What is Bitcoin (BTC)?
Per Satoshi Nakamoto, Bitcoin’s anonymous creator, Bitcoin is a “Peer-to-Peer Electronic Cash System.” Let’s examine this statement in depth to really grasp exactly what Nakamoto states here. Firstly, he states Bitcoin is a “peer-to-peer” network.
Peer-to-peer transactions are direct transactions. A great example of this style of transaction is when you hand cash to someone. When you hand your neighbor $5 cash, that is a direct transaction. There was no intermediary involved. There was no account validation, or central bank approving your transaction. You acted freely.
Inefficiencies in Today’s System
Now look at the same transaction, but this time you pay with your debit card or a payment App. While it may appear as if the funds instantly transfer from your account to theirs, this is hardly the case. Your payment begins a long arduous journey that can take days.
First, your payment order checks with both banks to make sure that the accounts are valid and that there are funds in your account to send. Then your payment action is sent to a major payment processing firm. In most instances, this is Visa or MasterCard.
Next, your funds bounce around 30+ intermediaries before reaching their destination around 3 days later. That’s why when you refund Debit or Credit transactions it takes days to show up in your account.
A Long Journey
All of these steps add more time to your transactions. Additionally, each intermediary and verification process tacks on a fee for their services. On top of all of these concerns, your transaction still must go through the regulatory channels. If for some reason, there is a discrepancy between your government and the person’s government you want to send a payment to, you will find it impossible to send these funds.
Centralization vs. Decentralization
The reason behind all of these intermediaries is simple, the current financial system is centralized. In a centralized system, there is one central organization, such as a bank or government that holds all the power. They hold your funds, they approve your transactions, and they decide when to issue more currency. You’re just along for the ride.
How Does Bitcoin (BTC) Work?
In a decentralized network, you remain in control of your assets until the exact moment that they arrive at their destination. When you send Bitcoin from your wallet to another person’s wallet, there are no intermediaries between your payment and its destination.
As such, there is no third-party to approve or deny your transactions. The entire process occurs in a “peer-to-peer” fashion. It’s the same as handing someone digital cash. Basically, you regain control over your finances using a decentralized system.
Examples of Other Decentralized Systems in Use Today
At first, the concept of decentralization can seem a bit awkward to comprehend. However, a quick glimpse into the market and you will see other decentralized systems hard at work. A perfect example of a decentralized system that you are more than likely familiar with is torrent streaming services.
When you go to a torrent streaming website, you probably ask yourself “how do these platforms remain open, even though they offer products that they don’t have licenses to offer?” The answer is simple, they utilize decentralization to prevent censorship. Here’s how decentralization is used in this scenario to bring you all your favorite early releases and new music for free.
Decentralization = Censorship Resistance
Websites like BitTorrent don’t actually provide you with any content. In reality, they just provide a location for people to meet up and exchange data freely, whatever that data may be. Now, granted, in most cases its music or movies, but it could be anything from political messages to actual value, such as cryptocurrencies.
Because these websites only provide a location for people to meet and exchange data, they are much more difficult to close than a centralized website that offered you these downloads directly. In essence, these streaming websites have done nothing wrong.
The same concepts can be put to use in the financial sector. Though the integration of decentralization, it becomes impossible to censor, edit, or block payments on the blockchain. In this way, Bitcoin represents an ideological shift towards more financial freedom and decoupling of government from currency.
To understand Bitcoin, you first need to take a look at some of the core technologies that make this marvelous coin function. As you now know, decentralized networks are censorship-resistant. There are also a variety of different types of decentralized networks. Bitcoin relies on a blockchain network to provide you with these freedoms.
What is a Blockchain?
A blockchain is a decentralized network that utilizes “blocks” of transactions to create a complete “chain” of events from the initiation of the network. In Bitcoin’s blockchain network, there are thousands of transaction validators known as miners or nodes. Importantly, every node validates every transaction on the blockchain but not every node receives a reward.
Who Gets the Reward? – How Does Bitcoin Work
These miners compete against each other via a complicated mathematical equation. The node that gets the question correct first gets to add the next block of transactions to the blockchain. They receive a reward for their efforts. Today, the reward is set at 6.5 BTC.
The mathematical equation, known as SHA-256 is so difficult that your computer examines it and decides it’s better to make educated guesses rather than attempt to calculate the equation directly. This guesswork is what drives up the processing on your computer, which, in turn, drives up mining costs.
What is Bitcoin (BTC) Mining?
When you hear that someone has a Bitcoin mining rig, this simply means that they have a specially built computer processor tailored to the SHA-256 algorithm. These devices, known as Application Specific Integrated Chips (ASIC) miners are thousands of times more accurate at guessing the SHA-256 algorithm’s answer.
