On somewhat short notice longtime DACS friend and multiple past presenter Mike Kaltschnee gave us an informative presentation on a current topic of keen interest, cryptocurrency and the blockchain technology on which it’s based. Mike is co-director of Danbury Hackerspace. We’ve been hearing about the money people have made (and lost) by investing in cryptocurrencies, so it was timely and welcome to hear what this technology was all about.
Bitcoin is probably the most well-known cryptocurrency. It was developed to be a decentralized cash payment system that was not controlled by a government or other central authority. Although in the past a currency might have been backed by gold, government-issued currencies can be manipulated by their governments to pursue their economic goals. Bitcoin and other digital cryptocurrencies are “mined” by solving complex algorithms which require huge amounts of computing power, thereby limiting the quantity of cryptocurrency created.
Mike showed a chart of Bitcoin’s value since 2012 starting at a value of a few hundred dollars, peaking at above $19,000 last year and dropping back down to around $8000 at the time of the presentation. Other cryptocurrencies of note are Etherium, Ripple, Bitcoin Cash, and Litecoin. There are now futures and shorts for those who want to bet on cryptocurrencies. Some early investors are now billionaires, but the investment is incredibly risky.
There is a limit of 21 million bitcoins, with 12 million currently in existence. Cryptocurrencies like Bitcoin require specialized hardware, mainly GPUs (Graphics Processing Units). You can buy the mining rigs on the internet. Mike tried to give us a flavor of the mining algorithm that solves a mathematical puzzle to generate another bitcoin. It requires a massive amount of electricity, so people have set up rigs in places like Washington State, where hydroelectric power provides cheaper electricity.
Where can you spend bitcoin? Mostly small merchants, but some better known like Overstock, Expedia, and Newegg. Some websites and companies like WordPress.com, Subway, Reddit, and even Microsoft take them. Exchanges like Coinbase, Binance, Bitstamp, and Livecoin are places where you can buy cryptocurrencies, and there are sites that rate the exchanges. You may also want to maintain a digital wallet to store your Bitcoin. You have to make sure you don’t lose your PIN or password. The IRS considers virtual currency as property and is taxed accordingly. Your accountant can advise you.
Blockchains are what underlie cryptocurrencies. A blockchain is a digital ledger of records arranged in blocks. The blocks are linked together cryptographically using a hashing function, forming an unbroken chain. The blockchain is a decentralized data structure, accessible by everyone, but immutable by any one party. Blockchain can be used for tracking cryptocurrencies, encrypted messaging, proof of ownership including real estate, and authenticated voting. Mike showed a nice chart from a website that did a great job of explaining how blockchain works. Blockchain relies on three key components: private key cryptography (to verify identity), a distributed network with a shared ledger (to prevent fraud), and an incentive to service the network’s transactions, record-keeping, and security (mining to create coins).
What are the risks of blockchain? It involves a large amount of data that can take hours or days to update. There has to be continued interest in maintaining the blockchain. It may be subject to hacking, fraud, and endpoint vulnerabilities. It depends on the security of the keys, and not losing PINs. There are also risks involved with the vendors and applications involved in handling the blockchain or cryptocurrency
The original paper on Bitcoin from Satoshi Nakamoto is at https://bitcoin.org/bitcoin.pdf. Needless to say, Mike’s talk generated lots of audience questions toward the end.