More Miners – The More Security
The cool thing about Bitcoin is that it’s not purely mathematical. There is a true psychological approach behind its nature. For example, the larger the Bitcoin network, the more secure it becomes, and the higher the value of BTC. Also, the higher the market value of Bitcoin, the more miners in the market.
As the value of Bitcoin rises, the SHA-256 algorithm adjusts accordingly. These adjustments ensure that the mining rewards get paid out around every ten minutes. These rewards are vital to the Bitcoin network for two main reasons. Firstly, this strategy incentivizes nodes to continue validating transactions.
Secondly, these rewards are the only time that new BTC enters the market. There will only ever be a total of 21 million BTC available to the world. The difficulty adjustment and mining rewards system of BTC ensures that these BTC enter the market in a concise and predictable manner.
Now let’s compare this sound mathematical process to that of the Central Bankers today. In the centralized financial system, the issuance of currency is done at a whim. Just recently, the US government issued trillions in currency into the market as a part of the Covid-19 stimulus package. However, these funds are sure to disrupt the delicate supply-and-demand balance. Consequently, inflation is sure to come soon.
Why The World Needs Bitcoin
The world needs Bitcoin now more than ever. Bitcoin represents a real danger to the centralized markets because, for the first time in history, it provides the world with a secure digital alternative to the fiat systems in place. Unlike its predecessor, gold, Bitcoin is available to the entire world and requires very little overhead in terms of security.
Gold vs. Bitcoin
Now, let’s compare gold and Bitcoin for a second to see why cryptocurrencies are the future reserve currencies of the world. Firstly, it’s important to acknowledge that gold did and still serves an important purpose in the market as a safe-haven for investors. Gold is extremely stable and universally accepted.
The problems with gold are systemic. For one, gold only functions as a reserve currency. You couldn’t use gold for day-to-day micro-transactions. Imagine going to your local grocery store and chipping off some gold to pay for your items, not realistic in 2020 at all.
Where Do You Keep Your Gold Bars?
Additionally, gold isn’t an asset that you can readily get your hands on. Sure there are tons of gold investors today, but what do they really own? If your gold isn’t in a safe located on your property, you really just own a piece of paper that states you own gold. Sadly, in times of great economic strife, gold owners learn this lesson the hard way. Really, for any reason, your gold can be taken.
A perfect example of gold investors coming to terms with reality occurred in the 1930s in the US. During this time, the government of Franklin D Roosevelt seized all the citizen’s gold bullion and coins via Executive Order 6102. The order forced all citizens to sell their gold to the government at well below market rates. Those that refused had their gold confiscated.
Can’t Confiscate Bitcoin
Bitcoin holders never have to worry about this scenario. You hold your Bitcoin directly, not just a note of ownership. Bitcoin relies on a pair of cryptographic keys to keep your holdings safe. The public key is what you give people so they can send you BTC, whereas the private key is how you access your wallet. You must never give your private key out to anyone.
As you already learned, the decentralized nature of Bitcoin’s network is set up in a way that it would be impossible for governments to stop it. Additionally, the security keys also prevent overreaching governments from snagging your hard-earned BTC whenever they deem it necessary.
Fills All Use Scenarios
Bitcoin functions as both a currency and a store of value. You can HODL your BTC and enjoy the appreciation, or you can trade or spend your Bitcoin with impunity. This unique currency affords investors the flexibility of cash, the convenience of digital transactions, and the value storage capabilities of gold.
The Future of Bitcoin
The future for Bitcoin looks bright. The network is larger and more secure. Also, more people know about this revolutionary protocol than ever. The world’s first crypto also gained some new functionality recently via the Lightning Network.
After the crypto craze of 2017, it became evident that BTC’s scaling issues needed resolution. The network traffic reached a point that BTC was unable to fulfill one of its primary roles. It was unable to function as a peer-to-peer cash system due to extreme volatility, delayed transaction times, and huge fees.
Luckily, developers have since corrected many of these issues via updates and other developments. The Lightning Network is one of these developments that continue to garner attention in the market. The Lightning Network is an off-chain protocol that relies on private payment channels to reduce network congestion.
Additionally, the Lighting Network provides BTC with some new functionality such as the ability to utilize smart contracts and oracles. Oracles are off-chain sensors that can trigger on-chain events such as smart contracts.
Bitcoin is Here to Stay
Today, Bitcoin is a household name. Amazingly, Nakamoto’s single coin inspired a digital revolution in the market. There are thousands of cryptocurrencies now available to investors. While many of these platforms improve upon Bitcoin’s core design, none can match Bitcoin’s network strength and overall community support. For this reason, Bitcoin continues to reign as the king of cryptocurrencies.